PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) Intellicheck, Inc. is a technology company specializing in identity authentication and threat identification solutions for retail fraud prevention, law enforcement, and access control in government, military, and commercial markets [Overview](index=4&type=section&id=OVERVIEW) Intellicheck develops and markets identity authentication and threat identification solutions, including Retail ID®, Age ID®, and Defense ID®, with plans for market expansion - Intellicheck, Inc. develops, integrates, and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and mobile/handheld access control in government, military, and commercial markets[12](index=12&type=chunk) - Key products include Retail ID® (retail fraud), Age ID® (age-restricted sales), and Defense ID® (military/government threat identification and access control)[12](index=12&type=chunk) - The company plans to expand by increasing market share in existing markets and entering new product markets, such as online applications and biometric enhancements, focusing on fraud prevention, safety, and regulatory compliance[13](index=13&type=chunk) [Identity Card Reading and Verification Sector](index=5&type=section&id=IDENTITY%20CARD%20READING%20AND%20VERIFICATION%20SECTOR) This sector focuses on the widespread use of driver licenses as identification and the challenges posed by high-quality fake IDs, which Intellicheck addresses with patented verification technology - Driver licenses are the most widely used government-issued photo identification in North America, recognized as quasi-identification cards under the Real ID Act[16](index=16&type=chunk) - The proliferation of high-tech devices makes it easy to obtain high-quality fake IDs, leading to significant economic losses from fraud and enabling various criminal activities[18](index=18&type=chunk) - Intellicheck possesses patented technology that reads and analyzes encoded data on identification documents (magnetic stripe or barcode) to verify authenticity against known standards, addressing the challenge of falsified IDs[19](index=19&type=chunk) [Our Products and Services](index=6&type=section&id=OUR%20PRODUCTS%20AND%20SERVICES) The company offers a range of identity authentication solutions, primarily as Software as a Service (SaaS), for commercial and government applications - The company's products and services are generally sold as **Software as a Service (SaaS)**, indicating a cloud-based subscription model[21](index=21&type=chunk) [Commercial Identification Solutions](index=6&type=section&id=Commercial%20Identification) These solutions, including ID Check®, Retail ID®, Age ID®, and Guest ID®, provide advanced document verification for fraud prevention and age-restricted sales - ID Check® technology is advanced document verification software capable of reading and verifying encoded formats on U.S. and Canadian driver licenses, non-driver IDs, and military IDs, even those not complying with AAMVA/ANSI/ISO standards[23](index=23&type=chunk)[24](index=24&type=chunk) - The ID Check® process quickly determines document validity, alteration, expiration, and age for restricted products, and can display, save, or print transaction records[26](index=26&type=chunk) - Commercial products include Retail ID® (fraud prevention), Age ID® (age verification), Guest ID® (hotel check-in), and ID Check® SDK (for software developers to integrate the technology)[27](index=27&type=chunk)[28](index=28&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [Government Identification Solutions](index=8&type=section&id=Government%20Identification) These systems, such as Defense ID and PORT ID, offer threat identification, identity authentication, and access control for law enforcement and military security - The Defense ID System provides law enforcement and military security officers with threat identification, identity authentication, and access control by scanning ID cards and comparing information against over **100 databases**[41](index=41&type=chunk) - PORT ID offers an integrated solution for validating ID credentials at ports and facilities, meeting TSA requirements for portable readers and listed on the TSA's QTL[42](index=42&type=chunk) - The Visitor Center (IM 3000), a component of Defense ID, streamlines visitor and vendor processing by scanning IDs, performing real-time background checks, and printing passes[43](index=43&type=chunk) [Strategy](index=9&type=section&id=STRATEGY) Intellicheck aims to be a leading security company in identity solutions, focusing on commercial workflow, fraud protection, risk management, and government access control - Intellicheck's objective is to be a leading security company in the identity sector, providing solutions for commercial workflow, fraud protection, risk management, and government access control, vendor validation, and suspect identification[45](index=45&type=chunk) [Commercial Systems Strategy](index=9&type=section&id=Commercial%20Systems) This strategy emphasizes marketing ID Check® as a productivity tool, forming strategic alliances, and focusing sales on SaaS licenses in financial, retail, and hospitality sectors - The company markets its technology as a productivity enhancement tool, leveraging its ID Check® software to automatically populate forms with government-issued photo ID data, increasing throughput and data integrity[45](index=45&type=chunk) - Strategic alliances with security solution providers (e.g., Lenel, AMAG, Zebra, Idemia) and participation in industry boards (AAMVA) are key to broadening marketing reach[46](index=46&type=chunk) - Sales and marketing efforts are focused on **SaaS license arrangements** in financial services, retail, and hospitality, with an intent to pursue additional licensing agreements and protect intellectual property[47](index=47&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk) [Government Identity Systems Strategy](index=10&type=section&id=Government%20Identity%20Systems) This strategy involves continuous product enhancement for law enforcement and port security, participation in programs like TWIC, and expanding data access for Defense ID - Product enhancement efforts support law enforcement, port security, and commercial installations, with continuous research and implementation of new ID cards, databases, and equipment[51](index=51&type=chunk) - The company is involved in the Transportation Worker Identification Credential Program (TWIC), being the first to have readers listed on the TSA's Qualified Technology List (QTL)[52](index=52&type=chunk) - Sales and marketing target new sectors for access control systems, and the company continuously increases access to data source information for its Defense ID system through internal scraping programs and agreements with law enforcement/government agencies[53](index=53&type=chunk)[54](index=54&type=chunk) [Revenue Sources and Target Industry Sectors](index=10&type=section&id=Our%20Revenue%20Sources) This section outlines the company's revenue generation methods and identifies key commercial and government sectors targeted for its identity authentication solutions [Revenue Sources](index=10&type=section&id=Revenue%20Sources) Revenue is generated through direct sales, SaaS subscriptions, revenue sharing from alliances, and sales of software upgrades and maintenance programs - Revenue is derived from direct sales, per transaction or subscription fees (**SaaS**) for licensed technology, revenue sharing from strategic alliances, and sales of software upgrades and extended maintenance programs[56](index=56&type=chunk) [Target Industry Sectors](index=10&type=section&id=Our%20Target%20Industry%20Sectors) Commercial systems target sectors with high fraud losses, while government systems focus on military, seaports, and law enforcement for access control - Commercial Identity Systems target sectors facing significant economic losses from fraud due to falsified identification, including banks, credit card issuers, retailers, casinos, and the hospitality industry[55](index=55&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) - Government Identity Systems, particularly Defense ID, are tailored for locations validating ID cards for access, with primary focus on military, seaports, oil refineries, and law enforcement sectors[58](index=58&type=chunk)[62](index=62&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) [Marketing and Distribution](index=12&type=section&id=MARKETING%20AND%20DISTRIBUTION) This section details the marketing and distribution strategies for both commercial and government identity systems, including direct sales, resellers, and government procurement channels [Commercial Identity Systems Marketing](index=12&type=section&id=Commercial%20Identity%20Systems) Marketing efforts for commercial systems include direct sales, resellers, web marketing, and trade shows, offering SaaS-based software and bundled solutions across multiple platforms - Marketing efforts for commercial identity systems include direct sales, resellers, license agreements, web marketing, trade shows, and public interest/trade associations[62](index=62&type=chunk)[65](index=65&type=chunk)[69](index=69&type=chunk) - The company generates revenue from software licensing and bundled hardware/software solutions sold on a **SaaS basis**, available across multiple platforms (Windows, Android, iOS, Linux, credit card terminals)[63](index=63&type=chunk)[64](index=64&type=chunk) [Government Identity Solutions Marketing](index=12&type=section&id=Government%20Identity%20Solutions) Government marketing involves sector-specific brochures, compliance with procurement regulations, and listing products on GSA Schedule 70 for direct government purchases - Government marketing involves sector-specific brochures for military, port, and law enforcement, compliance with procurement regulations, and responding to RFPs/RFQs[66](index=66&type=chunk)[67](index=67&type=chunk)[70](index=70&type=chunk) - All Defense ID products and labor services are listed on **GSA Schedule 70**, enabling direct purchases by government entities at pre-negotiated prices[71](index=71&type=chunk) [Major Customers](index=13&type=section&id=MAJOR%20CUSTOMERS) The company relies significantly on a limited number of major customers, though it anticipates future customer base expansion to reduce this dependence Revenue Concentration from Top 10 Customers | Year | % of Total Revenues from Top 10 Customers | | :--- | :------------------------------------------ | | 2019 | 66% | | 2018 | 52% | - The company anticipates its customer base will continue to expand, reducing future dependence on major customers[72](index=72&type=chunk) [Regulation](index=13&type=section&id=REGULATION) The sale and use of the company's Identity System products are subject to government regulations, particularly concerning data protection and storage - The sale and use of Identity System products are subject to government regulations, particularly concerning data protection and storage[73](index=73&type=chunk) [Competition](index=13&type=section&id=COMPETITION) The industry is highly competitive and rapidly changing, with Intellicheck asserting its ID Check® product's superiority due to its comprehensive barcode reading capabilities - The industry is intensely competitive and rapidly changing, with competitors offering ID reading and age calculation products[74](index=74&type=chunk) - Intellicheck believes its ID Check® product is superior in quality and functionality, especially due to its ability to read barcodes, which are utilized by all states and Canadian provinces for driver licenses and military IDs[74](index=74&type=chunk) - Competitors in the government identity sector include Idemia USA, HID Global, and U.S. government systems like DBIDS and AIE[75](index=75&type=chunk) [Manufacturing](index=13&type=section&id=MANUFACTURING) The company does not manufacture hardware but customizes, assembles, and tests commercial off-the-shelf (COTS) products with its specialized software in-house - The company does not manufacture readers or input devices, instead using commercial off-the-shelf (COTS) products from a small number of suppliers[77](index=77&type=chunk) - Government identity systems products are customized with software and specialized configurations, assembled, and tested in-house[78](index=78&type=chunk) [Research and Development](index=14&type=section&id=RESEARCH%20AND%20DEVELOPMENT) R&D efforts are focused on modifying existing software based on customer requirements and developing new, internally funded software solutions and improvements - R&D efforts focus on modifying existing software based on customer requirements (fee-based) and developing new software solutions/improvements (internally funded)[79](index=79&type=chunk) Research and Development Spending | Year Ended December 31, | R&D Spending ($) | | :---------------------- | :------------- | | 2019 | $3,656,679 | | 2018 | $2,904,166 | [Intellectual Property](index=14&type=section&id=INTELLECTUAL%20PROPERTY) The company protects its technology through 18 U.S. patents, international patents, pending applications, copyrights for software, and trademarks for its brand and products - The company holds **18 U.S. patents**, **1 Canadian patent**, and **1 United Kingdom patent**, with **5 additional patent applications pending**[80](index=80&type=chunk) - Patents cover commercially important aspects of identification document authentication and verification, and Defense ID System technology[80](index=80&type=chunk) - The company owns multiple copyrights for software source codes and graphics (ID Check® and other products) and several trademarks for its company, product names, and logos[94](index=94&type=chunk) [Employees](index=15&type=section&id=EMPLOYEES) As of March 18, 2020, Intellicheck had 34 full-time employees across executive management, information technology, sales and marketing, integration, customer support, and administration - As of March 18, 2020, Intellicheck had **34 full-time employees**, with roles in executive management (3), information technology (19), sales and marketing (6), integration and customer support (3), and administration (3)[96](index=96&type=chunk) [Item 1A. Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including a history of net losses and potential for continued losses, reliance on government data and long sales cycles, and the evolving nature of its industry [Risks Related to Our Business and Industry](index=16&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) The company faces risks from historical net losses, reliance on government data, long sales cycles, intellectual property protection, security breaches, and customer concentration - The company has incurred net losses since inception (**$2,548,711 in 2019**, **$3,963,576 in 2018**) and has an accumulated deficit of **$116,935,112** as of December 31, 2019, with potential for continued losses[98](index=98&type=chunk) - Reliance on reference data from government and quasi-government agencies for proprietary software, and access to over **100 databases** for Defense ID, poses a risk if these agencies cease cooperation[99](index=99&type=chunk)[122](index=122&type=chunk) - Long sales and implementation cycles for large retailers and government agencies, coupled with budgetary constraints and evolving industry standards, create uncertainty in revenue realization and growth[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) - Failure to protect proprietary technology through patents, trade secrets, copyrights, and trademarks, or potential infringement claims from third parties, could severely harm the company's competitive position and financial results[105](index=105&type=chunk)[111](index=111&type=chunk) - Security breaches or other disruptions compromising sensitive data (intellectual property, customer information, PII) could lead to legal claims, regulatory penalties, reputational damage, and operational disruptions[125](index=125&type=chunk)[126](index=126&type=chunk) - The company is highly dependent on a limited number of major customers, with the top ten accounting for **66% of total revenues in 2019** and **52% in 2018**, making it vulnerable to the loss of significant customers[72](index=72&type=chunk)[135](index=135&type=chunk) [Item 1B. Unresolved Staff Comments](index=22&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments to report - Not applicable[136](index=136&type=chunk) [Item 2. Properties](index=22&type=section&id=Item%202.%20Properties) The company's corporate headquarters is located in Melville, New York, occupying approximately 5,400 square feet under a lease expiring March 31, 2021 - Corporate headquarters are in Melville, New York, occupying **5,400 square feet** of office space[137](index=137&type=chunk) - The lease for the corporate headquarters expires on **March 31, 2021**[137](index=137&type=chunk) - The company believes its existing facility is adequate and additional space will be available if needed[137](index=137&type=chunk) [Item 3. Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any legal or regulatory proceedings or arbitrations that are expected to have a material adverse effect on its business - The company is not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on its business[138](index=138&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company has no mine safety disclosures to report - None[139](index=139&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on The Nasdaq Stock Market under the symbol "IDN", experiencing significant price volatility, with 38 shareholders of record as of March 17, 2020, and no anticipated cash dividends - The company's common stock is traded on The Nasdaq Stock Market under the symbol "**IDN**"[141](index=141&type=chunk) Common Stock Price Ranges (High/Low) | Period | Low ($) | High ($) | | :--------------- | :------ | :------- | | 2018 First quarter | $1.60 | $2.87 | | 2018 Second quarter| $1.74 | $2.36 | | 2018 Third quarter | $1.91 | $2.75 | | 2018 Fourth quarter| $1.96 | $2.63 | | 2019 First quarter | $2.10 | $3.55 | | 2019 Second quarter| $3.28 | $6.25 | | 2019 Third quarter | $4.01 | $5.95 | | 2019 Fourth quarter| $4.75 | $8.04 | | 2020 First quarter*| $4.36 | $10.15 | *Portion of first fiscal quarter through March 17, 2020. - As of **March 17, 2020**, there were **38 shareholders of record** of the common stock[143](index=143&type=chunk) - No cash dividends were paid during the fiscal year ended December 31, 2019, and none are anticipated in the foreseeable future[143](index=143&type=chunk) Equity Compensation Plan Information (as of December 31, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :---------------------------------------------- | :-------------------------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | 1,424,293 | $1.79 | 789,463 | | Equity compensation plans not approved by security holders | - | N/A | N/A | | Total | 1,424,293 | $1.79 | 789,463 | [Item 6. Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of selected financial data, including key statement of operations and balance sheet figures, offering a historical overview of the company's financial performance and position from 2015 to 2019 Selected Statement of Operations Data (in thousands, except per share data) | Indicator | 2015 ($000) | 2016 ($000) | 2017 ($000) | 2018 ($000) | 2019 ($000) | | :---------------------------- | :------ | :------ | :------ | :------ | :------ | | Revenues | $7,015 | $3,839 | $3,598 | $4,433 | $7,664 | | Loss from operations | $(5,480)| $(5,750)| $(6,080)| $(4,093)| $(2,648)| | Net loss | $(5,334)| $(5,735)| $(6,021)| $(3,964)| $(2,549)| | Net loss per common share Basic | $(0.55) | $(0.58) | $(0.48) | $(0.26) | $(0.16) | | Net loss per common share Diluted | $(0.55) | $(0.58) | $(0.48) | $(0.26) | $(0.16) | | Common shares used in computing per share amounts Basic | 9,658 | 9,915 | 12,429 | 15,542 | 15,792 | | Common shares used in computing per share amounts Diluted | 9,658 | 9,915 | 12,429 | 15,542 | 15,792 | Selected Balance Sheet Data (in thousands) | Indicator | 2015 ($000) | 2016 ($000) | 2017 ($000) | 2018 ($000) | 2019 ($000) | | :-------------------- | :------ | :------ | :------ | :------ | :------ | | Cash | $5,953 | $3,092 | $8,010 | $4,376 | $3,351 | | Working capital | $5,659 | $2,471 | $7,340 | $4,244 | $3,178 | | Total assets | $18,473 | $14,534 | $17,882 | $14,461 | $13,997 | | Total liabilities | $2,146 | $1,598 | $1,873 | $1,541 | $2,248 | | Stockholders' equity | $16,326 | $12,935 | $16,009 | $12,920 | $11,750 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, highlighting key accounting policies, a detailed comparison of 2019 and 2018 financial performance, and an analysis of liquidity and capital resources [Overview](index=25&type=section&id=Overview) Intellicheck is a technology company focused on identity authentication and threat identification solutions for bank and retail fraud prevention, law enforcement, and access control in government, military, and commercial markets - Intellicheck is a technology company focused on identity authentication and threat identification solutions for bank and retail fraud prevention, law enforcement, and access control in government, military, and commercial markets[150](index=150&type=chunk) - Key products include Retail ID®, Age ID®, and Defense ID®[150](index=150&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) This section outlines the company's critical accounting policies and significant estimates, including revenue recognition, stock-based compensation, deferred taxes, and goodwill impairment - Critical accounting policies include revenue recognition, stock-based compensation, deferred taxes, goodwill and intangible asset valuation and impairment, and commitments and contingencies[152](index=152&type=chunk) - Significant estimates and assumptions are made for goodwill and intangible asset impairment, deferred tax valuation allowances, allowance for doubtful accounts, revenue allocation for multi-element arrangements, and fair value of stock options[151](index=151&type=chunk) - Goodwill of **$8,101,661** remained unchanged in 2019 and 2018, with no impairment recognized after annual tests[155](index=155&type=chunk)[157](index=157&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations%20(All%20figures%20were%20rounded%20to%20the%20nearest%20$1,000)) This section details the company's financial performance for 2019 versus 2018, highlighting significant changes in revenues, gross profit, operating expenses, and net loss Key Financial Performance (2019 vs. 2018) | Metric | 2019 ($000) | 2018 ($000) | Change ($000) | Change (%) | | :---------------------- | :---------- | :---------- | :------------ | :--------- | | Revenues | $7,664 | $4,433 | $3,231 | 73% | | SaaS Revenue | $6,102 | $2,696 | $3,406 | 126% | | Gross Profit | $6,668 | $4,047 | $2,621 | 65% | | Gross Profit % of Revenues | 87% | 91% | -4% | | | Operating Expenses | $9,316 | $8,140 | $1,176 | 14% | | Selling, General & Administrative | $5,659 | $5,236 | $423 | 8% | | Research & Development | $3,657 | $2,904 | $753 | 26% | | Interest and Other Income | $99 | $130 | $(31) | -24% | | Net Loss | $(2,549) | $(3,964) | $1,415 | -36% | - The decrease in gross profit percentage in 2019 was primarily due to increased hosting costs on SaaS revenue[168](index=168&type=chunk) - The increase in SG&A expenses was mainly due to higher stock-based compensation, sales commissions, and accrued incentive plans, partially offset by reduced sales personnel headcount and travel[169](index=169&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources%20(All%20figures%20were%20rounded%20to%20the%20nearest%20$1,000)) This section analyzes the company's cash position, working capital, and cash flow activities, concluding that current resources and credit facilities are sufficient for the next 12 months Key Liquidity and Capital Resources (as of December 31, 2019) | Metric | Amount ($000) | | :--------------------- | :------------ | | Cash | $3,351 | | Working Capital | $3,178 | | Total Assets | $13,997 | | Stockholders' Equity | $11,750 | Cash Flow Activities (2019 vs. 2018) | Activity | 2019 ($000) | 2018 ($000) | | :--------------------- | :---------- | :---------- | | Net decrease in cash | $(1,025) | $(3,634) | | Cash used in operating activities | $(1,841) | $(4,221) | | Cash generated in investing activities | $22 | $(101) | | Cash generated in financing activities | $794 | $688 | - A revolving credit facility with Citibank, allowing borrowings up to **$2,000,000**, was established in February 2019 and remained unused with full availability as of December 31, 2019[175](index=175&type=chunk) - The company anticipates that available cash, expected cash from operations, and the revolving credit agreement will be sufficient to meet working capital and capital expenditure requirements for at least the next **12 months**[176](index=176&type=chunk) [Adjusted EBITDA](index=28&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA is presented as a non-GAAP financial measure used by management to assess operational strength, calculated by adjusting net loss for non-cash and non-operating items - Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate operational strength and performance, calculated by adding back interest and other income, income taxes, impairments, depreciation, amortization, and stock-based compensation to net loss[181](index=181&type=chunk)[182](index=182&type=chunk) Adjusted EBITDA Reconciliation | Metric | 2019 ($) | 2018 ($) | | :-------------------------- | :------------ | :------------ | | Net loss | $(2,548,711) | $(3,963,576) | | Interest and other income | $(99,059) | $(129,923) |\ | Depreciation and amortization | $249,895 | $245,548 | | Stock-based compensation expense | $584,865 | $186,707 | | Adjusted EBITDA | $(1,813,010) | $(3,661,244) | [Net Operating Loss Carry Forwards](index=29&type=section&id=Net%20Operating%20Loss%20Carry%20Forwards) The company holds approximately $17 million in net operating loss (NOL) carryforwards as of December 31, 2019, with varying expiration rules based on the year incurred - As of December 31, 2019, the company had approximately **$17 million** in available net operating loss (NOL) carryforwards[184](index=184&type=chunk) - Federal and state NOLs incurred through 2017 expire between 2020 and 2038, while 2018 and 2019 NOLs can be utilized at **80%** with no expiration[184](index=184&type=chunk)[302](index=302&type=chunk) [Contractual Obligations](index=29&type=section&id=Contractual%20Obligations) This section details the company's contractual obligations as of December 31, 2019, primarily consisting of operating lease payments Contractual Obligations as of December 31, 2019 | Obligation | Total ($) | Less than 1 year ($) | 1-3 years ($) | 3-5 years ($) | More than 5 years ($) | | :------------------- | :---------- | :--------------- | :---------- | :-------- | :---------------- | | Operating Leases | $163,822 | $130,930 | $32,892 | $- | $- | | Total Contractual Obligations | $163,822 | $130,930 | $32,892 | $- | $- | [Recently Issued Accounting Pronouncements](index=29&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) The company is evaluating the impact of new accounting standards on income taxes and goodwill impairment, while other pronouncements were deemed to have no material impact - The company is evaluating the impact of ASU 2019-12 (Income Taxes) and ASU 2017-04 (Goodwill Impairment), both effective for fiscal years beginning after December 15, 2019[187](index=187&type=chunk)[190](index=190&type=chunk) - ASU 2018-15 (Cloud Computing) and SEC amendments on stockholders' equity disclosures were determined not to have a material