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 AND EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission File No.: 001-15465

 

Intellicheck, Inc.
(Exact name of Registrant as specified in its charter)

 

Delaware   11-3234779
(State or Other Jurisdiction of
Incorporation or Organization)
 

(I.R.S. Employer

Identification No.)

 

535 Broad Hollow Road, Suite B51, Melville, NY 11747

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (516) 992-1900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]  

Non-accelerated filer[  ]

(Do not check if a smaller reporting company)

  Smaller reporting company [X]   Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Number of shares outstanding of the issuer’s Common Stock:

 

Class   Outstanding at August 14, 2018
Common Stock, $.001 par value   15,632,196

 

 

 

 

 

 

INTELLICHECK, INC.

 

Index

 

  Page
   
Part I – Financial Information  
   
Item 1. Financial Statements 3
   
Consolidated Balance Sheets – June 30, 2018 (Unaudited) and December 31, 2017 3
   
Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (Unaudited) 4
   
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2018 (Unaudited) 5
   
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (Unaudited) 6
   
Notes to Consolidated Financial Statements (Unaudited) 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
   
Item 4. Controls and Procedures 23
   
Part II - Other Information 23
   
Item 1. Legal Proceedings 23
   
Item 1A. Risk Factors 23
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
   
Item 3. Defaults Upon Senior Securities 23
   
Item 4. Mine Safety Disclosures 23
   
Item 5. Other Information 23
   
Item 6. Exhibits 24
   
Signatures 25

 

  Exhibits  
     
  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

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

INTELLICHECK, INC.

 

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2018   December 31, 2017 
   (Unaudited)     
ASSETS          
           
CURRENT ASSETS:          
Cash  $6,462,631   $8,010,161 
Accounts receivable, net of allowance of $24,375 and $18,750 at June 30, 2018 and December 31, 2017, respectively   473,704    652,627 
Inventory   81,217    85,321 
Other current assets   453,355    218,835 
Total current assets   7,470,907    8,966,944 
           
NOTE RECEIVABLE, net of current portion   50,287    71,138 
PROPERTY AND EQUIPMENT, net   296,992    211,602 
GOODWILL   8,101,661    8,101,661 
INTANGIBLE ASSETS, net   385,075    463,578 
OTHER ASSETS   9,742    67,181 
           
Total assets  $16,314,664   $17,882,104 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $52,762   $71,578 
Accrued expenses   928,281    815,350 
Deferred revenue, current portion   624,064    739,980 
Total current liabilities   1,605,107    1,626,908 
           
OTHER LIABILITIES:          
Deferred revenue, long-term portion   48,751    87,736 
Other long-term liabilities   7,863    158,407 
           
Total liabilities   1,661,721    1,873,051 
           
COMMITMENTS AND CONTINGENCIES (Note 11)          
           
STOCKHOLDERS’ EQUITY:          
Common stock - $.001 par value; 40,000,000 shares authorized; 15,625,329 and 15,009,246 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively   15,625    15,009 
Additional paid-in capital   127,228,475    126,416,869 
Accumulated deficit   (112,591,157)   (110,422,825)
Total stockholders’ equity   14,652,943    16,009,053 
           
Total liabilities and stockholders’ equity  $16,314,664   $17,882,104 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

INTELLICHECK, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
                 
REVENUES  $1,001,418   $951,334   $2,063,480   $1,663,994 
COST OF REVENUES   (82,393)   (204,634)   (182,862)   (314,070)
Gross profit   919,025    746,700    1,880,618    1,349,924 
                     
OPERATING EXPENSES                    
Selling, general and administrative   1,307,524    1,352,361    2,722,908    2,525,244 
Research and development   755,097    495,048    1,383,133    865,645 
Total operating expenses   2,062,621    1,847,409    4,106,041    3,390,889 
                     
Loss from operations   (1,143,596)   (1,100,709)   (2,225,423)   (2,040,965)
                     
OTHER INCOME                    
Interest and other income   43,221    2,156    57,091    5,655 
                     
Net loss  $(1,100,375)  $(1,098,553)  $(2,168,332)  $(2,035,310)
                     
PER SHARE INFORMATION                    
Loss per common share - Basic/Diluted  $(0.07)  $(0.10)  $(0.14)  $(0.19)
                    
Weighted average common shares used in computing per share amounts - Basic/Diluted   15,623,351    10,769,437    15,448,255    10,750,751 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

INTELLICHECK, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2018

(Unaudited)

 

           Additional       Total 
   Common Stock   Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
                     
BALANCE, January 1, 2018   15,009,246   $15,009   $126,416,869   $(110,422,825)  $16,009,053 
                          
Stock-based compensation expense   -    -    124,701    -    124,701 
Exercise of stock options   593,838    594    686,927    -    687,521 
Vesting of restricted stock   22,155    22    (22)   -    - 
Net loss   -    -    -    (2,168,332)   (2,168,332)
                          
