Intellicheck(IDN) - 2018 Q4 - Annual Report

PART I Business Intellicheck, Inc. develops threat identification and identity authentication solutions for commercial and government sectors, primarily through SaaS offerings Overview - Intellicheck develops and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and government/military access control[12] - Key products include Retail ID® (fraud prevention), Age ID® (age verification), Law ID® (law enforcement), and Defense ID® (government/military access control)[12] - The company plans to expand by increasing market share, entering new markets, and enhancing products with features like online applications and biometrics[13] Our Products and Services - Products are generally sold as Software as a Service (SaaS), where customers pay for a cloud-based service[21] - 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][25] - Commercial products focus on fraud reduction (Retail ID®), age verification (Age ID®), and workflow efficiency (Guest ID®, Instant Credit Application Kiosks)[28][31][32][39] - 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][42][43] Strategy - The company's objective is to be a leading security company in the identity sector, focusing on both commercial and government systems[46] - 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][48][49][51] - 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][53][55] Major Customers 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] Competition - The company operates in an intensely competitive and rapidly changing industry[74] - Competitors in the government identity sector include Idemia USA, HID Global, and U.S. government systems like DBIDS and AIE[75] - Zebra and Honeywell offer embedded driver's license reading solutions, but these are noted to simply read the barcode rather than authenticating it[75] Research and Development 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] Intellectual Property - 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] - Patents cover key aspects of identification document authentication and verification, as well as Defense ID System technology[80] Risk Factors 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] - A significant business risk is the high customer concentration, with the ten largest customers accounting for 52% of total net revenues in 2018[132] - 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][100] - 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] - Potential security breaches of the company's information systems could compromise sensitive data, leading to liability, reputational damage, and loss of customer confidence[123][124] Properties 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] - The company leases approximately 5,400 square feet of office space, with the lease set to expire on March 31, 2021[135] Legal Proceedings 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] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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] Selected Financial Data 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 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) 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] - 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] Liquidity and Capital Resources 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] - In August 2017, the company raised approximately $8.67 million in net proceeds from a public offering of common stock[179] - 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][182] Adjusted EBITDA 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][189] Controls and Procedures 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] - 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] - 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] PART III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accounting Fees and Services 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] PART IV Exhibits and Financial Statement Schedules 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] - 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] Financial Statements Consolidated Balance Sheets 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 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] Consolidated Statements of Cash Flows 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 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][260] - 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] - 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][317] - Two customers accounted for 31% of revenue in 2018, and two customers accounted for 26% of revenue in 2017, indicating significant customer concentration[281]