impact[188](index=188&type=chunk)[189](index=189&type=chunk) - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing a right-to-use asset of approximately **$266,000** and a corresponding operating lease liability of **$274,000**, with no significant impact on the statement of operations[192](index=192&type=chunk) [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has not entered into any off-balance sheet financing arrangements, special purpose entities, or guarantees of other entities' debt or commitments - The company has not entered into any off-balance sheet financing arrangements, established special purpose entities, guaranteed debt/commitments of other entities, or entered into options on non-financial assets[194](index=194&type=chunk) [Forward Looking Statements](index=31&type=section&id=Forward%20Looking%20Statements) The document contains forward-looking statements regarding future financial performance, which are subject to inherent uncertainties and changes in circumstances - The document contains forward-looking statements regarding future growth in revenues, loss from operations, and cash flow, which are subject to inherent uncertainties and changes in circumstances[195](index=195&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure is credit risk concentration from cash and cash equivalents held across multiple financial institutions, which are periodically evaluated - Financial instruments subject to concentrations of credit risk primarily consist of cash and cash equivalents[196](index=196&type=chunk) - Cash is maintained across **three financial institutions**, and marketable securities/short-term investments are in money market funds and bank certificates of deposit[196](index=196&type=chunk) - The company performs periodic evaluations of the credit standing of these financial institutions[196](index=196&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=31&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section incorporates the company's audited financial statements for the years ended December 31, 2019 and 2018, along with supplementary data, including the independent auditor's report, balance sheets, statements of operations, stockholders' equity, and cash flows, followed by comprehensive notes [Report of Independent Registered Public Accounting Firm](index=38&type=section&id=REPORT%20OF%20INDEPENDENT%20REGISTERED%20PUBLIC%20ACCOUNTING%20FIRM) EisnerAmper LLP issued an unqualified opinion on Intellicheck, Inc.'s financial statements for 2019 and 2018, affirming their fair presentation in accordance with GAAP - EisnerAmper LLP, the independent registered public accounting firm, issued an unqualified opinion on Intellicheck, Inc.'s financial statements for the years ended December 31, 2019 and 2018, stating they present fairly the financial position, results of operations, and cash flows in conformity with GAAP[222](index=222&type=chunk) [Balance Sheets](index=39&type=section&id=Balance%20Sheets%20as%20of%20December%2031,%202019%20and%202018) This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of December 31, 2019 and 2018 Balance Sheet Summary (as of December 31) | Asset/Liability/Equity | 2019 ($) | 2018 ($) | | :--------------------- | :----------- | :----------- | | **ASSETS:** | | | | Cash | 3,350,853 | 4,376,017 | | Accounts receivable, net | 1,674,894 | 1,019,434 | | Inventory | 6,113 | 82,337 | | Total current assets | 5,380,096 | 5,749,203 | | Property and equipment, net | 181,731 | 264,583 | | Goodwill | 8,101,661 | 8,101,661 | | Intangible assets, net | 174,237 | 306,575 | | Total assets | 13,997,171 | 14,460,781 | | **LIABILITIES:** | | | | Accounts payable | 95,388 | 73,334 | | Accrued expenses | 1,408,086 | 726,918 | | Deferred revenue, current | 572,391 | 704,536 | | Total current liabilities | 2,201,716 | 1,504,788 | | Total liabilities | 2,247,658 | 1,541,076 | | **STOCKHOLDERS' EQUITY:** | | | | Total stockholders' equity | 11,749,513 | 12,919,705 | [Statements of Operations](index=40&type=section&id=Statements%20of%20Operations%20for%20the%20Years%20Ended%20December%2031,%202019%20and%202018) This section provides a summary of the company's revenues, cost of revenues, gross profit, operating expenses, and net loss for the years ended December 31, 2019 and 2018 Statements of Operations Summary (Years Ended December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :----------- | :----------- | | REVENUES | 7,663,658 | 4,433,454 | | COST OF REVENUES | (995,791) | (386,617) | | Gross profit | 6,667,867 | 4,046,837 | | OPERATING EXPENSES | | | | Selling, general and administrative | 5,658,958 | 5,236,170 | | Research and development | 3,656,679 | 2,904,166 | | Total operating expenses | 9,315,637 | 8,140,336 | | Loss from operations | (2,647,770) | (4,093,499) | | Interest and other income | 99,059 | 129,923 | | Net loss | (2,548,711) | (3,963,576) | | Loss per common share - Basic/Diluted | (0.16) | (0.26) | | Weighted average common shares - Basic/Diluted | 15,792,470 | 15,542,480 | [Statements of Stockholders' Equity](index=41&type=section&id=Statements%20of%20Stockholders%27%20Equity%20for%20the%20Years%20Ended%20December%2031,%202019%20and%202018) This section details changes in the company's common stock, additional paid-in capital, accumulated deficit, and total stockholders' equity for the years ended December 31, 2019 and 2018 Statements of Stockholders' Equity Summary (Years Ended December 31) | Item | Common Stock Shares (2019) | Common Stock Amount (2019) ($) | Additional Paid-in Capital (2019) ($) | Accumulated Deficit (2019) ($) | Total Stockholders' Equity (2019) ($) | | :------------------------ | :------------------------- | :------------------------- | :-------------------------------- | :------------------------- | :-------------------------------- | | BALANCE, December 31, 2018 | 15,638,765 | $15,639 | $127,290,467 | $(114,386,401) | $12,919,705 | | Stock-based compensation expense | - | - | 584,865 | - | 584,865 | | Exercise of stock options, net | 73,008 | 73 | 89,427 | - | 89,500 | | Exercise of warrants | 320,070 | 321 | 703,833 | - | 704,154 | | Net loss | - | - | - | (2,548,711) | (2,548,711) | | BALANCE, December 31, 2019 | 16,041,650 | $16,042 | $128,668,583 | $(116,935,112) | $11,749,513 | [Statements of Cash Flows](index=42&type=section&id=Statements%20of%20Cash%20Flows%20for%20the%20Years%20Ended%20December%2031,%202019%20and%202018) This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the years ended December 31, 2019 and 2018 Statements of Cash Flows Summary (Years Ended December 31) | Cash Flow Activity | 2019 ($) | 2018 ($) | | :---------------------------- | :----------- | :----------- | | Net cash used in operating activities | (1,840,850) | (4,220,611) | | Net cash provided by (used in) investing activities | 22,032 | (101,054) | | Net cash provided by financing activities | 793,654 | 687,521 | | Net decrease in cash | (1,025,164) | (3,634,144) | | CASH, beginning of year | 4,376,017 | 8,010,161 | | CASH, end of year | 3,350,853 | 4,376,017 | [Notes to Financial Statements](index=43&type=section&id=NOTES%20TO%20FINANCIAL%20STATEMENTS) These notes provide detailed explanations of the company's business, significant accounting policies, and specific financial accounts, offering crucial context to the financial statements [Nature of Business](index=43&type=section&id=1%20NATURE%20OF%20BUSINESS) Intellicheck, Inc. develops and markets identity authentication and threat identification solutions, operating with a history of net losses but expecting sufficient liquidity for the next 12 months - Intellicheck, Inc. develops, integrates, and markets identity authentication and threat identification solutions for commercial and government markets, including Retail ID®, Age ID®, and Defense ID®[233](index=233&type=chunk) - The company incurred a net loss of **$2,548,711** and used **$1,840,850** in cash from operations in 2019, with an accumulated deficit of **$116,935,112** as of December 31, 2019[235](index=235&type=chunk) - Existing and future resources are expected to satisfy working capital requirements for at least the next **12 months**, but additional financing or expense reduction may be needed if performance falls short[235](index=235&type=chunk)[236](index=236&type=chunk) [Significant Accounting Policies](index=43&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details the company's key accounting principles, including revenue recognition, goodwill and long-lived asset impairment, and deferred tax valuation allowances - Revenue is recognized when a customer obtains control of promised goods or services, with the majority from fixed-price and per-scan contracts for SaaS and licensed software[246](index=246&type=chunk)[249](index=249&type=chunk)[250](index=250&type=chunk) - Goodwill and long-lived assets are reviewed for impairment annually (goodwill) or when impairment indicators are present (long-lived assets); no impairment charges were recognized in 2019 or 2018[243](index=243&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) - The company has recorded a full valuation allowance for its net deferred tax assets due to uncertainty of their realizability, given historical net operating losses[263](index=263&type=chunk)[299](index=299&type=chunk)[300](index=300&type=chunk) Disaggregation of Revenue (Years Ended December 31) | Products and services | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Software as a Service (SaaS) | 6,102,280 | 2,696,208 | | Other subscription and support services | 682,325 | 1,042,196 | | Equipment | 480,304 | 362,625 | | Non-recurring services | 330,895 | 206,910 | | Extended warranties on equipment | 59,146 | 120,710 | | Other | 8,708 | 4,805 | | **Total** | **7,663,658** | **4,433,454** | | Timing of revenue recognition | 2019 ($) | 2018 ($) | | :-------------------------- | :---------- | :---------- | | Products transferred at a point in time | 489,012 | 367,430 | | Services transferred over time | 7,174,646 | 4,066,024 | | **Total** | **7,663,658** | **4,433,454** | [Accounts Receivable](index=50&type=section&id=3.%20ACCOUNTS%20RECEIVABLE) This section provides a breakdown of accounts receivable, net of the allowance for doubtful accounts, as of December 31, 2019 and 2018 Accounts Receivable, Net (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Accounts receivable | 1,716,949 | 1,044,109 | | Less: Allowance for doubtful accounts | (42,055) | (24,675) | | Accounts receivable, net | 1,674,894 | 1,019,434 | [Property and Equipment](index=50&type=section&id=4.%20PROPERTY%20AND%20EQUIPMENT) This section details the company's property and equipment, net of accumulated depreciation and amortization, as of December 31, 2019 and 2018, along with depreciation expense Property and Equipment, Net (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Computer equipment | 1,025,287 | 992,336 | | Furniture and fixtures | 136,524 | 136,524 | | Leasehold improvements | 41,257 | 41,257 | | Office equipment | 591,111 | 589,357 | | Total | 1,794,179 | 1,759,474 | | Less – Accumulated depreciation and amortization | (1,612,448) | (1,494,891) | | **Net Property and Equipment** | **181,731** | **264,583** | Depreciation Expense (Years Ended December 31) | Year | Depreciation Expense ($) | | :--- | :----------------------- | | 2019 | 117,557 | | 2018 | 88,545 | [Goodwill and Intangible Assets](index=50&type=section&id=5.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) This section outlines the company's goodwill and intangible assets, net of amortization, as of December 31, 2019 and 2018, noting no impairment charges Intangible Assets, Net (as of December 31) | Item | 2019 Net ($) | 2018 Net ($) | | :------------------------ | :----------- | :----------- | | Patents and copyrights | 174,237 | 208,686 | | Trade name | - | 7,765 | | Non-contractual customer relationships | - | 90,124 | | **Total Intangible Assets, Net** | **174,237** | **306,575** | Amortization Expense of Intangible Assets (Years Ended December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Cost of sales | 104,830 | 129,496 | | General and administrative | 27,508 | 27,507 | | **Total Amortization Expense** | **132,338** | **157,003** | - Goodwill remained at **$8,101,661** as of December 31, 2019 and 2018, resulting from the acquisitions of Mobilisa, Inc. and Positive Access Corporation, with no impairment charges recognized[288](index=288&type=chunk)[291](index=291&type=chunk) [Note Receivable](index=52&type=section&id=6.%20NOTE%20RECEIVABLE) This section describes a promissory note from a 2015 asset sale, detailing its remaining balance, interest rate, and monthly payment schedule - A promissory note from the sale of wireless enterprise assets in 2015 had a total balance of **$29,017** as of December 31, 2019, down from **$71,137** in 2018[294](index=294&type=chunk) - The note bears **4% interest** with monthly payments of **$3,683** (principal and interest) over a **60-month term**, expiring in August 2020[294](index=294&type=chunk) [Debt](index=52&type=section&id=7.%20DEBT) This section details the company's revolving credit facility with Citibank, including its borrowing limit, collateral, interest rate, and unused availability - A revolving credit facility with Citibank, established in February 2019, allows borrowings up to **$2,000,000**, collateralized by a fixed income investment account[295](index=295&type=chunk) - The facility bears interest at Citibank's Base Rate (**6.25%** at December 31, 2019) minus **2%**, with no amounts outstanding and **$2,000,000** unused availability as of December 31, 2019[295](index=295&type=chunk) [Accrued Expenses](index=52&type=section&id=8.%20ACCURRED%20EXPENSES) This section provides a breakdown of accrued expenses, including professional fees, payroll, incentive bonuses, and other items, as of December 31, 2019 and 2018 Accrued Expenses (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Professional fees | 171,331 | 69,406 | | Payroll and related | 544,441 | 406,925 | | Incentive bonuses | 632,105 | - | | Severance payments to former officer | - | 158,406 | | Other | 60,209 | 92,181 | | **Total Accrued Expenses** | **1,408,086** | **726,918** | [Income Taxes](index=52&type=section&id=9.