Intellicheck(IDN) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited financial statements for Intellicheck, Inc., including the Balance Sheets, Statements of Operations, Statements of Stockholders' Equity, and Statements of Cash Flows, along with detailed notes explaining the company's business, significant accounting policies, and specific financial line items for the periods ended June 30, 2022, and December 31, 2021 Balance Sheets | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Cash and cash equivalents | $11,957 | $13,651 | | Accounts receivable, net | $2,458 | $2,192 | | Total current assets | $14,951 | $16,486 | | Total assets | $24,194 | $25,711 | | Total current liabilities | $5,830 | $6,126 | | Total liabilities | $5,834 | $6,134 | | Total stockholders' equity | $18,360 | $19,577 | Statements of Operations | Metric (in thousands) | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $4,008 | $4,797 | $7,403 | $7,660 | | Gross profit | $3,644 | $3,328 | $6,723 | $5,971 | | Operating expenses | $4,742 | $4,165 | $9,289 | $11,447 | | Loss from operations | $(1,098) | $(837) | $(2,566) | $(5,476) | | Net loss | $(1,098) | $(836) | $(2,566) | $(5,461) | | Loss per common share - Basic/Diluted | $(0.06) | $(0.04) | $(0.14) | $(0.29) | Statements of Stockholders' Equity | Metric (in thousands) | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Equity compensation | $520 | $651 | $1,349 | $1,632 | | Net loss | $(1,098) | $(836) | $(2,566) | $(5,461) | | Total Stockholders' Equity (End of Period) | $18,360 | $20,158 | $18,360 | $20,158 | Statements of Cash Flows | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(1,538) | $(1,075) | | Net cash used in investing activities | $(156) | $(182) | | Net cash provided by financing activities | $0 | $76 | | Net decrease in cash | $(1,694) | $(1,181) | | Cash, end of period | $11,957 | $11,940 | Notes to Financial Statements 1. Nature of Business - Intellicheck, Inc. develops, integrates, and markets identity verification solutions for commercial retail, banking fraud prevention, law enforcement, and access control, leveraging a portfolio of 17 U.S. and 1 Canadian patents[21] - The company incurred a net loss of $2,566 thousand and used $1,538 thousand in cash from operations for the six months ended June 30, 2022. As of June 30, 2022, cash and cash equivalents were $11,957 thousand, working capital was $9,121 thousand, and accumulated deficit was $129,463 thousand[22] - COVID-19 pandemic has impacted revenues, primarily due to lower equipment revenues, despite an increase in SaaS revenues; the company cannot accurately predict the full future impact[23] 2. Significant Accounting Policies - The financial statements for Q3 2020, all quarters of 2021, and years ended December 31, 2021 and 2020 were restated due to errors in accounting for certain option awards, specifically reclassifying them as liability awards due to cashless withholding for tax obligations[28][29] - The company does not expect ASU No. 2016-13 (Credit Losses) to have a material impact on its financial statements[30] - Significant estimates include goodwill and intangible asset valuation, deferred tax valuation allowances, allowance for doubtful accounts, revenue recognition (including breakage), and fair value of stock options[31] - Goodwill was $8,102 thousand at June 30, 2022, with no impairment charge required for the six months ended June 30, 2022 and 2021[9][37] - Intangible assets (patents, copyrights, developed technology) are amortized on a straight-line basis; no impairment charges were recognized for the six months ended June 30, 2022 and 2021[38] Revenue Recognition and Deferred Revenue - Revenue is generated from fixed-price and per-scan contracts, with an additional model for predetermined transactions where breakage revenue is estimated and recognized ratably[45][46] Disaggregated Revenue by Product and Service (in thousands) | Product and Service | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Software as a Service (SaaS) | $3,928 | $3,234 | $7,281 | $6,009 | | Equipment | $80 | $1,425 | $117 | $1,462 | | Other | $0 | $138 | $5 | $189 | | Total Revenues | $4,008 | $4,797 | $7,403 | $7,660 | Transaction Price Allocated to Remaining Performance Obligations (in thousands) | Category | Remainder 2022 | 2023 | 2024 | Total | | :------- | :------------- | :--- | :--- | :---- | | SaaS | $1,216 | $563 | $1 | $1,780 | | Other | $1 | $1 | $0 | $2 | | Total| $1,217 | $564 | $1 | $1,782 | Business Concentrations and Credit Risk - For the three and six months ended June 30, 2022, three customers accounted for approximately 53% of total revenues, primarily from commercial identity sales. These three, plus one other, represented 70% of total accounts receivable at June 30, 2022[60] Net Loss Per Share Net Loss Per Share (Basic/Diluted) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Loss per share | $(0.06) | $(0.04) | $(0.14) | $(0.29) | Anti-Dilutive Common Stock Equivalents Excluded from Diluted EPS | Type of Equivalent | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Stock options | 1,144,335 | 502,424 | 1,144,335 | 502,424 | | Restricted stock | 230,082 | 409,765 | 230,082 | 409,765 | | Performance stock units | 177,688 | 233,848 | 177,688 | 233,848 | | Total | 1,552,105 | 1,146,037 | 1,552,105 | 1,146,037 | 3. Property and Equipment Property and Equipment, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :------- | :------------ | :---------------- | | Computer equipment and software | $1,775 | $1,708 | | Furniture and fixtures | $139 | $139 | | Leasehold improvements | $55 | $55 | | Office equipment | $600 | $599 | | Less – Accumulated depreciation | $(1,762) | $(1,764) | | Total Property and Equipment, net | $807 | $737 | - Depreciation expense for the six months ended June 30, 2022, and 2021 amounted to $86 thousand and $31 thousand, respectively[65] 4. Intangible Assets Intangible Assets, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :------- | :------------ | :---------------- | | Patents and copyrights | $112 | $125 | | Developed technology | $213 | $253 | | Net balance | $325 | $378 | Amortization Expense of Intangible Assets (in thousands) | Category | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of sales | $23 | $24 | $47 | $47 | | General and administrative | $3 | $3 | $6 | $5 | | Total | $26 | $27 | $53 | $52 | 5. Debt - The company has a revolving credit facility with Citi Personal Wealth Management, allowing borrowings up to $2,000 thousand. As of June 30, 2022, there were no outstanding amounts, and unused availability was $2,000 thousand[69] 6. Accrued Expenses Accrued Expenses (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :------- | :------------ | :---------------- | | Professional fees | $333 | $127 | | Payroll and related | $994 | $1,100 | | Incentive bonuses | $855 | $1,565 | | Other | $139 | $78 | | Total| $2,321 | $2,870 | 7. Income Taxes - The company had approximately $18.0 million in net operating loss (NOL) carryforwards at December 31, 2021, which began to expire in 2021. A full valuation allowance has been recorded for net deferred tax assets due to uncertainty of realizability[71][42] 8. Equity Compensation Equity Compensation Cost Recognized (in thousands) | Category | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Selling, general & administrative | $282 | $651 | $709 | $4,922 | | Research & development | $164 | $98 | $329 | $372 | | Total | $446 | $749 | $1,038 | $5,294 | - Certain stock option awards were reclassified as liability awards, leading to a reduction in equity compensation expense by approximately $74 thousand (3 months) and $311 thousand (6 months) for 2022, and an increase by $99 thousand (3 months) and $3,663 thousand (6 months) for 2021[74] Stock Option Activity | Metric | Outstanding at Dec 31, 2021 | Granted | Forfeited | Outstanding at Jun 30, 2022 | | :----- | :-------------------------- | :------ | :-------- | :-------------------------- | | Number of Shares | 496,424 | 657,228 | (9,317) | 1,144,335 | | Weighted average Exercise Price | $6.13 | $2.06 | $11.50 | $3.75 | - As of June 30, 2022, total unrecognized compensation cost was $3,419 thousand, expected to be recognized over a weighted average period of approximately 1.81 years. There were 1,322,729 shares available for future grants[83][84] 9. Commitments and Contingencies - The Company is not aware of any infringement by its products or technology on proprietary rights of others and is not currently involved in any legal or regulatory proceeding expected to have a material effect on its business[85] Item 2. 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 for the six-month period ended June 30, 2022. It covers an overview of the business, critical accounting policies, detailed analysis of revenues, expenses, and net loss for both three-month and six-month periods, liquidity, and a reconciliation of GAAP net loss to non-GAAP Adjusted EBITDA Overview - Intellicheck is a technology company focused on identity authentication and threat identification solutions for various markets, including bank and retail fraud prevention, law enforcement, and government[89] - Critical accounting policies include revenue recognition, equity compensation, deferred taxes, goodwill and intangible asset valuation and impairment, and commitments and contingencies[91] Results of Operations Comparison of Three Months Ended June 30, 2022 vs. 2021 - Revenues decreased by $789 thousand (16%) to $4,008 thousand, primarily due to lower equipment revenues. Excluding equipment sales, revenues increased by $556 thousand (16%). SaaS revenue increased by $694 thousand (21%) to $3,928 thousand[104] - Gross profit increased by $316 thousand (9%) to $3,644 thousand. Gross profit as a percentage of revenues increased from 69% to 91%, mainly due to lower equipment revenues[105] - Operating expenses increased by $577 thousand (14%) to $4,742 thousand, driven by higher personnel expenses, professional fees, and marketing expenses[106] - Net loss increased to $1,098 thousand from $836 thousand in the prior year period[107] Comparison of Six Months Ended June 30, 2022 vs. 2021 - Revenues decreased by $257 thousand (3%) to $7,403 thousand, primarily due to lower equipment revenues. Excluding equipment sales, revenues increased by $1,088 thousand (18%). SaaS revenue increased by $1,272 thousand (21%) to $7,281 thousand[109] - Gross profit increased by $752 thousand (13%) to $6,723 thousand. Gross profit as a percentage of revenues increased from 78% to 91%, due to lower equipment sales[110] - Operating expenses decreased by $2,158 thousand (19%) to $9,289 thousand, primarily due to lower equity compensation expenses from liability award reclassification adjustments in 2021[111] - Net loss decreased to $2,566 thousand from $5,461 thousand in the