BALANCE, June 30, 2018   15,625,239   $15,625   $127,228,475   $(112,591,157)  $14,652,943 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

INTELLICHECK, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six months ended June 30, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(2,168,332)  $(2,035,310)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   120,618    208,600 
Stock-based compensation expense   124,701    191,518 
Provision for doubtful accounts   5,625    - 
Deferred rent   (6,002)   (22,215)
Changes in assets and liabilities:          
Decrease (increase) in accounts receivable   173,298    (273,595)
Decrease (increase) in inventory   4,104    (11,580)
(Increase) in other current assets   (233,703)   (187,879)
Decrease in other assets   57,439    1,358 
Increase in accounts payable and accrued expenses   107,980    93,792 
(Decrease) in deferred revenue   (154,901)   (175,662)
(Decrease) in other long-term liabilities   (158,407)   - 
Net cash used in operating activities   (2,127,580)   (2,210,973)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Capital expenditures   (127,505)   (12,794)
Collection of note receivable   20,034    19,185 
Net cash (used in) provided by investing activities   (107,471)   6,391 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net proceeds from issuance of common stock from exercise of stock options   687,521    10,100 
Net proceeds from issuance of common stock from exercise of warrants   -    137,500 
Net cash provided by financing activities   687,521    147,600 
           
Net decrease in cash   (1,547,530)   (2,056,982)
           
CASH, beginning of period   8,010,161    3,092,172 
           
CASH, end of period  $6,462,631   $1,035,190 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

INTELLICHECK, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

1. NATURE OF BUSINESS

 

Business

 

Intellicheck, Inc. (the “Company” or “Intellicheck”) is a trusted industry leader in SaaS technology solutions that provide real-time identification authentication and age verification. The Company strives to make it possible for its customers to enhance safety, security and awareness, increase revenues, improve customer service, and increase operational efficiencies. The Company’s identity authentication solutions address challenges that include retail fraud prevention, law enforcement unknown contact identification, and mobile and handheld access control and security for the government, military and commercial markets. Intellicheck’s products include the Retail ID™ product suite, cutting-edge technology solutions that provides online, mobile and point of sale of transaction, new account and account takeover fraud protection in the retail industry; Age ID®, a suite of point of sale, iOS and Android smartphone or tablet-based solutions for preventing sale of age-restricted products to minors attempting to use fake ID’s; Law ID®, a smartphone-based solution used by law enforcement officers to identify and mitigate threats based on real-time authentication of scanned identifications on a smartphone or tablet and with immediate access to critical information on Nlets, the premiere International Justice and Public Safety Network.; and Defense ID®, a mobile and fixed infrastructure solution for threat identification, identity authentication and access control to military bases and other government facilities.

 

Intellicheck continues to develop and release innovative products based upon its rich patent portfolio consisting of twenty issued patents and six pending.

 

Liquidity

 

For the six months ended June 30, 2018, the Company incurred a net loss of $2,168,332 and used cash in operations of $2,127,444. As of June 30, 2018, the Company had cash of $6,462,631, working capital of $5,865,800 and an accumulated deficit of $112,591,157. Based on the Company’s business plan and cash resources, Intellicheck expects its existing and future resources and revenues generated from operations and current level of expenses from operations to satisfy its working capital requirements for at least the next 12 months.

 

However, if performance expectations fall short or expenses exceed expectations, the Company may need to secure additional financing or reduce expenses to continue operations. Failure to do so would have a material adverse impact on its consolidated financial condition. There can be no assurance that any contemplated additional financing will be available on terms acceptable, if at all. If required, the Company believes it would be able to reduce expenses to a sufficient level to continue as a going concern.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Intellicheck and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and Positive Access Corporation (“Positive Access”). All intercompany balances and transactions have been eliminated upon consolidation.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s consolidated financial position at June 30, 2018 and the consolidated results of operations for the three and six months ended June 30, 2018 and 2017 and the consolidated stockholders’ equity and cash flows for the six months ended June 30, 2018. All such adjustments are of a normal and recurring nature. Interim consolidated financial statements are prepared on a basis consistent with the Company’s annual consolidated financial statements. Results of operations for the six month period ended June 30, 2018, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2018.

 

7

 

 

The consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

References in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”).

 

For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09” or “ASC 606”), which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States of America (“GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than were required under previous GAAP. In addition, this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework and additional quantitative disclosures regarding contract balances and remaining performance obligations.

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods. See the section “Revenue Recognition and Deferred Revenue” for a detailed disclosure later in this footnote titled Significant Accounting Policies in these consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. On January 1, 2018, the Company adopted ASU 2017-09 prospectively to awards after this adoption date and did not have a material effect on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires that lease arrangements longer than 12 months’ result in an entity recognizing an asset and liability. The pronouncement is effective for periods beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact this guidance but is not expected to have a material impact on its consolidated financial statements.