%20INCOME%20TAXES) This section explains the impact of the TCJA on the company's tax rate, its full valuation allowance against deferred tax assets, and the details of its net operating loss carryforwards - The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the U.S. corporate income tax rate to a flat **21% in 2018**, leading to a remeasurement and decrease in deferred tax assets and liabilities[297](index=297&type=chunk)[298](index=298&type=chunk) - The company has historically not paid income taxes due to continuing losses and has recorded a full valuation allowance against its net deferred tax assets, as realization is not considered more likely than not[299](index=299&type=chunk)[300](index=300&type=chunk) Deferred Tax Assets and Liabilities (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | **Deferred tax assets:** | | | | Net operating loss carryforwards | 4,498,000 | 3,914,000 | | Stock-based compensation | 171,000 | 82,000 | | Research and development tax credits | 333,000 | 258,000 | | Total deferred tax assets | 5,091,000 | 4,360,000 | | **Deferred tax liabilities:** | | | | Depreciation | (30,000) | (37,000) | | Total deferred tax liabilities | (30,000) | (37,000) | | Net deferred tax assets | 5,061,000 | 4,323,000 | | Less: Valuation allowance | (5,061,000) | (4,323,000) | | Deferred tax assets, net of allowance | - | - | - The company's available NOL at December 31, 2019, was approximately **$17 million**, with pre-2018 NOLs expiring from 2020-2039 and 2018/2019 NOLs having no expiration but limited to **80% utilization**[302](index=302&type=chunk) [Stockholders' Equity](index=55&type=section&id=10.%20STOCKHOLDERS%27%20EQUITY) This section details the company's equity compensation plans, including stock options and restricted stock units, and summarizes stock option activity and share-based compensation expense - The 2015 Omnibus Incentive Plan covers up to **3,500,000 common shares** for officers, directors, key employees, and consultants, allowing for incentive stock options, nonqualified stock options, and restricted stock units (RSUs)[307](index=307&type=chunk) Stock Option Activity (Years Ended December 31) | Item | 2019 Number of Shares Subject to Issuance | 2019 Weighted average Exercise Price ($) | 2018 Number of Shares Subject to Issuance | 2018 Weighted average Exercise Price ($) | | :------------------------ | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Outstanding at beginning of year | 1,072,332 | 1.44 | 1,631,358 | 1.36 | | Granted | 444,163 | 2.68 | 102,500 | 2.86 | | Exercised | (94,872) | 2.08 | (593,838) | 1.16 | | Outstanding at end of year | 1,421,623 | 1.78 | 1,072,332 | 1.44 | | Exercisable at end of year | 1,069,542 | 1.49 | - | - | Share-Based Compensation Expense (Years Ended December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Stock options | 515,805 | 124,886 | | Restricted stock units | 69,060 | 61,821 | | **Total Compensation Cost Recognized** | **584,865** | **186,707** | - As of December 31, 2019, there was **$485,110** of unrecognized compensation cost related to unvested stock options and RSUs, expected to be recognized over a weighted average period of approximately **2.87 years**[316](index=316&type=chunk) - As of December 31, 2019, **63,430 warrants** remained outstanding with an exercise price of **$2.20**, expiring through 2021; **320,070 warrants** were exercised in 2019[318](index=318&type=chunk) [Commitments and Contingencies](index=58&type=section&id=11.%20COMMITMENTS%20AND%20CONTINGENCIES) This section outlines the company's operating lease obligations, a new software license agreement, a royalty agreement, and executive incentive bonus liabilities - The company leases its Melville, New York office, with monthly payments of **$10,334**, under an operating lease expiring **March 31, 2021**[319](index=319&type=chunk) - A new software license agreement was entered into on February 26, 2020, for **$400,000**, with an initial payment of **$100,000** and an obligation to pay **$300,000** by December 31, 2020[320](index=320&type=chunk) - The company has a royalty agreement with a former officer, paying **0.005%** on gross sales from **$2M to $52M** and **0.0025%** above **$52M** for specific patents, with cumulative fees of approximately **$2,000** through December 31, 2019[321](index=321&type=chunk) - Executive incentive bonus plans for 2019 resulted in a bonus liability of **$402,369** for executive management and **$229,736** for non-executives/non-sales personnel, paid in March 2020[327](index=327&type=chunk)[328](index=328&type=chunk) [Quarterly Financial Data (Unaudited)](index=60&type=section&id=12.%20QUARTERLY%20FINANCIAL%20DATA%20(UNAUDITED)) This section presents unaudited quarterly financial data for 2019 and 2018, including revenues, gross profit, income/loss from operations, and net income/loss per share Unaudited Quarterly Financial Data (Dollars in thousands, except per share data) | Item | 2019 Q1 ($000) | 2019 Q2 ($000) | 2019 Q3 ($000) | 2019 Q4 ($000) | 2018 Q1 ($000) | 2018 Q2 ($000) | 2018 Q3 ($000) | 2018 Q4 ($000) | | :------------------------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Revenues | $1,279 | $1,558 | $1,930 | $2,897 | $1,062 | $1,001 | $1,040 | $1,330 | | Gross profit | $1,087 | $1,339 | $1,671 | $2,571 | $962 | $919 | $927 | $1,239 | | Income (loss) from operations | $(1,219)| $(920) | $(581) | $72 | $(1,082)| $(1,143)| $(1,154)| $(714) | | Net income (loss) | $(1,213)| $(874) | $(568) | $106 | $(1,068)| $(1,101)| $(1,131)| $(664) | | Net loss per common share: Basic/Diluted | $(0.08) | $(0.06) | $(0.04) | $0.01 | $(0.07) | $(0.07) | $(0.07) | $(0.04) | [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=31&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) There have been no changes in or disagreements with the company's principal independent registered public accounting firm for the two-year period ended December 31, 2019 - There have been no changes in or disagreements with the principal independent registered public accounting firm for the two-year period ended December 31, 2019[198](index=198&type=chunk) [Item 9A. Controls and Procedures](index=31&type=section&id=Item%209A.%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[199](index=199&type=chunk) - Management, including the CEO and CFO, evaluated and concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[202](index=202&type=chunk) - There were no material changes in internal control over financial reporting during the most recently completed fiscal quarter[201](index=201&type=chunk) [Item 9B. Other Information](index=31&type=section&id=Item%209B.%20Other%20Information) There is no other information to report in this section - None[203](index=203&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=33&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the company's 2020 definitive Proxy Statement, which will be filed within **120 days** after December 31, 2019[206](index=206&type=chunk) [Item 11. Executive Compensation](index=33&type=section&id=Item%2011.%20Executive%20Compensation) Information concerning executive compensation is incorporated by reference from the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the company's 2020 definitive Proxy Statement under the captions "Executive Compensation" and "Director Compensation"[207](index=207&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=33&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of certain beneficial owners and management, as well as related stockholder matters, is incorporated by reference from the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the company's 2020 definitive Proxy Statement under the captions "Other Information—Security Ownership of Certain Beneficial Owners and Management" and "Other Information – Equity Compensation Plan Information"[207](index=207&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=33&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the company's 2020 definitive Proxy Statement under the captions "Other Information – Related Party Transactions Overview," "Other Information – Certain Transactions with Related Persons" and "Director Attributes and Independence"[208](index=208&type=chunk) [Item 14. Principal Accounting Fees and Services](index=33&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information concerning principal accounting fees and services is incorporated by reference from the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the company's 2020 definitive Proxy Statement under the caption "Proposal 2 – Ratification of the Selection of Independent Auditors"[208](index=208&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=33&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements filed as part of the 10-K report, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows for 2019 and 2018, and provides a comprehensive index of exhibits - The financial statements included are Balance Sheets, Statements of Operations, Statements of Stockholders' Equity, and Statements of Cash Flows for the years ended December 31, 2019 and 2018[210](index=210&type=chunk) - The exhibit index lists various corporate documents, including the Certificate of Incorporation, By-laws, specimen stock certificate, and several stock option plans (1998, 1999, 2001, 2003, 2006, 2015 Omnibus Incentive Plan)[210](index=210&type=chunk)[211](index=211&type=chunk) - Other exhibits include employment and severance agreements, a Code of Business Conduct and Ethics, a list of subsidiaries, and certifications (CEO/CFO pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), along with XBRL instance and taxonomy documents[211](index=211&type=chunk)[212](index=212&type=chunk)[218](index=218&type=chunk)

Financial Data and Key Metrics Changes - The company achieved positive adjusted EBITDA of over $216,000 in Q4 2019, marking the first EBITDA positive quarter since Q3 2014 [8][37] - Total revenue for Q4 2019 was $2.897 million, a 118% increase compared to $1.330 million in Q4 2018 [35] - SaaS revenue for Q4 2019 was approximately $2.557 million, representing a 209% increase from $826,000 in Q4 2018 [35] - The company reported a net income of $106,000 for Q4 2019, compared to a net loss of $664,000 in Q4 2018 [37] - Total revenue for the full year 2019 was $7.67 million, up 73% from $4.43 million in 2018 [38] Business Line Data and Key Metrics Changes - SaaS revenues grew 126% in 2019 compared to 2018, reaching $6.1 million [38] - Total scan volumes increased by 46% in 2019, with Q4 scan volumes up 98% compared to Q4 2018 [11][38] - The transition to a per-scan pricing model significantly contributed to revenue growth, particularly during the holiday season [10][12] Market Data and Key Metrics Changes - The company noted that Black Friday was the largest scan day of the year with over 620,000 scans, a 125% increase over 2018 [11] - The retail sector has shown strong demand for the company's services, particularly in age-restricted markets and law enforcement [27] Company Strategy and Development Direction - The company is focusing on expanding its client base among financial services companies, with five major credit card issuers now as clients [22] - The management emphasized the importance of pricing power as contracts come up for renewal, indicating a shift towards more favorable pricing models [23] - The company is actively working on a robust implementation pipeline with 33 projects in various stages [26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the ongoing COVID-19 situation, stating that operations can continue remotely without disruption [30] - The CEO highlighted the increasing relevance of identity theft and fraud, suggesting a growing market for the company's services [28] - The management remains optimistic about 2020, despite not providing specific guidance due to the evolving situation [116] Other Important Information - The company ended Q4 2019 with $3.35 million in cash, an increase from $2.8 million in Q3 2019 [10] - The board announced the addition of two new members, enhancing the company's governance [31][32] Q&A Session Summary Question: Update on financial services company number five or six - Management indicated that number five is an online bank with limited scan volume expectations, while number six is rolling out to subprime loan locations [48] Question: When will new clients seven and eight begin to see scans? - Client number eight is in production, while client number seven's scan volume will depend on training their call center staff [50][51] Question: Any hesitation from customers regarding implementations due to COVID-19? - Management confirmed that implementations are not affected as they are conducted remotely [62] Question: What percentage of revenue is generated at checkout versus online? - The majority of revenue is currently generated in-store, with online services accounting for about 10% of revenue [64] Question: How quickly can online services be set up for existing clients? - The setup can be done quickly, often within weeks, depending on the retailer's prioritization [106] Question: Impact of COVID-19 on scanning activity? - No significant impact on scanning activity has been observed so far, with scans in line with seasonal expectations [112] Question: How many financial services institutions does the company aim to engage with in 2020? - The company is in discussions with multiple financial institutions, focusing on major credit card issuers [127]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File No.: 000-50296 Delaware 11-3234779 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Em ...