prior year period[112] Liquidity and Capital Resources Key Liquidity Metrics (in thousands) | Metric | June 30, 2022 | | :----- | :------------ | | Cash and cash equivalents | $11,957 | | Working capital | $9,121 | | Total assets | $24,194 | | Stockholders' equity | $18,360 | - Net cash used in operating activities was $1,538 thousand for the six months ended June 30, 2022, compared to $1,075 thousand in the prior year[115] - The company anticipates that available cash, expected cash from operations, and the revolving line of credit will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months[117] Net Operating Loss Carry Forwards - The company had approximately $18.0 million in federal and state net operating loss (NOL) carryforwards at December 31, 2021, available to offset future taxable income, with expirations beginning in 2021[120] Adjusted EBITDA - Adjusted EBITDA is a non-GAAP measure used to evaluate operational strength, calculated by adjusting net loss for items like debt forgiveness, interest, income taxes, depreciation, amortization, and equity compensation[121][122] Reconciliation of GAAP Net Loss to Non-GAAP Adjusted EBITDA (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss | $(1,098) | $(836) | $(2,566) | $(5,461) | | Depreciation and amortization | $69 | $41 | $139 | $84 | | Equity compensation | $446 | $749 | $1,038 | $5,294 | | Adjusted EBITDA | $(583) | $(47) | $(1,389) | $(98) | Off-Balance Sheet Arrangements - The company has not entered into any off-balance sheet financing arrangements, established special purpose entities, guaranteed debt, or entered into options on non-financial assets[124] Forward Looking Statements - The document contains forward-looking statements regarding future growth, operations, and cash flow, which are subject to inherent uncertainties and changes in circumstances. The company disclaims any obligation to update these statements[125] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily focusing on concentrations of credit risk related to its cash and cash equivalents held in financial institutions - The company's financial instruments are primarily subject to concentrations of credit risk related to cash and cash equivalents held in two major financial institutions, with periodic evaluations of their credit standing[126] Item 4. Controls and Procedures This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures, identifying a material weakness in internal control over financial reporting related to equity compensation accounting, and outlining the remediation plan Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022, due to material weaknesses in internal control over financial reporting[127] - A material weakness was identified related to accounting for shares surrendered for personal income tax liabilities, calculation of shares issued/outstanding, and weighted-average shares outstanding, stemming from insufficient accounting personnel knowledge in US GAAP for equity compensation[129] Remediation Plan - The company plans to outsource equity compensation administration and recordkeeping to a third-party brokerage firm during the second half of 2022 to improve accuracy and compliance[131] - A professional services firm has been engaged to oversee the implementation of a global broker-dealer platform and provide recommendations on best practices and internal controls[132] Changes in Internal Controls over Financial Reporting - No material changes in internal control over financial reporting occurred during the fiscal quarter, other than those related to the material weakness in equity compensation accounting[133] Part II – OTHER INFORMATION Item 1. Legal Proceedings This section states that the company is not currently involved in any material legal proceedings - The company is not involved in any legal proceedings[135] Item 1A. Risk Factors This section outlines various risk factors that could adversely affect the company's business and financial performance, including current economic conditions, the ongoing impact of the COVID-19 pandemic, the conflict in Ukraine, and the identified material weakness in internal control over financial reporting - Current economic conditions, including the COVID-19 pandemic, may cause a decline in business and consumer spending, adversely affecting the company's business and financial performance[136][137][138] - The conflict in Ukraine could negatively impact the global economy, potentially leading to a reduction in the company's revenue and increasing the risk of cyber-attacks on US networks[141][142] - The identified material weakness in internal control over financial reporting related to equity compensation accounting could impair the company's ability to report accurate financial information timely, potentially leading to restatements and additional costs[145] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms that there were no unregistered sales of equity securities or use of proceeds to report - None[146] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - None[146] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Not applicable[146] Item 5. Other Information This section states that there is no other information to report - None[147] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents Exhibits Filed | 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 | | 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Signatures