 

8

 

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, and the fair value of stock options granted under the Company’s stock-based compensation plans. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.

 

Allowance for Doubtful Accounts

 

The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect customers’ ability to pay.

 

Inventory

 

Inventory is stated at the lower of cost or market and cost is determined using the first-in, first-out method. Inventory is primarily comprised of finished goods. As of June 30, 2018 and December 31, 2017, the majority of inventory is related to Government and Commercial Identity products for intended near-term sales.

 

Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. There were no impairment charges recognized during the six months ended June 30, 2018 and 2017.

 

Intangible Assets

 

Intangible assets include trade names, patents and non-contractual customer relationships. The Company uses the straight line method to amortize these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. There were no impairment charges recognized during the six months ended June 30, 2018 and 2017.

 

Income Taxes

 

The Company accounts for income taxes under in accordance with ASC Topic 740, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company has recorded a full valuation allowance for its net deferred tax assets as of June 30, 2018 and December 31, 2017, due to the uncertainty of the realizability of those assets.

 

9

 

 

Fair Value of Financial Instruments

 

The Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement requires that the Company calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments. The Company’s financial instruments include cash, accounts receivable, note receivable, accounts payable and accrued expenses. As of June 30, 2018 and December 31, 2017, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature.

 

Revenue Recognition and Deferred Revenue

 

General

 

Effective January 1, 2018, the Company adopted ASC 606. In accordance with ASC 606, the Company’s analysis indicated that there was no change to how the Company records revenue and that the standard only impacted enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations and the related judgments and estimates necessary to apply the new standard.

 

ASC 606 was applied using the modified retrospective method. There was no cumulative effect of the initial application to be recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition.

 

The majority of license fees and services revenue are generated from fixed-price contracts, which provide for licenses to software products and services to customize such software to meet the customers’ use. In certain instances, customization services are determined to be essential to the functionality of the delivered software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company measures revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of the Company’s services as they are performed. Substantially all customer contracts provide that the Company is compensated for services performed to date.

 

Invoicing is based on schedules established in customer contracts. Payment terms are generally established at 30 days from the invoice date. Product returns are recorded as a reduction to revenue.

 

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Furthermore, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

 

Nature of goods and services

 

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

 

Hosted Subscription Services Revenue

 

Subscription services allows customers to access a set of data for a predetermined period of time. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, subscription revenue should be recognized over time based on the usage of the hosted subscription services, which can vary from month to month. The revenue is typically based on a formula such as number of stores using the service in a given month multiplied by a fee per store.

 

10

 

 

License Revenue

 

The Company also recognizes revenues from licensing of its software to customers. The license allows customers to access a set of data for a predetermined period of time. The licensed software requires continuing service or post contractual customer support and performance. As the customer obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of stores in a given month multiplied by a fee per store. Royalties from the licensing of the Company’s technology are recognized as revenues in the period they are earned.

 

Equipment Revenue

 

Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the equipment is received.

 

Non-Recurring Services Revenue

 

The non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as it is provided and the Company’s performance obligation has been satisfied.

 

Extended Warranty

 

Extended warranty revenues is generated when a warranty is provided to the customer separately of other performance obligations when the equipment is sold. As the customer obtains access at a point in time and continues to have access for the remainder of the warranty term, the customer is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs. The related revenue is recognized ratably over the specified term of the warranty period. The extended warranty is separate to the Company’s standard warranty of usually one year that it receives from its vendor.

 

Disaggregation of revenue

 

In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue.

 

   For the Three Months Ended June 30, 
   2018   2017 
Products and services          
           
Hosted subscription services  $221,096   $203,040 
Licensing   679,863    392,139 
Equipment   60,544    236,335 
Non-recurring Services   27,288    109,598 
Extended warranties on equipment   3,607    4,048 
Other   9,020    6,174 
   $1,001,418   $951,334 
           

Timing of revenue recognition

          
           
Products transferred at a point in time  $69,564   $242,509 
Services transferred over time   931,854    708,825 
   $1,001,418   $951,334 

 

11

 

 

   For the Six Months Ended June 30, 
   2018   2017 
Products and services          
           
Hosted subscription services  $414,078   $414,752 
Licensing   1,370,178    776,930 
Equipment   182,457    304,845 
Non-recurring Services   71,937    148,689 
Extended warranties on equipment   7,107    8,354 
Other   17,723    10,424 
   $2,063,480   $1,663,994 
           
Timing of revenue recognition          
           
Products transferred at a point in time  $200,180   $315,269 
Services transferred over time   1,863,300    1,348,725 
   $2,063,480   $1,663,994 

 

Contract balances

 

The current portion of deferred revenue at June 30, 2018 and December 31, 2017 was $624,064 and $739,980, respectively, and primarily consists of revenue that is recognized over time for one-year software license contracts and hosted subscription services. The changes in these balances are related to the satisfaction or partial satisfaction of these contracts. Of this balance at December 31, 2017, $227,490 and $536,873 was recognized as revenue for the three and six months ended June 30, 2018, respectively. The long-term portion of deferred revenue is $48,751 and $87,736 as of June 30, 2018 and December 31, 2017, respectively.