Intellicheck, Inc (NASDAQ:IDN) Q3 2019 Results Earnings Conference Call November 7, 2019 4:30 PM ET Company Participants Gar Jackson - IR Bryan Lewis - CEO Bill White - CFO Conference Call Participants Mike Grondahl - Northland Capital Markets Roger Liddell - Clear Harbor Asset Management Scott Buck - B. Riley Amy Norflus - Neuberger Berman Jeff Kobylarz - Diamond Bridge Capital Operator Greetings. Welcome to the Intellicheck's Third Quarter 2019 Earnings Call. [Operator Instructions] Please note that this ...

[PART I – Financial Information](index=4&type=section&id=PART%20I%20%E2%80%93%20Financial%20Information) This section presents Intellicheck, Inc.'s unaudited consolidated financial statements and management's discussion and analysis for the periods ended June 30, 2019 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Intellicheck, Inc.'s unaudited consolidated financial statements, including balance sheets, operations, equity, cash flows, and notes, highlighting revenue growth and a narrowed net loss [Balance Sheets](index=4&type=section&id=Balance%20Sheets) The balance sheet as of June 30, 2019, shows a decrease in total assets to $13.4 million from $14.5 million, primarily due to reduced cash, alongside increased liabilities and decreased equity Balance Sheet Summary (Unaudited) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash | $3,061,041 | $4,376,017 | | Total current assets | $4,655,191 | $5,749,203 | | Goodwill | $8,101,661 | $8,101,661 | | Total assets | $13,435,794 | $14,460,781 | | **Liabilities & Equity** | | | | Total current liabilities | $1,770,937 | $1,504,788 | | Total liabilities | $1,892,443 | $1,541,076 | | Total stockholders' equity | $11,543,351 | $12,919,705 | [Statements of Operations](index=5&type=section&id=Statements%20of%20Operations) For Q2 2019, revenues increased 55.6% to $1.56 million, with a narrowed net loss of $0.87 million, while six-month revenues grew 37.5% to $2.84 million Statements of Operations Highlights (Unaudited) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,557,991 | $1,001,418 | $2,836,985 | $2,063,480 | | Gross Profit | $1,339,003 | $919,025 | $2,425,700 | $1,880,618 | | Loss from Operations | ($919,742) | ($1,143,596) | ($2,138,752) | ($2,225,423) | | Net Loss | ($873,677) | ($1,100,375) | ($2,086,668) | ($2,168,332) | | Loss per Share (Basic/Diluted) | ($0.06) | ($0.07) | ($0.13) | ($0.14) | [Statements of Stockholders' Equity](index=6&type=section&id=Statements%20of%20Stockholders%27%20Equity) Stockholders' equity decreased from $12.9 million to $11.5 million due to the net loss, partially offset by stock option exercises and compensation expense - For the six months ended June 30, 2019, total stockholders' equity decreased by approximately **$1.4 million**, from **$12,919,705** to **$11,543,351**[16](index=16&type=chunk) - Key changes in equity during the first six months of 2019 included a net loss of **$2,086,668**, stock-based compensation of **$442,781**, and proceeds from stock option and warrant exercises totaling **$267,533**[16](index=16&type=chunk) [Statements of Cash Flows](index=8&type=section&id=Statements%20of%20Cash%20Flows) Net cash used in operating activities for the six months ended June 30, 2019, was $1.60 million, leading to a $1.31 million decrease in the cash balance Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,596,830) | ($2,127,580) | | Net cash provided by (used in) investing activities | $14,321 | ($107,471) | | Net cash provided by financing activities | $267,533 | $687,521 | | **Net decrease in cash** | **($1,314,976)** | **($1,547,530)** | | Cash, end of period | $3,061,041 | $6,462,631 | [Notes to Financial Statements](index=9&type=section&id=Notes%20to%20Financial%20Statements) These notes detail the company's identity authentication business, liquidity, accounting policies, revenue recognition, and significant customer concentration - The company develops and markets identity authentication solutions like Retail ID®, Age ID®, Law ID®, and Defense ID®[20](index=20&type=chunk) - As of June 30, 2019, the company had cash of **$3.1 million** and working capital of **$2.9 million**; management expects to have sufficient working capital for at least the next 12 months[22](index=22&type=chunk) - The company adopted the new lease accounting standard ASU 2016-02 on January 1, 2019, resulting in the recognition of a right-to-use asset of approximately **$266,000** and an operating lease liability of **$274,000**[31](index=31&type=chunk) Revenue Disaggregation (Six Months Ended June 30, 2019) | Product/Service | Revenue 2019 | Revenue 2018 | | :--- | :--- | :--- | | Software as a Service (SaaS) | $1,981,907 | $1,219,384 | | Other subscription and support | $424,476 | $578,781 | | Equipment | $187,521 | $177,406 | | Total Revenue | $2,836,985 | $2,063,480 | - For the six months ended June 30, 2019, three customers accounted for approximately **33% of total revenues** and represented **35% of total accounts receivable**[55](index=55&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial results for the three and six months ended June 30, 2019, highlighting significant SaaS revenue growth, a narrowed net loss, and changes in gross margin and operating expenses [Results of Operations](index=22&type=section&id=Results%20of%20Operations) For Q2 2019, revenue increased 56% to $1.56 million, driven by a 79% increase in SaaS revenue, while the net loss for the six-month period improved to $2.09 million Q2 Performance Comparison (2019 vs 2018) | Metric | Q2 2019 | Q2 2018 | Change | | :--- | :--- | :--- | :--- | | Revenues | $1,558,000 | $1,001,000 | +56% | | SaaS Revenue | $1,121,000 | $625,000 | +79% | | Gross Profit | $1,339,000 | $919,000 | +46% | | Gross Margin % | 85.9% | 91.8% | -5.9 pts | | Net Loss | ($874,000) | ($1,100,000) | +20.5% | Six-Month Performance Comparison (2019 vs 2018) | Metric | H1 2019 | H1 2018 | Change | | :--- | :--- | :--- | :--- | | Revenues | $2,837,000 | $2,063,000 | +37% | | SaaS Revenue | $1,982,000 | $1,219,000 | +63% | | Gross Profit | $2,426,000 | $1,881,000 | +29% | | Gross Margin % | 85.5% | 91.1% | -5.6 pts | | Net Loss | ($2,087,000) | ($2,168,000) | +3.7% | - The increase in operating expenses for both the three and six-month periods was primarily due to increased headcount for development, legal fees, and a new annual executive bonus plan[101](index=101&type=chunk)[106](index=106&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2019, the company had $3.1 million in cash and $2.9 million in working capital, with a $2.0 million unused revolving credit facility, deemed sufficient for the next 12 months - The company had cash of **$3,061,000** and working capital of **$2,884,000** as of June 30, 2019[109](index=109&type=chunk) - In February 2019, the company entered into a **$2,000,000** revolving credit facility with Citibank, which was fully available and unused as of June 30, 2019[111](index=111&type=chunk) - Management believes current cash, expected cash from operations, and credit availability will be sufficient to fund operations for at least the next 12 months[112](index=112&type=chunk) [Adjusted EBITDA](index=24&type=section&id=Adjusted%20EBITDA) The company uses Adjusted EBITDA, a non-GAAP measure, reporting a loss of $0.79 million for Q2 2019 and $1.57 million for the six-month period, both improvements year-over-year Reconciliation of Net Loss to Adjusted EBITDA (Unaudited) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net loss | ($873,677) | ($1,100,375) | ($2,086,668) | ($2,168,332) | | **Adjusted EBITDA** | **($785,318)** | **($1,018,135)** | **($1,572,479)** | **($1,980,104)** | - Adjusted EBITDA is calculated by adding back interest, taxes, depreciation, amortization, and stock-based compensation expense to net loss[118](index=118&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is related to concentrations of credit risk, specifically from maintaining its cash balances at a single financial institution - The company's main market risk is credit risk concentration, as cash is held in one financial institution[123](index=123&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) As of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes in internal controls during Q2 2019 - Management, including the CEO and CFO, evaluated disclosure controls and procedures and found them to be effective as of June 30, 2019[124](index=124&type=chunk) - No material changes were made to the company's internal controls over financial reporting during the second quarter of 2019[127](index=127&type=chunk) [Part II – Other Information](index=26&type=section&id=Part%20II%20%E2%80%93%20Other%20Information) This section covers legal proceedings, risk factors, and other standard disclosures including equity sales, defaults, and exhibits [Item 1. Legal Proceedings](index=26&type=section&id=Item%201.%20Legal%20Proceedings) The company reports that it is not currently involved in any legal proceedings expected to have a material effect on its business - The company reports no material legal proceedings[129](index=129&type=chunk) [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) The company highlights that adverse economic conditions could lead to a decline in business and consumer spending, negatively impacting its financial performance - The company identifies potential adverse effects from poor economic conditions, such as reduced business and consumer spending, as a key risk factor[130](index=130&type=chunk)[131](index=131&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=26&type=section&id=Other%20Items%20%28Items%202%2C%203%2C%204%2C%205%2C%206%29) This section covers several standard disclosure items, including no unregistered sales of equity securities, no defaults, and a list of filed exhibits - Item 2: No unregistered sales of equity securities[133](index=133&type=chunk) - Item 3: No defaults upon senior securities[133](index=133&type=chunk) - Item 4: Mine safety disclosures are not applicable[133](index=133&type=chunk) - Item 6: A list of exhibits filed with the report is provided, including incentive plans, executive bonus plans, and CEO/CFO certifications[134](index=134&type=chunk)

