Intellicheck(IDN) - 2019 Q4 - Annual Report

PART I Item 1. Business 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 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] - Key products include Retail ID® (retail fraud), Age ID® (age-restricted sales), and Defense ID® (military/government threat identification and access control)[12] - 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] Identity Card Reading and Verification Sector 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] - 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] - 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] Our Products and Services 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] Commercial Identification Solutions 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][24] - The ID Check® process quickly determines document validity, alteration, expiration, and age for restricted products, and can display, save, or print transaction records[26] - 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][28][31][32] Government Identification Solutions 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] - 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] - 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] 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] Commercial Systems Strategy 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] - 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] - 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][49][50] Government Identity Systems Strategy 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] - 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] - 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][54] Revenue Sources and Target Industry Sectors This section outlines the company's revenue generation methods and identifies key commercial and government sectors targeted for its identity authentication solutions Revenue Sources 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] Target Industry Sectors 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][60][61] - 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][62][67][68] Marketing and Distribution 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 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][65][69] - 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][64] Government Identity Solutions Marketing 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][67][70] - All Defense ID products and labor services are listed on GSA Schedule 70, enabling direct purchases by government entities at pre-negotiated prices[71] Major Customers 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] 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] 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] - 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] - Competitors in the government identity sector include Idemia USA, HID Global, and U.S. government systems like DBIDS and AIE[75] 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] - Government identity systems products are customized with software and specialized configurations, assembled, and tested in-house[78] Research and Development 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] Research and Development Spending | Year Ended December 31, | R&D Spending ($) | | :---------------------- | :------------- | | 2019 | $3,656,679 | | 2018 | $2,904,166 | Intellectual Property 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] - Patents cover commercially important aspects of identification document authentication and verification, and Defense ID System technology[80] - 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] 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] Item 1A. Risk Factors 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 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] - 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][122] - 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][101][102] - 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][111] - 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][126] - 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][135] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report - Not applicable[136] Item 2. Properties 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] - The lease for the corporate headquarters expires on March 31, 2021[137] - The company believes its existing facility is adequate and additional space will be available if needed[137] Item 3. Legal Proceedings 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] Item 4. Mine Safety Disclosures The company has no mine safety disclosures to report - None[139] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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 | $10.15 | *Portion of first fiscal quarter through March 17, 2020. - As of March 17, 2020, there were 38 shareholders of record of the common stock[143] - No cash dividends were paid during the fiscal year ended December 31, 2019, and none are anticipated in the foreseeable future[143] Equity Compensation Plan Information (as of December 31, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) ($) | 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 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 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 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] - Key products include Retail ID®, Age ID®, and Defense ID®[150] Critical Accounting Policies and Estimates 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] - 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] - Goodwill of $8,101,661 remained unchanged in 2019 and 2018, with no impairment recognized after annual tests[155][157] Results of Operations 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] - 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] Liquidity and Capital Resources 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 $2,000,000, was established in February 2019 and remained unused with full availability as of December 31, 2019[175] - The company anticipates that available cash, expected cash from operations, and the revolving credit agreement will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months[176] Adjusted EBITDA Adjusted EBITDA is presented as a non-GAAP financial measure used by management to assess operational strength, calculated by adjusting net loss for non-cash and non-operating items - Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate operational strength and performance, calculated by adding back interest and other income, income taxes, impairments, depreciation, amortization, and stock-based compensation to net loss[181][182] Adjusted EBITDA Reconciliation | Metric | 2019 ($) | 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 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 $17 million in available net operating loss (NOL) carryforwards[184] - Federal and state NOLs incurred through 2017 expire between 2020 and 2038, while 2018 and 2019 NOLs can be utilized at 80% with no expiration[184][302] Contractual Obligations This section details the company's contractual obligations as of December 31, 2019, primarily consisting of operating lease payments Contractual Obligations as of December 31, 2019 | Obligation | Total ($) | 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 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][190] - ASU 2018-15 (Cloud Computing) and SEC amendments on stockholders' equity disclosures were determined not to have a material impact[188][189] - 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] Off-Balance Sheet Arrangements 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] Forward Looking Statements 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] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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] - Cash is maintained across three financial institutions, and marketable securities/short-term investments are in money market funds and bank certificates of deposit[196] - The company performs periodic evaluations of the credit standing of these financial institutions[196] Item 8. Financial Statements and Supplementary Data 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 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] Balance Sheets 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 ($) | | :--------------------- | :----------- | :----------- | | ASSETS: | | | | Cash | 3,350,853 | 4,376,017 | | Accounts receivable, net | 1,674,894 | 1,019,434 | | Inventory | 6,113 | 82,337 | | Total current assets | 5,380,096 | 5,749,203 | | Property and equipment, net | 181,731 | 264,583 | | Goodwill | 8,101,661 | 8,101,661 | | Intangible assets, net | 174,237 | 306,575 | | Total assets | 13,997,171 | 14,460,781 | | LIABILITIES: | | | | Accounts payable | 95,388 | 73,334 | | Accrued expenses | 1,408,086 | 726,918 | | Deferred revenue, current | 572,391 | 704,536 | | Total current liabilities | 2,201,716 | 1,504,788 | | Total liabilities | 2,247,658 | 1,541,076 | | STOCKHOLDERS' EQUITY: | | | | Total stockholders' equity | 11,749,513 | 12,919,705 | Statements of Operations This section provides a summary of the company's revenues, cost of revenues, gross profit, operating expenses, and net loss for the years ended December 31, 2019 and 2018 Statements of Operations Summary (Years Ended December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :----------- | :----------- | | REVENUES | 7,663,658 | 4,433,454 | | COST OF REVENUES | (995,791) | (386,617) | | Gross profit | 6,667,867 | 4,046,837 | | OPERATING EXPENSES | | | | Selling, general and administrative | 5,658,958 | 5,236,170 | | Research and development | 3,656,679 | 2,904,166 | | Total operating expenses | 9,315,637 | 8,140,336 | | Loss from operations | (2,647,770) | (4,093,499) | | Interest and other income | 99,059 | 129,923 | | Net loss | (2,548,711) | (3,963,576) | | Loss per common share - Basic/Diluted | (0.16) | (0.26) | | Weighted average common shares - Basic/Diluted | 15,792,470 | 15,542,480 | Statements of Stockholders' Equity This section details changes in the company's common stock, additional paid-in capital, accumulated deficit, and total stockholders' equity for the years ended December 31, 2019 and 2018 Statements of Stockholders' Equity Summary (Years Ended December 31) | Item | Common Stock Shares (2019) | Common Stock Amount (2019) ($) | 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) | $11,749,513 | Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the years ended December 31, 2019 and 2018 Statements of Cash Flows Summary (Years Ended December 31) | Cash Flow Activity | 2019 ($) | 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 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 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] - 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 $116,935,112 as of December 31, 2019[235] - Existing and future resources are expected to satisfy working capital requirements for at least the next 12 months, but additional financing or expense reduction may be needed if performance falls short[235][236] Significant Accounting Policies This section details the company's key accounting principles, including revenue recognition, goodwill and long-lived asset impairment, and deferred tax valuation allowances - Revenue is recognized when a customer obtains control of promised goods or services, with the majority from fixed-price and per-scan contracts for SaaS and licensed software[246][249][250] - Goodwill and long-lived assets are reviewed for impairment annually (goodwill) or when impairment indicators are present (long-lived assets); no impairment charges were recognized in 2019 or 2018[243][244][245] - The company has recorded a full valuation allowance for its net deferred tax assets due to uncertainty of their realizability, given historical net operating losses[263][299][300] Disaggregation of Revenue (Years Ended December 31) | Products and services | 2019 ($) | 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 ($) | | :-------------------------- | :---------- | :---------- | | Products transferred at a point in time | 489,012 | 367,430 | | Services transferred over time | 7,174,646 | 4,066,024 | | Total | 7,663,658 | 4,433,454 | Accounts Receivable This section provides a breakdown of accounts receivable, net of the allowance for doubtful accounts, as of December 31, 2019 and 2018 Accounts Receivable, Net (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Accounts receivable | 1,716,949 | 1,044,109 | | Less: Allowance for doubtful accounts | (42,055) | (24,675) | | Accounts receivable, net | 1,674,894 | 1,019,434 | Property and Equipment This section details the company's property and equipment, net of accumulated depreciation and amortization, as of December 31, 2019 and 2018, along with depreciation expense Property and Equipment, Net (as of December 31) | Item | 2019 ($) | 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 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][291] Note Receivable 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] - The note bears 4% interest with monthly payments of $3,683 (principal and interest) over a 60-month term, expiring in August 2020[294] Debt 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] - The facility bears interest at Citibank's Base Rate (6.25% at December 31, 2019) minus 2%, with no amounts outstanding and $2,000,000 unused availability as of December 31, 2019[295] Accrued Expenses This section provides a breakdown of accrued expenses, including professional fees, payroll, incentive bonuses, and other items, as of December 31, 2019 and 2018 Accrued Expenses (as of December 31) | Item | 2019 ($) | 2018 ($) | | :------------------------ | :---------- | :---------- | | Professional fees | 171,331 | 69,406 | | Payroll and related | 544,441 | 406,925 | | Incentive bonuses | 632,105 | - | | Severance payments to former officer | - | 158,406 | | Other | 60,209 | 92,181 | | Total Accrued Expenses | 1,408,086 | 726,918 | Income Taxes This section explains the impact of the TCJA on the company's tax rate, its full valuation allowance against deferred tax assets, and the details of its net operating loss carryforwards - The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the U.S. corporate income tax rate to a flat 21% in 2018, leading to a remeasurement and decrease in deferred tax assets and liabilities[297][298] - The company has historically not paid income taxes due to continuing losses and has recorded a full valuation allowance against its net deferred tax assets, as realization is not considered more likely than not[299][300] Deferred Tax Assets and Liabilities (as of December 31) | Item | 2019 ($) | 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 $17 million, with pre-2018 NOLs expiring from 2020-2039 and 2018/2019 NOLs having no expiration but limited to 80% utilization[302] Stockholders' Equity This section details the company's equity compensation plans, including stock options and restricted stock units, and summarizes stock option activity and share-based compensation expense - The 2015 Omnibus Incentive Plan covers up to 3,500,000 common shares for officers, directors, key employees, and consultants, allowing for incentive stock options, nonqualified stock options, and restricted stock units (RSUs)[307] Stock Option Activity (Years Ended December 31) | Item | 2019 Number of Shares Subject to Issuance | 2019 Weighted average Exercise Price ($) | 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] - 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] Commitments and Contingencies 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] - 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] - 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] - 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][328] Quarterly Financial Data (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 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] Item 9A. Controls and Procedures 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] - 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] - There were no material changes in internal control over financial reporting during the most recently completed fiscal quarter[201] Item 9B. Other Information There is no other information to report in this section - None[203] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accounting Fees and Services 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] PART IV Item 15. Exhibits and Financial Statement Schedules 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] - 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][211] - 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][212][218]