 

The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:

 

   2018   2019   Thereafter   Total 
                 
Hosted subscription services  $189,223   $83,432   $12,379   $285,034 
                     
Licensing  $285,822   $74,533   $2,381   $362,736 
                     
Non-recurring services  $391    -    -   $391 
                     
Extended warranties on equipment  $6,252   $9,896   $8,506   $24,654 

 

All consideration from contracts with customers is included in the amounts presented above.

 

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Business Concentrations and Credit Risk

 

During the three and six month periods ended June 30, 2018, the Company made sales to two customers that accounted for approximately 34% and 33% of total revenues, respectively. The revenue was associated with commercial identity sales customers. These customers represented 36% of total accounts receivable at June 30, 2018. During the three and six month periods ended June 30, 2017, the Company made sales to two customers that accounted for approximately 28% and 24% of total revenues, respectively. The revenue was associated with two commercial identity customers.

 

Net Loss Per Share

 

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net loss per share excludes all anti-dilutive shares.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Numerator:                    
                     
Net Loss  $(1,100,375)  $(1,098,553)  $(2,168,332)  $(2,035,310)
                     
Denominator:                    
Weighted average common shares – Basic/Diluted   15,623,351    10,769,437    15,448,255    10,750,751 
                     
Net Loss per share – Basic/Diluted  $(0.07)  $(0.10)  $(0.14)  $(0.19)

 

The following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive due to the net loss:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Stock options   1,074,332    1,652,920    1,074,332    1,652,920 
Warrants   471,801    472,801    471,801    472,801 
Restricted stock   6,957    28,025    6,957    28,025 
    1,553,090    2,153,746    1,553,090    2,153,746 

 

3. INTANGIBLE ASSETS

 

The changes in the carrying amount of intangible assets for the six months ended June 30, 2018 were as follows:

 

Net balance at December 31, 2017  $463,578 
Deduction: Amortization expense   (78,503)
Net balance at June 30, 2018  $385,075 

 

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The following summarizes amortization of intangible assets included in the accompanying consolidated statements of operations:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Cost of sales  $32,374   $59,164   $64,748   $118,326 
General and administrative   6,878    19,728    13,755    39,456 
   $39,252   $78,892   $78,503   $157,782 

 

4. NOTE RECEIVABLE

 

On August 31, 2015, the Company sold the wireless enterprise assets to the Jamestown S’Klallam Tribe (the “Buyer”) for total consideration of $350,000 which consists of an upfront cash payment of $30,000, the issuance of a promissory note totaling $200,000 and contingent consideration up to a maximum of $120,000 based on future earnings. Under the terms of the promissory note, monthly payments of $3,683 including principal and interest at 4%, are to be made over a 60-month term expiring in August 2020. At June 30, 2018, the total note receivable is $91,575, of which $41,288 and $50,287 is included in Other Current Assets and Note Receivable, net of current portion, respectively, on the Consolidated Balance Sheets. At December 31, 2017, the total note receivable was $111,609, of which $40,471 and $71,138 is included in Other Current Assets and Notes Receivable, net of current portion, respectively on the Consolidated Balance Sheets.

 

5. DEBT

 

Revolving Line of Credit

 

The Company has a revolving credit facility with Northwest Bank (“Northwest”). This agreement allows for borrowings to the lesser of (i) $2,000,000 or (ii) 95% of the balance in the Company’s money market account less $250,000. The borrowings are secured by the Company’s existing deposit and money market accounts with Northwest. The facility bears interest at a rate consistent with Northwest’s money market account (0.65% at June 30, 2018) plus 3%. Interest is payable monthly and the principal is due upon maturity on May 22, 2019. As of June 30, 2018, there were no amounts outstanding under this facility and unused availability under this facility was $2,000,000.

 

6. ACCRUED EXPENSES

 

Accrued expenses are comprised of the following:

 

  

June 30, 2018

   December 31, 2017 
Professional fees  $151,355   $78,552 
Payroll and related   401,830    365,384 
Severance payments to former officer   316,812    316,812 
Other   58,284    54,602 
   $928,281   $815,350 

 

7. INCOME TAXES

 

As of December 31, 2017, the Company had net operating loss carryforwards (NOL’s) for federal and New York state income tax purposes of approximately $11 million. There can be no assurance that the Company will realize any benefit of the NOL’s. The federal and New York state NOL’s are available to offset future taxable income and expire from 2018 through 2037 if not utilized. The Company has a full valuation allowance on its deferred tax assets since management continues to believe that it is more likely than not that these assets will not be realized.