Financial Data and Key Metrics Changes - Revenue for Q2 2019 grew 57% to $1.558 million compared to $1.001 million for the same period last year [48] - SaaS revenue was approximately $1.121 million for Q2 2019, representing a 79% increase from $625,000 in Q2 2018 and a 30% sequential increase from approximately $861,000 in Q1 2019 [48] - Gross profit as a percentage of revenue was 85.9% for Q2 2019, down from 91.8% in Q2 2018 [49] - The company reported a net loss of $874,000 for Q2 2019, an improvement from a net loss of $1.1 million in Q2 2018 [50] Business Line Data and Key Metrics Changes - SaaS revenue increased significantly, indicating a shift in focus towards financial services as the primary target market [9][10] - The company onboarded 86 new clients in the age-restricted product market, representing a 10% increase in sales over Q1 2019 [42] Market Data and Key Metrics Changes - Total scan volumes for financial services were up 13% sequentially comparing Q2 2019 to Q1 2019, and there was an 8% year-over-year increase comparing Q2 2019 to Q2 2018 [41] - The company has signed four of the top 10 banks as clients, indicating strong market penetration [25] Company Strategy and Development Direction - The company has shifted its focus to financial services to combat identity theft, which is seen as a significant pain point for financial institutions [10][11] - A new pricing model based on a per-scan approach has been implemented to better align with the transactional nature of banking [21][22] - The company aims to expand its technology into bank branches and mobile apps, indicating a broader application of its services [44][45] Management's Comments on Operating Environment and Future Outlook - Management believes the market is increasingly recognizing the need for authentication solutions due to rising identity theft incidents [11][12] - The company anticipates that changes in legislation regarding age-restricted products could lead to significant growth opportunities [42][43] - Management expressed confidence in the company's ability to capitalize on the growing demand for fraud prevention solutions [45] Other Important Information - The company has a revolving credit facility with Citibank allowing for maximum borrowings of $2 million, which is currently untapped [53] - As of June 30, 2019, the company had cash of $3.1 million and total assets of $13.4 million [51] Q&A Session Summary Question: Clarification on the implementation pipeline - Management confirmed that the listed clients are committed to the system and are at various stages of implementation [56] Question: One-time payment amount for implementation - The one-time payment for implementation was confirmed to be approximately $185,000 [57] Question: Customer retention rate - Management stated that customer retention remains at nearly 100%, with losses only occurring if a client goes out of business [60] Question: Potential revenue ranking of banks - Management indicated that it is difficult to rank banks by potential revenue without analyzing their specific programs [61] Question: Impact of data breaches on business - Management noted that data breaches create a heightened demand for their services, as they make identity theft easier [67][69] Question: Future use of driver's license verification - Management acknowledged that there is potential for increased use of driver's license verification in securing data [71] Question: Timeline for FDA-related opportunities - Management believes that legislation requiring authentication could happen soon, as discussions are ongoing [82]

[PART I – FINANCIAL INFORMATION](index=4&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) This section presents Intellicheck, Inc.'s unaudited financial statements and management's discussion for the quarter ended March 31, 2019 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Intellicheck, Inc.'s unaudited financial statements for Q1 2019, reporting an increased net loss and shifts in assets, liabilities, and equity [Balance Sheets](index=4&type=section&id=Balance%20Sheets%20%E2%80%93%20March%2031%2C%202019%20(Unaudited)%20and%20December%2031%2C%202018) This section details the company's financial position, showing assets, liabilities, and equity at March 31, 2019, and December 31, 2018 | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------------- | :------------- | :---------------- | | Cash | $3,840,600 | $4,376,017 | | Accounts receivable, net | $796,834 | $1,019,434 | | Total current assets | $5,044,630 | $5,749,203 | | Total assets | $13,922,974 | $14,460,781 | | Total current liabilities | $1,688,003 | $1,504,788 | | Total liabilities | $1,846,521 | $1,541,076 | | Total stockholders' equity | $12,076,453 | $12,919,705 | - Total assets decreased by approximately **$537,807** from December 31, 2018, to March 31, 2019, primarily due to a decrease in cash and accounts receivable[9](index=9&type=chunk) - Total liabilities increased by approximately **$305,445**, driven by increases in current operating lease liability and deferred revenue[9](index=9&type=chunk) [Statements of Operations](index=5&type=section&id=Statements%20of%20Operations%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section outlines the company's financial performance, including revenues, expenses, and net loss for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | Change (YoY) (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenues | $1,278,994 | $1,062,062 | +20.4% | | Cost of Revenues | $(192,297) | $(100,469) | +91.4% | | Gross profit | $1,086,697 | $961,593 | +13.0% | | Total operating expenses | $2,305,707 | $2,043,420 | +12.8% | | Loss from operations | $(1,219,010) | $(1,081,827) | +12.7% | | Net loss | $(1,212,991) | $(1,067,957) | +13.6% | | Loss per common share - Basic/Diluted | $(0.08) | $(0.07) | -14.3% | - Revenues increased by **20.4%** year-over-year, primarily driven by higher commercial revenues, particularly Software as a Service (SaaS) revenue, which grew by **45%**[11](index=11&type=chunk)[91](index=91&type=chunk) - Gross profit percentage decreased from **90.5%** in Q1 2018 to **85.0%** in Q1 2019, mainly due to increased hosting costs on SaaS revenue[11](index=11&type=chunk)[92](index=92&type=chunk) [Statement of Stockholders' Equity](index=6&type=section&id=Statement%20of%20Stockholders'%20Equity%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section details changes in stockholders' equity, reflecting the impact of net loss and stock-based compensation for the period | Metric | December 31, 2018 ($) | March 31, 2019 ($) | | :-------------------------- | :---------------- | :------------- | | Total Stockholders' Equity | $12,919,705 | $12,076,453 | | Stock-based compensation | $369,739 | - | | Net loss | $(1,212,991) | - | - Total stockholders' equity decreased from **$12,919,705** at December 31, 2018, to **$12,076,453** at March 31, 2019, primarily due to the net loss incurred during the period, partially offset by stock-based compensation expense[13](index=13&type=chunk) [Statements of Cash Flows](index=7&type=section&id=Statements%20of%20Cash%20Flows%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 and 2018 | Cash Flow Activity | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(542,249) | $(864,559) | | Net cash provided by (used in) investing activities | $6,832 | $(67,431) | | Net cash provided by financing activities | $- | $687,521 | | Net decrease in cash | $(535,417) | $(244,469) | | Cash, end of period | $3,840,600 | $7,765,692 | - Net cash used in operating activities decreased by **$322,310**, primarily due to the timing of collections on accounts receivable[15](index=15&type=chunk)[97](index=97&type=chunk) - Investing activities shifted from cash used (**$67,431**) in Q1 2018 to cash provided (**$6,832**) in Q1 2019, mainly due to reduced purchases of property and equipment[15](index=15&type=chunk)[97](index=97&type=chunk) - No cash was provided by financing activities in Q1 2019, compared to **$687,521** in Q1 2018 from the exercise of stock options[15](index=15&type=chunk)[97](index=97&type=chunk) [Notes to Financial Statements](index=8&type=section&id=Notes%20to%20Financial%20Statements%20(Unaudited)) This section provides detailed explanations and disclosures supporting the unaudited financial statements, covering accounting policies, assets, liabilities, and equity [1. Nature of Business](index=8&type=section&id=1.%20NATURE%20OF%20BUSINESS) This section describes Intellicheck, Inc.'s core business activities, products, and its financial outlook regarding working capital - Intellicheck, Inc. develops, integrates, and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and access control in government, military, and commercial markets[16](index=16&type=chunk) - Key products include Retail ID®, Age ID®, Law ID®, and Defense ID®[16](index=16&type=chunk) - The company expects existing resources and revenues to satisfy working capital requirements for at least the next 12 months, but may need additional financing if performance falls short or expenses exceed expectations[18](index=18&type=chunk)[19](index=19&type=chunk) [2. Significant Accounting Policies](index=8&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines the key accounting principles and methods used in preparing the financial statements, including revenue recognition and lease accounting - The company adopted ASU 2016-02, Leases, effective January 1, 2019, recognizing a right-to-use asset of approximately **$266,000** and an operating lease liability of approximately **$274,000**, with no significant impact on the statement of operations[27](index=27&type=chunk) - Revenue from Software as a Service (SaaS) and other subscription/support services is recognized over time based on usage[40](index=40&type=chunk)[41](index=41&type=chunk) - Revenue from equipment sales is recognized at a point in time when the customer obtains control[42](index=42&type=chunk) Revenue Disaggregation by Product and Service (Three Months Ended March 31) | Products and services | 2019 ($) | 2018 ($) | | :-------------------------- | :--------- | :--------- | | Software as a Service (SaaS) | $861,249 | $594,690 | | Other subscription and support services | $268,170 | $294,199 | | Equipment | $116,412 | $119,722 | | Non-recurring services | $7,143 | $17,248 | | Extended warranties on equipment | $20,678 | $33,851 | | Other | $5,342 | $2,352 | | **Total Revenues** | **$1,278,994** | **$1,062,062** | - Two customers accounted for approximately **26%** of total revenues in Q1 2019 and **33%** in Q1 2018, both associated with commercial identity sales[50](index=50&type=chunk) [3. Intangible Assets](index=14&type=section&id=3.%20INTANGIBLE%20ASSETS) This section details the carrying amount and amortization expense related to the company's intangible assets Intangible Assets Carrying Amount and Amortization | Metric | Amount ($) | | :-------------------------- | :--------- | | Net balance at December 31, 2018 | $306,575 | | Amortization expense (Q1 2019) | $(39,252) | | Net balance at March 31, 2019 | $267,323 | - Amortization expense for intangible assets was **$39,252** for the three months ended March 31, 2019, consistent with **$39,251** in the prior year period[55](index=55&type=chunk) [4. Note Receivable](index=14&type=section&id=4.%20NOTE%20RECEIVABLE) This section reports the outstanding balance of the note receivable from the sale of wireless enterprise assets - The total note receivable from the sale of wireless enterprise assets was **$60,765** at March 31, 2019, down from **$71,137** at December 31, 2018[56](index=56&type=chunk) [5. Debt](index=14&type=section&id=5.%20DEBT) This section describes the company's revolving credit facility and its available borrowing capacity - The company entered into a revolving credit facility with Citibank on February 6, 2019, allowing borrowings up to **$2,000,000**. As of March 31, 2019, there were no outstanding amounts, and **$2,000,000** was available[57](index=57&type=chunk) [6. Accrued Expenses](index=15&type=section&id=6.%20ACCRUED%20EXPENSES) This section provides a breakdown of accrued expenses, including professional fees, payroll, and severance payments Accrued Expenses Breakdown | Category | March 31, 2019 ($) | December 31, 2018 ($) | | :------------------ | :------------- | :---------------- | | Professional fees | $103,976 | $69,406 | | Payroll and related | $484,316 | $406,925 | | Severance payments | $79,203 | $158,406 | | Other | $69,239 | $92,181 | | **Total** | **$736,734** | **$726,918** | - Accrued expenses increased slightly to **$736,734** at March 31, 2019, from **$726,918** at December 31, 2018, driven by higher professional fees and payroll-related accruals, partially offset by a decrease in severance payments[58](index=58&type=chunk) [7. Income Taxes](index=15&type=section&id=7.%20INCOME%20TAXES) This section discusses the company's net operating loss carryforwards and the valuation allowance against deferred tax assets - The company had approximately **$15 million** in net operating loss (NOL) carryforwards at December 31, 2018, with varying expiration dates[59](index=59&type=chunk) - A full valuation allowance has been recorded against net deferred tax assets due to uncertainty regarding their realizability[59](index=59&type=chunk) [8. Share Based Compensation](index=15&type=section&id=8.