 

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8. SHARE BASED COMPENSATION

 

The Company accounts for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which requires that the cost resulting from all share based payment transactions be recognized in the financial statements. These pronouncements establish fair value as the measurement objective in accounting for share based payment arrangements and requires all companies to apply a fair value based measurement method in accounting for all share based payment transactions with employees. All stock-based compensation is included in operating expenses for the periods as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Compensation cost recognized:                    
Selling, general & administrative  $57,719   $88,040   $112,153   $177,158 
Research & development   6,274    6,678    12,548    14,360 
   $63,993   $94,718   $124,701   $191,518 

 

Stock Options

 

The Company uses the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected life of the options in years. The expected life computation is based on the time to option expiration. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Stock option activity under the 1998, 1999, 2001, 2003, 2006 and 2015 Stock Option Plans (collectively, the “Plans”) during the periods indicated below were as follows:

 

   Number of Shares Subject to Issuance  

Weighted-average Exercise

Price

  

Weighted-average Remaining Contractual

Term

  

Aggregate Intrinsic

Value

 
                 
Outstanding at December 31, 2017   1,631,358   $1.36    1.70 years   $2,106,669 
                     
Granted   102,500    2.86           
Forfeited or expired   (65,688)   (4.22)          
Exercised   (593,838)   1.16           
Outstanding at June 30, 2018   1,074,332   $1.44    2.42 years   $1,031,006 
                     
Exercisable at June 30, 2018   811,988   $1.30    2.16 years   $862,310 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on June 30, 2018. This amount changes based upon the fair market value of the Company’s stock.

 

Restricted Stock Units

 

The Company issues Restricted Stock Units (“RSUs”) which are equity-based instruments that may be settled in shares of common stock of the Company. During the six months ended June 30, 2018, the Company issued RSUs to certain directors as compensation. RSU agreements can vest immediately or with the passage of time. The vesting of all RSUs is contingent on continued board and employment services.

 

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The compensation expense incurred by the Company for RSUs is based on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite service period and charged to general and administrative expense with a corresponding increase to additional paid-in capital.

 

   Number of
Shares
   Weighted
Average
Grant Date
Fair Value
   Aggregate
Intrinsic
Value
 
             
Outstanding at December 31, 2017   5,859   $2.56   $- 
Granted   23,253    1.95      
Vested and settled in shares   (22,155)   2.00      
                
Outstanding at June 30, 2018   6,957   $2.30   $- 

 

As of June 30, 2018, there was $238,679 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options and restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.18 years.

 

The Company had 752,672 shares available for future grants under the Plans at June 30, 2018.

 

Warrants

 

All previously granted warrants were issued with an exercise price that was equal to or above the fair market value of the Company’s common stock on the date of grant. As of June 30, 2018, the Company had 471,801 remaining warrants outstanding and exercisable through 2021. During the six months ended June 30, 2018, there were no warrants exercised.

 

9. COMMON STOCK

 

On August 4, 2017, the Company completed a public offering of 4,168,750 shares of its common stock, offered to the public at $2.25 per share. Net proceeds to the Company from this offering were approximately $8,670,000 after deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling approximately $157,000 were recorded as a reduction to the net proceeds on the consolidated statement of stockholders’ equity.

 

10. LEGAL PROCEEDINGS

 

The Company is not aware of any infringement by the Company’s products or technology on the proprietary rights of others.

 

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.

 

11. COMMITMENTS AND CONTINGENCIES

 

The Company leases offices in Melville, New York which require monthly payments of $10,334 and expires March 31, 2021.

 

On November 29, 2017, Bill White, the Chief Financial Officer and the then Interim Chief Executive Officer entered into a severance agreement with the Company (the “Agreement”). The Agreement provides that in consideration of his services and pursuant to the Agreement, in the event that Mr. White’s employment is terminated without “cause” (as such term is defined in the Agreement), Mr. White will receive a 24-month continuation of salary payments, continuation of certain eligible medical benefits under the COBRA program, and a lump sum payment equal to any quarterly bonus target applicable during the quarter of termination plus any prior completed quarterly bonus which has not yet been determined (if any). In addition, the Agreement provides that upon such termination without Cause, the Company will accelerate the vesting of all of Mr. White’s outstanding but unvested stock options or other equity incentives. This Agreement replaces a severance agreement, as amended, initially executed by Mr. White and the Company on September 30, 2014 and amended May 30, 2017 (the “Original Agreement”). The Original Agreement, as amended, provided equivalent severance benefits as provided in the Agreement. The Original Agreement expired by its terms September 30, 2017.

 

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On October 4, 2017, Dr. William Roof, the Company’s President and Chief Executive Officer retired from the Company at the request of the board of directors (the “Board”). The parties have entered into a separation and consulting agreement dated as of November 2, 2017 (the “Agreement”). Pursuant to the Agreement, the Company may contact Dr. Roof to provide consulting services and he will provide consulting services at the Company’s request to ensure a smooth and effective transition of management and business affairs. In consideration of these services and to fulfill the Company’s obligations under Dr. Roof’s employment agreement with the Company, Dr. Roof will receive aggregate cash payments of $500,000 over a 20-month period together with reimbursement of certain vision and dental benefit premiums. The Company does not anticipate this to be a significant effort and therefore has accounted for these payments as severance on the date of separation. In addition, the board of directors of the Company has extended the expiration date of Dr. Roof’s options to purchase Company’s common stock to six months from the Separation Date. The Board immediately appointed Bill White, the Company’s current Chief Financial Officer, as its Interim President and Chief Executive Officer. At June 30, 2018, the total severance liability was $316,812, which is included in Accrued Expenses on the Consolidated Balance Sheets.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

References made in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “Intellicheck,” or the “Company,” refer to Intellicheck, Inc.

 

The following discussion and analysis of our financial condition and results of operations constitutes management’s review of the factors that affected our financial and operating performance for the six month period ended June 30, 2018. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K, for the year ended December 31, 2017. The consolidated financial statements include the accounts of Intellicheck and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and Positive Access Corporation (“Positive Access”).

 

Overview

 

We are a leading technology company that is engaged in developing, integrating and marketing identity authentication solutions to address challenges that include retail identification fraud prevention, law enforcement threat identification, and mobile and handheld access control and security for the government, military and commercial markets. Our products include Retail ID™, the industry leading solution for preventing identity fraud in the retail industry; Age ID®, a smartphone or tablet-based solution for preventing sale of age-restricted products to minors attempting to use fake ID’s; Law ID®, a smartphone-based solution used by law enforcement officers to identify and mitigate threats based on a person’s authenticated identification and subsequent near instantaneous database searches; and Defense ID®, a mobile and fixed infrastructure solution for threat identification, identity authentication and access control to military bases and other government facilities.

 

Critical Accounting Policies and the Use of Estimates

 

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial statements include impairment consideration and valuation of goodwill and intangible assets, deferred tax valuation allowances, allowance for doubtful accounts and the fair value of stock options granted under the Company’s stock-based compensation plans. Due to the inherent uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.

 

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We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, stock-based compensation, deferred taxes and commitments and contingencies. These policies and our procedures related to these policies are described in detail below.

 

Goodwill

 

The excess of the purchase consideration over the fair value of the assets of acquired businesses is considered goodwill. Under authoritative guidance, purchased goodwill is not amortized, but rather it is periodically reviewed for impairment. We had goodwill of $8,101,661 as of June 30, 2018. This goodwill resulted from the acquisition of Mobilisa, Inc. and Positive Access Corporation.

 

For the year ended December 31, 2017, we performed our annual impairment test of goodwill in the fourth quarter. Under authoritative guidance, we can use industry and Company specific qualitative factors to determine whether it is more likely than not that impairment exists, before using a two-step quantitative analysis. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. As a result of our overall financial performance, we completed the first step of the goodwill impairment test in order to identify potential impairment by comparing our fair value of the Company to our carrying amount, including goodwill. The fair value was determined using the weighting of certain valuation techniques, including both income and market approaches which include a discounted cash flow analysis, an estimation of an implied control premium, in addition to our market capitalization on the measurement date. The implied control premium selected was developed based on certain observable market data of comparable companies. The market capitalization is sensitive to the volatility of our stock price. Although we believe that the factors considered in the impairment analysis are reasonable, changes in any one of the assumptions used could have produced a different result which may have led to an impairment charge. Any future impairment loss could have a material adverse effect on our long-term assets and operating expenses in the period in which impairment is determined to exist.

 

As of December 31, 2017, we determined that the fair value was in excess of its carrying amount and therefore the second step of the goodwill impairment test was not required.

 

We determined that no events occurred or circumstances changed during the six months ended June 30, 2018 that would more likely than not reduce the fair value of the Company below its carrying amounts. We will, however, continue to monitor our stock price and operations for any potential indicators of impairment. We will conduct the 2018 annual test for goodwill impairment in the fourth quarter, or at such time where an indicator of impairment appears to exist.

 

Intangible Assets

 

Our intangible assets consist of trade names, patents and non-contractual customer relationships. We determined that no events occurred or circumstances changed during the six months ended June 30, 2018 that would more likely than not reduce our intangible assets below our carrying amounts. We will, however, continue to monitor any potential indicators of impairment.

 

Revenue Recognition and Deferred Revenue

 

Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). In accordance with ASC 606, our analysis indicated that there was no change to how we record revenue and that the standard only impacted enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations and the related judgments and estimates necessary to apply the new standard.