%20SHARE%20BASED%20COMPENSATION) This section details the stock-based compensation expense, outstanding options, and unrecognized compensation costs Stock-Based Compensation Expense (Three Months Ended March 31) | Category | 2019 ($) | 2018 ($) | | :-------------------------- | :--------- | :--------- | | Selling, general & administrative | $366,523 | $54,434 | | Research & development | $3,216 | $6,274 | | **Total Compensation Cost** | **$369,739** | **$60,708** | - Total stock-based compensation expense significantly increased to **$369,739** in Q1 2019 from **$60,708** in Q1 2018[60](index=60&type=chunk) - Outstanding stock options increased to **1,516,495 shares** at March 31, 2019, with a weighted average exercise price of **$1.80** and an aggregate intrinsic value of **$2,632,195**[63](index=63&type=chunk) - As of March 31, 2019, there was **$638,237** of unrecognized compensation cost related to unvested stock options and RSUs, expected to be recognized over approximately **3.56 years**[66](index=66&type=chunk) [9. Common Stock](index=17&type=section&id=9.%20COMMON%20STOCK) This section provides information on the company's common stock, including details of a past public offering - On August 4, 2017, the company completed a public offering of **4,168,750 shares** at **$2.25 per share**, generating approximately **$8,670,000** in net proceeds[69](index=69&type=chunk) [10. Legal Proceedings](index=17&type=section&id=10.%20LEGAL%20PROCEEDINGS) This section confirms the company is not currently involved in any material legal or regulatory proceedings - The company is not currently involved in any legal or regulatory proceedings expected to have a material effect on its business[70](index=70&type=chunk) [11. Commitments and Contingencies](index=17&type=section&id=11.%20COMMITMENTS%20AND%20CONTINGENCIES) This section outlines the company's lease obligations and remaining severance liabilities - The company leases offices in Melville, New York, with monthly payments of **$10,334**, expiring March 31, 2021. Rent and utilities expense for Q1 2019 was **$31,404**[71](index=71&type=chunk) - A severance liability of **$79,203** remained at March 31, 2019, related to payments to a former CEO[72](index=72&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Intellicheck's Q1 2019 financial performance, highlighting revenue growth, increased expenses, and liquidity, alongside critical accounting policies and Adjusted EBITDA [Overview](index=18&type=section&id=Overview) This section provides a general introduction to Intellicheck's business and recent corporate restructuring - Intellicheck is a technology company focused on threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and access control in government, military, and commercial markets[76](index=76&type=chunk) - The company's wholly-owned subsidiaries, Mobilisa, Inc. and Positive Access Corporation, merged into Intellicheck on December 31, 2018[75](index=75&type=chunk) [Critical Accounting Policies and the Use of Estimates](index=18&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) This section outlines the key accounting policies requiring significant management judgment and estimates, including goodwill impairment testing - Critical accounting policies include revenue recognition, stock-based compensation, deferred taxes, and commitments and contingencies, which involve significant management judgments and estimates[78](index=78&type=chunk) - Goodwill, totaling **$8,101,661** as of March 31, 2019, is tested annually for impairment, with no impairment identified in Q1 2019[79](index=79&type=chunk)[82](index=82&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations%20(All%20figures%20have%20been%20rounded%20to%20the%20nearest%20%241%2C000)) This section analyzes the company's financial performance for the quarter, focusing on revenue growth, gross profit, operating expenses, and net loss Key Financial Results (Three Months Ended March 31) | Metric | 2019 ($) | 2018 ($) | Change (YoY) (%) | | :-------------------------- | :--------- | :--------- | :----------- | | Revenues | $1,279,000 | $1,062,000 | +20% | | SaaS revenue | $861,000 | $595,000 | +45% | | Gross profit | $1,087,000 | $962,000 | +13% | | Gross profit margin | 85.0% | 90.5% | -5.5 pp | | Operating expenses | $2,306,000 | $2,043,000 | +13% | | Net loss | $(1,213,000) | $(1,068,000) | +14% | - The **20%** increase in revenues was primarily driven by higher commercial revenues, with SaaS revenue increasing by **45%**[91](index=91&type=chunk) - Operating expenses increased by **13%** due to higher stock-based compensation costs and an increase in development personnel headcount[93](index=93&type=chunk) [Liquidity and Capital Resources](index=20&type=section&id=Liquidity%20and%20Capital%20Resources%20(All%20figures%20have%20been%20rounded%20to%20the%20nearest%20%241%2C000)) This section assesses the company's ability to meet its short-term and long-term obligations, including cash position, working capital, and future financing plans Liquidity and Capital Resources (as of March 31, 2019) | Metric | Amount ($) | | :-------------------------- | :--------- | | Cash and cash equivalents | $3,841,000 | | Working capital | $3,357,000 | | Total assets | $13,923,000 | | Stockholders' equity | $12,076,000 | - Net cash used in operating activities decreased to **$542,000** in Q1 2019 from **$865,000** in Q1 2018, mainly due to improved accounts receivable collections[97](index=97&type=chunk) - The company anticipates its available cash, expected cash from operations, and a **$2,000,000** revolving credit facility to be sufficient for working capital and capital expenditures for at least the next 12 months[99](index=99&type=chunk)[100](index=100&type=chunk) - A universal shelf registration statement on Form S-3 allows the company to offer up to **$25,000,000** in securities for future capital needs[102](index=102&type=chunk) [Adjusted EBITDA](index=21&type=section&id=Adjusted%20EBITDA) This section defines and reconciles Adjusted EBITDA, a non-GAAP measure, to GAAP net loss, providing insight into operational performance - Adjusted EBITDA is a non-GAAP measure used by management and investors to evaluate operational strength, excluding non-cash charges and non-operating items[106](index=106&type=chunk)[107](index=107&type=chunk) Reconciliation of GAAP Net Loss to Non-GAAP Adjusted EBITDA (Three Months Ended March 31) | Metric | 2019 ($) | 2018 ($) | | :-------------------------- | :------------- | :------------- | | Net loss | $(1,212,991) | $(1,067,957) | | Interest and other income | $(6,019) | $(13,870) | | Depreciation and amortization | $62,110 | $59,150 | | Stock-based compensation expense | $369,739 | $60,708 | | **Adjusted EBITDA** | **$(787,161)** | **$(961,969)** | - Adjusted EBITDA improved to **$(787,161)** in Q1 2019 from **$(961,969)** in Q1 2018, indicating a reduced operational loss when excluding certain non-cash and non-operating items[108](index=108&type=chunk) [Off-Balance Sheet Arrangements](index=22&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of any off-balance sheet financing arrangements or special purpose entities - The company has not entered into any off-balance sheet financing arrangements or established any special purpose entities[109](index=109&type=chunk) [Forward Looking Statements](index=22&type=section&id=Forward%20Looking%20Statements) This section advises that the report contains forward-looking statements subject to uncertainties, with no obligation for updates - The report contains forward-looking statements subject to inherent uncertainties and changes in circumstances, with no obligation to update them[110](index=110&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=22&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses the company's exposure to market risks, primarily focusing on concentrations of credit risk related to its cash holdings - The company's primary market risk relates to concentrations of credit risk, specifically cash held in a single financial institution[111](index=111&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2019, and reports no material changes in internal controls over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2019[113](index=113&type=chunk) - No material changes in internal controls over financial reporting occurred during the period covered by the report[115](index=115&type=chunk) [PART II - OTHER INFORMATION](index=23&type=section&id=Part%20II%20-%20Other%20Information) This section covers additional information not included in the financial statements, such as legal proceedings, risk factors, and exhibits [Item 1. Legal Proceedings](index=23&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is not involved in any legal proceedings - The company is not currently involved in any legal proceedings[117](index=117&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) This section highlights potential risks to the company's business and financial performance, including adverse economic conditions and reliance on government business - Current economic conditions, such as a decline in business and consumer spending, could adversely affect the company's business and financial performance[118](index=118&type=chunk)[119](index=119&type=chunk) - Operating results may be impacted by the overall health of the North American economy, despite a significant portion of business being with the U.S. government[119](index=119&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[121](index=121&type=chunk) [Item 3. Defaults Upon Senior Securities](index=23&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities - No defaults upon senior securities to report[121](index=121&type=chunk) [Item 4. Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[121](index=121&type=chunk) [Item 5. Other Information](index=24&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - No other information to report[122](index=122&type=chunk) [Item 6. Exhibits](index=24&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents List of Exhibits | Exhibit No. | Description | | :---------- | :------------------------------------------ | | 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | | 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | | 32 | 18 U.S.C. Section 1350 Certifications | | 101.INS | XBRL Instance Document | | 101.SCH | XBRL Taxonomy Extension Schema | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | | 101.LAB | XBRL Taxonomy Extension Label Linkbase | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | [Signatures](index=25&type=section&id=Signatures) This section confirms the official signing of the report by the company's President, CEO, and CFO - The report is signed by Bryan Lewis, President and Chief Executive Officer, and Bill White, Chief Financial Officer, on May 10, 2019[125](index=125&type=chunk)[126](index=126&type=chunk)

Intellicheck, Inc. (NYSEMKT:IDN) Q1 2019 Earnings Conference Call May 1, 2019 4:30 PM ET Company Participants Gar Jackson - Investor Relations Bryan Lewis - Chief Executive Officer Bill White - Chief Financial Officer Conference Call Participants Yi Fu Lee - Oppenheimer Roger Liddell - Clear Harbor Asset Management Michael Samuels - Berthel Fisher Amy Norflus - Neuberger Berman Operator Greetings, and welcome to the Intellicheck’s First Quarter 2019 Earnings Conference Call. At this time, all participants a ...

Intellicheck, Inc. (NASDAQ:IDN) Q4 2018 Earnings Conference Call March 21, 2019 4:30 PM ET Company Participants Gar Jackson - IR Bryan Lewis - CEO Bill White - CFO Conference Call Participants Mike Pochucha - Northland Capital Markets Yi Fu Lee - Oppenheimer Roger Liddell - Clear Harbor Asset Management Ashok Kumar - ThinkEquity Amy Norflus - Neuberger Berman Operator Greetings, and welcome to Intellicheck Fourth Quarter and Year-End 2018 Earnings Call. At this time, all participants are in listen-only mode ...