 

ASC 606 was applied using the modified retrospective method. There was no cumulative effect of the initial application to be recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition.

 

18

 

 

The majority of license fees and services revenue are generated from fixed-price contracts, which provide for licenses to software products and services to customize such software to meet the customers’ use. In certain instances, customization services are determined to be essential to the functionality of the delivered software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. We measure revenue based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our services as they are performed. Substantially all customer contracts provide that we are compensated for services performed to date.

 

Invoicing is based on schedules established in customer contracts. Payment terms are generally established at 30 days from the invoice date. Product returns are recorded as a reduction to revenue.

 

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Furthermore, we recognize revenue when we satisfies a performance obligation by transferring control over a product or service to a customer.

 

Stock-Based Compensation

 

We account for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which requires that the cost resulting from all share based payment transactions be recognized in the financial statements. This pronouncement establishes fair value as the measurement objective in accounting for share based payment arrangements and requires all companies to apply a fair value based measurement method in accounting for all share based payment transactions with employees.

 

Deferred Income Taxes

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of June 30, 2018, due to the uncertainty of the our ability to realize those assets.

 

Commitments and Contingencies

 

We are not currently involved in any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations or cash flows.

 

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

 

Results of Operations (All figures have been rounded to the nearest $1,000)

 

Comparison of the three months ended June 30, 2018 to the three months ended June 30, 2017

 

Revenues for the three months ended June 30, 2018 increased 5% to $1,001,000 compared to $951,000 for the previous year.

 

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The increase in revenues in the three months ended June 30, 2018 is primarily the result of higher commercial sales offset by a decrease in Defense ID® sales.

 

Our gross profit as a percentage of revenues was 91.8% for the three months ended June 30, 2018 compared to 78.5% for the three months ended June 30, 2017. The increase in percentage is primarily due to the 107% increase in Software as a Service (“SaaS”) revenue.

 

Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $216,000 or 12% to $2,063,000 for the three months ended June 30, 2018 compared to $1,847,000 for the three months ended June 30, 2017. This increase is primarily due to an increase in headcount for development personnel and an increase in accelerated marketing and research and development efforts.

 

Interest and other income and interest expense was insignificant in the three month periods ended June 30, 2018 and 2017.

 

As further explained in Note 7, we have a net operating loss carryforward for losses generated in prior years of $11 million and, therefore, no provision for income tax has been made for the three months ended June 30, 2018.

 

As a result of the factors noted above, the Company generated a net loss of $1,100,000 for the three months ended June 30, 2018 compared to a net loss of $1,099,000 for the three months ended June 30, 2017.

 

Comparison of the six months ended June 30, 2018 to the six months ended June 30, 2017

 

Revenues increased by 24% to $2,063,000 for the six months ended June 30, 2018 from $1,664,000 for the six months ended June 30, 2017.

 

The increase in revenues in the six months ended June 30, 2018, is primarily the result of higher commercial offset by a decrease in Defense ID® sales.

 

Our gross profit as a percentage of revenues amounted to 91.1% for the six months ended June 30, 2018 compared to 81.1% for the six months ended June 30, 2017. The increase in percentage is primarily due to the 114% increase on our Software as a Service (“SaaS”) revenue.

 

Operating expenses, which consist of selling, general and administrative and research and development expenses, increased $715,000 or 21% to $4,106,000 for the six months ended June 30, 2018 from $3,391,000 for the six months ended June 30, 2017. This increase is primarily due to an increase in headcount for sales and development personnel and related travel costs and an increase in accelerated marketing and research and development efforts.

 

Interest and other income and expense was insignificant in both periods presented.

 

As further explained in Note 7, we have a net operating loss carryforward for losses generated in prior years of $11 million and, therefore, no provision for income tax has been made for the six months ended June 30, 2018.

 

As a result of the factors noted above, the Company generated a net loss of $2,168,000 for the six months ended June 30, 2018 as compared to a net loss of $2,035,000 for the six months ended June 30, 2017.

 

Liquidity and Capital Resources (All figures have been rounded to the nearest $1,000)

 

As of June 30, 2018, we had cash and cash equivalents of $6,463,000, working capital (defined as current assets minus current liabilities) of $5,866,000, total assets of $16,315,000 and stockholders’ equity of $14,653,000.

 

During the six months ended June 30, 2018, we used net cash of $2,127,000 in operating activities as compared to net cash used of $2,211,000 in the six months ended June 30, 2017. Cash used in investing activities was $108,000 for the six months ended June 30, 2018 compared to cash provided by in investing activities of $6,000 for the six months ended June 30, 2017. Cash provided by financing activities was $688,000 for the six months ended June 30, 2018 compared to $148,000 for the six months ended June 30, 2017.

 

20

 

 

On August 4, 2017, we completed a public offering of 4,168,750 shares of our common stock, offered to the public at $2.25 per share. Our net proceeds from this offering were approximately $8,670,000 after deducting underwriting discounts and commissions paid by us. Direct offering costs totaling approximately $157,000 were recorded as a reduction to the net proceeds on the consolidated statement of stockholders’ equity.

 

We have a revolving credit facility with Northwest Bank (“Northwest”). This new agreement allows for borrowings to the lesser of (i) $2,000,000 or (ii) 95% of the balance in our money market account less $250,000. The borrowings are secured by our existing deposit and money market accounts with Northwest. The facility bears interest at a rate Northwest’s money market account (0.65% at June 30, 2018) plus 3%. Interest is payable monthly and the principal is due upon maturity on May 22, 2019. As of June 30, 2018, there were no amounts outstanding under this facility and unused availability under this facility was $2,000,000.

 

We currently anticipate that our available cash, expected cash from operations and availability under the revolving credit agreement, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.

 

We keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid expansion, fund additional marketing expenditures, develop new markets for our technology, enhance our operating infrastructure, respond to competitive pressures, or acquire complementary businesses or necessary technologies. There can be no assurance that we will be able to secure the additional funds when needed or obtain such on terms satisfactory to us, if at all.

 

We have filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which became effective July 19, 2010. Under the shelf registration statement, we may offer and sell, from time to time in the future in one or more public offerings, our common stock, preferred stock, warrants, and units. The aggregate initial offering price of all securities sold by us will not exceed $25,000,000, and, pursuant to SEC rules, we may only sell up to one-third of the market cap held by non-affiliate stockholders in any 12-month period. We renewed this registration with the SEC on October 21, 2016 and it was declared effective November 4, 2016.

 

The specific terms of any future offering, including the prices and use of proceeds, will be determined at the time of any such offering and will be described in detail in a prospectus supplement which will be filed with the SEC at the time of the offering.

 

The shelf registration statement is designed to give the Company the flexibility to access additional capital at some point in the future when market conditions are appropriate.

 

We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business.

 

Net Operating Loss Carry Forwards

 

Our available net operating loss (“NOL”) at December 31, 2017 was approximately $11 million. There can be no assurance that we will realize any benefit of the NOL’s. The federal and New York state NOL’s are available to offset future taxable income and expire from 2018 to 2037, if not utilized.

 

Adjusted EBITDA

 

We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net loss, interest and other income, income taxes, impairments of long-lived assets and goodwill, depreciation, amortization and stock-based compensation expense. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing our financial results with other companies that also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived assets and goodwill, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and income taxes, investors can evaluate our operations and can compare the results on a more consistent basis to the results of other companies. In addition, Adjusted EBITDA is one of the primary measures management uses to monitor and evaluate financial and operating results.

 

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We consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure of our historical operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest and other income and expense, impairments of long lived assets and goodwill, stock-based compensation expense, all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods. We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net loss presented in accordance with GAAP. Adjusted EBITDA as defined by us may not be comparable with similarly named measures provided by other entities.

 

A reconciliation of GAAP net loss to Non-GAAP Adjusted EBITDA follows:

 

   (Unaudited) 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net loss  $(1,100,375)  $(1,098,553)  $(2,168,332)  $(2,035,310)
Reconciling items:                    
Interest and other income   (43,221)   (2,156)   (57,091)   (5,655)
Depreciation and amortization   61,468    103,780    120,618    208,600 
Stock-based compensation expense   63,993    94,718    124,701    191,518 
Adjusted EBITDA  $(1,018,135)  $(902,211)  $(1,980,104)  $(1,640,847)

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

Forward Looking Statements

 

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, loss from operations and cash flow. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash. We maintain cash in one financial institution. We perform periodic evaluations of the relative credit standing of this institution.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of June 30, 2018, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e) and 15d-15(e), were effective.

 

Our disclosure controls and procedures have been formulated to ensure (i) that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) that the information required to be disclosed by us is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of 2018 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II - Other Information

 

Item 1. LEGAL PROCEEDINGS

 

None.

 

Item 1A. Risk Factors

 

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.

 

While a significant portion of our business is with the U.S. government, our operating results may be impacted by the overall health of the North American economy. Our business and financial performance, including collection of our accounts receivable, realization of inventory, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, etc.

 

Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our annual report on Form 10-K for fiscal year 2017 for information concerning other risks and uncertainties that could negatively impact us.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

None

 

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Item 6. Exhibits

 

(a) The following exhibits are filed as part of the Quarterly Report on Form 10-Q:

 

  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

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 14, 2018 Intellicheck, Inc.
     
  By: /s/ Bryan Lewis
    Bryan Lewis
    President and Chief Executive Officer
     
  By: /s/ Bill White
    Bill White
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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