PART I [Business](index=4&type=section&id=Item%201.%20Business) Intellicheck, Inc. develops threat identification and identity authentication solutions for commercial and government sectors, primarily through SaaS offerings [Overview](index=4&type=section&id=Overview) - Intellicheck develops and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and government/military access control[12](index=12&type=chunk) - Key products include Retail ID® (fraud prevention), Age ID® (age verification), Law ID® (law enforcement), and Defense ID® (government/military access control)[12](index=12&type=chunk) - The company plans to expand by increasing market share, entering new markets, and enhancing products with features like online applications and biometrics[13](index=13&type=chunk) [Our Products and Services](index=6&type=section&id=Our%20Products%20and%20Services) - Products are generally sold as Software as a Service (SaaS), where customers pay for a cloud-based service[21](index=21&type=chunk) - The core technology, ID Check®, is embedded in product lines like Retail ID®, Law ID®, and Age ID®, and is capable of reading and verifying encoded information on driver licenses and military IDs from the US and Canada[23](index=23&type=chunk)[25](index=25&type=chunk) - Commercial products focus on fraud reduction (Retail ID®), age verification (Age ID®), and workflow efficiency (Guest ID®, Instant Credit Application Kiosks)[28](index=28&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk)[39](index=39&type=chunk) - Government products include Defense ID® for facility protection, Law ID® for officer safety via real-time database queries, and PORT ID for securing ports[41](index=41&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk) [Strategy](index=9&type=section&id=Strategy) - The company's objective is to be a leading security company in the identity sector, focusing on both commercial and government systems[46](index=46&type=chunk) - Key commercial strategies include marketing technology for productivity enhancement, developing strategic alliances (e.g., with Lenel, AMAG, Zebra), strengthening sales with a focus on SaaS licenses, and protecting intellectual property[46](index=46&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk)[51](index=51&type=chunk) - Key government strategies involve enhancing products like Defense ID for new sectors (law enforcement, port security), providing TWIC® reader applications, and increasing access to multiple law enforcement and government databases[52](index=52&type=chunk)[53](index=53&type=chunk)[55](index=55&type=chunk) [Major Customers](index=13&type=section&id=Major%20Customers) Top 10 Customers' % of Total Revenue | Year | Top 10 Customers' % of Total Revenue | | :--- | :--- | | 2018 | 52% | | 2017 | 57% | - The company has a significant concentration of revenue from a limited number of major customers, although it anticipates the customer base will expand and reduce this dependency in the future[72](index=72&type=chunk) [Competition](index=13&type=section&id=Competition) - The company operates in an intensely competitive and rapidly changing industry[74](index=74&type=chunk) - Competitors in the government identity sector include Idemia USA, HID Global, and U.S. government systems like DBIDS and AIE[75](index=75&type=chunk) - Zebra and Honeywell offer embedded driver's license reading solutions, but these are noted to simply read the barcode rather than authenticating it[75](index=75&type=chunk) [Research and Development](index=14&type=section&id=Research%20and%20Development) R&D Spending | Year | R&D Spending | | :--- | :--- | | 2018 | $2,904,166 | | 2017 | $1,916,107 | - R&D efforts are primarily focused on the identity sector, including modifying existing software for customers and developing new software solutions[79](index=79&type=chunk) [Intellectual Property](index=14&type=section&id=Intellectual%20Property) - As of the report date, the company holds **sixteen (16) U.S. patents**, **one (1) Canadian patent**, and **one (1) United Kingdom patent**, with **six additional applications pending**[80](index=80&type=chunk) - Patents cover key aspects of identification document authentication and verification, as well as Defense ID System technology[80](index=80&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including historical financial losses, customer concentration, long sales cycles, and technology-related vulnerabilities - The company has a history of financial losses, with a net loss of **$3.96 million** in 2018 and an accumulated deficit of **$114.4 million** as of December 31, 2018[97](index=97&type=chunk) - A significant business risk is the high customer concentration, with the **ten largest customers accounting for 52% of total net revenues in 2018**[132](index=132&type=chunk) - The business strategy targeting large retailers and government agencies exposes the company to long sales and implementation cycles, which can adversely impact the timing of revenue recognition[99](index=99&type=chunk)[100](index=100&type=chunk) - The company's proprietary software relies on data from government agencies; if access to this data is lost, the software's utility would be diminished[98](index=98&type=chunk) - Potential security breaches of the company's information systems could compromise sensitive data, leading to liability, reputational damage, and loss of customer confidence[123](index=123&type=chunk)[124](index=124&type=chunk) [Properties](index=22&type=section&id=Item%202.%20Properties) The company's Melville, New York headquarters occupies 5,400 square feet under a lease expiring March 31, 2021, deemed adequate for current needs - The corporate headquarters is located in Melville, New York[135](index=135&type=chunk) - The company leases approximately **5,400 square feet** of office space, with the lease set to expire on **March 31, 2021**[135](index=135&type=chunk) [Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) As of the report date, Intellicheck, Inc. is not involved in any legal or regulatory proceedings that are expected to have a material adverse effect on its business - The company is not currently involved in any legal proceedings expected to have a material adverse effect on the business[136](index=136&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Intellicheck's common stock trades on NYSE MKT under 'IDN', with no cash dividends paid or anticipated, and details on outstanding equity securities - The company's common stock is traded on the NYSE MKT Stock Exchange under the symbol **"IDN"**[139](index=139&type=chunk) Common Stock Price Range | Period | High Price | Low Price | | :--- | :--- | :--- | | **2018** | | | | Q1 | $2.87 | $1.60 | | Q2 | $2.36 | $1.74 | | Q3 | $2.75 | $1.91 | | Q4 | $2.63 | $1.96 | | **2017** | | | | Q1 | $3.10 | $1.98 | | Q2 | $4.20 | $2.78 | | Q3 | $3.84 | $2.42 | | Q4 | $3.05 | $2.11 | - No cash dividends were paid in fiscal year 2018, and none are anticipated in the foreseeable future[141](index=141&type=chunk) [Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents five years of selected financial data, highlighting 2018 revenues of **$4.43 million** and a net loss of **$3.96 million** Selected Financial Data (In thousands, except per share data) | (In thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Statement of Operations Data:** | | | | | | | Revenues | $4,433 | $3,598 | $3,839 | $7,015 | $6,613 | | Loss from operations | $(4,093) | $(6,080) | $(5,750) | $(5,480) | $(7,645) | | Net loss | $(3,964) | $(6,021) | $(5,735) | $(5,334) | $(7,644) | | Net loss per common share (Basic/Diluted) | $(0.26) | $(0.48) | $(0.58) | $(0.55) | $(1.59) | | **Balance Sheet Data (As of Dec 31):** | | | | | | | Cash | $4,376 | $8,010 | $3,092 | $5,953 | $2,966 | | Total assets | $14,461 | $17,882 | $14,534 | $18,473 | $15,814 | | Stockholders' equity | $12,920 | $16,009 | $12,935 | $16,326 | $13,148 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses 2018 financial performance, highlighting a **23% revenue increase** to **$4.4 million**, improved gross margin, and a narrowed net loss [Results of Operations (2018 vs 2017)](index=28&type=section&id=Results%20of%20Operations%20%282018%20vs%202017%29) Financial Performance (2018 vs 2017) | Metric | 2018 | 2017 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $4,433,000 | $3,598,000 | +$835,000 | +23% | | SaaS Revenue | $2,696,000 | $1,659,000 | +$1,037,000 | +63% | | Gross Profit | $4,047,000 | $3,076,000 | +$970,000 | +31.5% | | Gross Margin | 91% | 85% | +6 pts | - | | Operating Expenses | $8,140,000 | $9,157,000 | -$1,017,000 | -11% | | Net Loss | $(3,964,000) | $(6,021,000) | +$2,057,000 | -34.2% | - The increase in 2018 revenue was primarily driven by higher commercial revenues, specifically a **63% increase in Software as a Service (SaaS) revenue**[172](index=172&type=chunk) - Operating expenses decreased by **11%** in 2018, mainly because 2017 included a **$1.38 million impairment charge** on intangible assets and higher severance costs[174](index=174&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Key Financial Metrics (as of Dec 31, 2018) | Metric (as of Dec 31, 2018) | Amount | | :--- | :--- | | Cash | $4,376,000 | | Working Capital | $4,244,000 | | Total Assets | $14,461,000 | | Stockholders' Equity | $12,920,000 | - Cash decreased by **$3.6 million** during 2018, with **$4.2 million** used in operating activities[178](index=178&type=chunk) - In August 2017, the company raised approximately **$8.67 million** in net proceeds from a public offering of common stock[179](index=179&type=chunk) - The company maintains a **$2 million revolving credit facility**, which was unused as of December 31, 2018. Management anticipates that available cash and credit will be sufficient for at least the next 12 months[180](index=180&type=chunk)[182](index=182&type=chunk) [Adjusted EBITDA](index=29&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA (in thousands) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | **Net loss** | **$(3,963,576)** | **$(6,020,505)** | | Interest and other | $(129,923) | $(59,841) | | Depreciation and amortization | $245,548 | $412,351 | | Stock-based compensation expense | $186,707 | $435,679 | | Impairment of intangible assets | - | $1,375,422 | | **Adjusted EBITDA** | **$(3,661,244)** | **$(3,856,894)** | - Adjusted EBITDA is a non-GAAP measure used by management to evaluate operational strength. The Adjusted EBITDA loss improved slightly to **$(3.66 million)** in 2018 from **$(3.86 million)** in 2017[187](index=187&type=chunk)[189](index=189&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2018, management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[206](index=206&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)[209](index=209&type=chunk) - No changes occurred in the company's internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[208](index=208&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=33&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2019 Proxy Statement - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2019 Proxy Statement[212](index=212&type=chunk) [Executive Compensation](index=33&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding Executive Compensation is incorporated by reference from the 2019 Proxy Statement - Information regarding Executive Compensation is incorporated by reference from the 2019 Proxy Statement[213](index=213&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=33&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding Security Ownership and Equity Compensation Plan Information is incorporated by reference from the 2019 Proxy Statement - Information regarding Security Ownership and Equity Compensation Plan Information is incorporated by reference from the 2019 Proxy Statement[213](index=213&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=33&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding Certain Relationships, Related Transactions, and Director Independence is incorporated by reference from the 2019 Proxy Statement - Information regarding Certain Relationships, Related Transactions, and Director Independence is incorporated by reference from the 2019 Proxy Statement[214](index=214&type=chunk) [Principal Accounting Fees and Services](index=33&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding Principal Accounting Fees and Services is incorporated by reference from the 2019 Proxy Statement - Information regarding Principal Accounting Fees and Services is incorporated by reference from the 2019 Proxy Statement[214](index=214&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=33&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the consolidated financial statements and various exhibits filed as part of the Form 10-K report - This item includes the consolidated financial statements for the years ended December 31, 2018 and 2017[216](index=216&type=chunk) - A list of exhibits is provided, including the Certificate of Incorporation, By-laws, material contracts such as employment agreements, and certifications required by the Sarbanes-Oxley Act[217](index=217&type=chunk) Financial Statements [Consolidated Balance Sheets](index=39&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2018, total assets decreased to **$14.5 million** from **$17.9 million** in 2017, with stockholders' equity at **$12.9 million** Consolidated Balance Sheets (As of December 31) | (As of December 31) | 2018 | 2017 | | :--- | :--- | :--- | | **Assets** | | | | Cash | $4,376,017 | $8,010,161 | | Total current assets | $5,749,203 | $8,966,944 | | Goodwill | $8,101,661 | $8,101,661 | | **Total assets** | **$14,460,781** | **$17,882,104** | | **Liabilities & Equity** | | | | Total current liabilities | $1,504,788 | $1,626,908 | | **Total liabilities** | **$1,541,076** | **$1,873,051** | | **Total stockholders' equity** | **$12,919,705** | **$16,009,053** | [Consolidated Statements of Operations](index=40&type=section&id=Consolidated%20Statements%20of%20Operations) For 2018, revenues were **$4.43 million** and gross profit **$4.05 million**, resulting in a net loss of **$3.96 million**, an improvement from 2017 Consolidated Statements of Operations (For the Year Ended December 31) | (For the Year Ended December 31) | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $4,433,454 | $3,598,296 | | Gross profit | $4,046,837 | $3,076,461 | | Total operating expenses | $8,140,336 | $9,156,807 | | Loss from operations | $(4,093,499) | $(6,080,346) | | **Net loss** | **$(3,963,576)** | **$(6,020,505)** | | Loss per common share (Basic/Diluted) | $(0.26) | $(0.48) | - The 2017 statement of operations includes an impairment charge of **$1.38 million** on intangible assets, which was not present in 2018 and contributed significantly to the higher net loss in 2017[237](index=237&type=chunk) [Consolidated Statements of Cash Flows](index=42&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In 2018, net cash used in operating activities was **$4.2 million**, leading to a **$3.6 million** net decrease in cash, ending the year with **$4.4 million** Consolidated Statements of Cash Flows (For the Year Ended December 31) | (For the Year Ended December 31) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,220,611) | $(3,745,285) | | Net cash (used in) provided by investing activities | $(101,054) | $4,846 | | Net cash provided by financing activities | $687,521 | $8,658,428 | | **Net (decrease) increase in cash** | **$(3,634,144)** | **$4,917,989** | | Cash, beginning of year | $8,010,161 | $3,092,172 | | **Cash, end of year** | **$4,376,017** | **$8,010,161** | [Notes to Consolidated Financial Statements](index=43&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including ASC 606 adoption, a **$1.38 million** intangible asset impairment in 2017, and deferred tax asset valuation allowance - The company adopted revenue recognition standard ASC 606 on January 1, 2018, using the modified retrospective method, which did not result in a material change to how revenue is recorded but enhanced disclosures[259](index=259&type=chunk)[260](index=260&type=chunk) - In 2017, the company recorded an impairment charge of **$1.38 million** on intangible assets (tradenames, patents, and customer relationships) acquired in the Mobilisa acquisition due to a projected loss of revenue and a shift in marketing strategy. No impairment was recognized in 2018[256](index=256&type=chunk) - The company has a net operating loss (NOL) carryforward of approximately **$15 million** as of December 31, 2018, which is available to offset future taxable income. A full valuation allowance has been recorded against net deferred tax assets due to uncertainty of realization[315](index=315&type=chunk)[317](index=317&type=chunk) - Two customers accounted for **31% of revenue in 2018**, and two customers accounted for **26% of revenue in 2017**, indicating significant customer concentration[281](index=281&type=chunk)