UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
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 Mobilisa, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
11-3234779
(I.R.S. Employer Identification No.)
100 Jericho Quadrangle, Suite 202, Jericho, NY 11753
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (516) 992-1900
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value
(Title of Class)
NYSE MKT
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
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 of 1934 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 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 during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated
filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
company)
Smaller reporting
company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
State the aggregate market value of the voting and non-voting stock held by non-affiliates of the Issuer: $10,917,888
(based upon the closing price of Issuer’s Common Stock, $0.001 par value, as of the last business day of the Issuer’s
most recently completed second fiscal quarter (June 30, 2016)).
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest
practicable date.
Common Stock, $0.001 Par Value
(Title of Class)
10,743,598
(No. of Shares Outstanding at March 30, 2017)
DOCUMENTS INCORPORATED BY REFERENCE: Proxy for Annual Meeting of Stockholders May 4, 2017
TABLE OF CONTENTS
PART I
Item 1.
Business ....................................................................................................................................................... 3
Item 1A. Risk Factors ............................................................................................................................................... 16
Item 1B. Unresolved Staff Comments ...................................................................................................................... 21
Properties ................................................................................................................................................... 23
Item 2.
Item 3. Legal Proceedings ...................................................................................................................................... 23
Item 4. Mine Safety Disclosures ............................................................................................................................ 23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ................................................................................................................................................... 24
Selected Financial Data ............................................................................................................................. 25
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................................... 34
Financial Statements and Supplementary Data .......................................................................................... 34
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ................... 34
Item 9A. Controls and Procedures ............................................................................................................................ 34
Item 9B. Other Information ...................................................................................................................................... 35
PART III
Item 10. Directors, Executive Officers and Corporate Governance ......................................................................... 36
Item 11. Executive Compensation ........................................................................................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .. 36
Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................... 36
Item 14. Principal Accounting Fees and Services .................................................................................................... 36
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................................. 37
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PART I
Item 1. Business
OVERVIEW
We were originally incorporated in the state of New York in 1994 as Intelli-Check, Inc. In August 1999, we
reincorporated in Delaware. On March 14, 2008, our corporation was renamed Intelli-Check - Mobilisa, Inc. after
the consummation of the merger with Mobilisa, Inc. (“Mobilisa”) (references to “Intelli-Check” in this annual report
refer to the Company prior to the merger with Mobilisa). At the closing of the merger, our headquarters were moved
to Mobilisa’s offices in Port Townsend, Washington. On October 27, 2009, we made a further change in our name to
Intellicheck Mobilisa, Inc. (“Intellicheck Mobilisa,” “we,” “our,” “us,” or “the Company”). On August 31, 2009, the
Company acquired 100% of the common stock of Positive Access Corporation (“Positive Access”), a developer of
driver license reading technology. The acquisition of Positive Access expanded the Company’s technology portfolio
and related product offerings and allowed the Company to reach a larger number of customers through Positive
Access’s extensive distribution network. On October 27, 2015, we announced that our headquarters were relocated
to the Company’s Jericho, New York facility.
We are a technology company engaged in developing, integrating and marketing identity systems for
various applications including mobile and handheld access control and security systems for the government, military
and commercial markets. Our products include the Defense ID® and Fugitive Finder systems, advanced ID card
access control products currently protecting military and federal locations, and ID-Check, a patented technology that
instantly reads, analyzes, and verifies encoded data in magnetic stripes and barcodes on government-issue IDs from
U.S. and Canadian jurisdictions designed to improve the customer experience for the financial, hospitality and retail
sectors.
We plan to expand our business in the near term by pursuing a strategy designed to move our technologies
into new product markets that are expected to benefit from enhanced safety, regulatory compliance and fraud
prevention. For example, we have extended our technologies into online applications to provide enhanced safety,
regulatory compliance and fraud prevention for the billions of transactions that occur online each day.
As a complement to these offerings, we are also developing a data analytics platform to analyze the data
we capture and to provide meaningful data, trend and predictive analysis to a variety of customers in the commercial
and government spaces.
We sold our wireless enterprise assets on August 31, 2015 to focus the Company’s resources on our core
identity authentication business.
We plan to leverage our intellectual property in the new markets we are targeting to strengthen our
competitive position.
Our primary businesses include Identity Systems products, which include commercial applications of
identity card reading and verification and government sales of defense security and identity card applications.
Our technologies address problems such as:
Commercial Fraud and Risk Management – which may lead to economic losses to merchants from
check cashing, debit and credit card, as well as other types of fraud such as identity theft that principally
use fraudulent identification cards as proof of identity;
Instant Credit Card Approval – retail stores use our technology to scan a driver license at a kiosk or at
the Point Of Sale (POS) and send the information to a credit card underwriter to get instant approval for a
loyalty-branded credit card. This technique protects consumer data and is significantly more likely to result
in a completed transaction compared to in-store personnel asking customers to fill out a paper form;
Unauthorized Access – our systems and software are designed to increase security and deter terrorism at
airports, shipping ports, rail and bus terminals, military installations, high profile buildings and
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infrastructure where security is a concern; and
Inefficiencies Associated With Manual Data Entry – by reading encoded data contained in the bar code
and magnetic stripe of an identification card with a quick swipe or scan of the card, where permitted by
law, customers are capable of accurately and instantaneously inputting information into forms, applications
and the like without the errors associated with manual data entry.
IDENTITY CARD READING AND VERIFICATION SECTOR
Background on Identification Documentation
Driver license
The driver license is the most widely used form of government issued photo identification in North
America. The Real ID Act, which became federal law in May 2005, recognizes that the driver license is also a quasi-
identification card. In addition to its primary function, the driver license is used to verify identity for social services,
firearm sales, check cashing, credit card issuance and use and other applications. Our technology can read the
electronically stored information on all currently issued driver licenses (even those that do not comply with the
the District of Columbia and all 13 Canadian
AAMVA/ANSI/ISO standards). Today, all 50 states,
provinces/territories electronically store information on their driver license.
Non-driver identification card
Each U.S. and Canadian Jurisdiction also provides a non-driver identification card as an alternative form of
identification for those unable to acquire a driver license. These identification cards are issued with most of the same
data found on a driver license. Military documents also provide a means of identification and contain encoded data
as well. Since driver licenses are the most widely used form of legally acceptable government documentation, we
refer to all these identification documents as "driver licenses." Our ID√Check® software is capable of performing its
function on all these forms of identification.
Current Challenges Associated with Verifying Identification Documents
The high-tech revolution has created a major problem for those who rely on identification documents. In an
age where scanners, computers and color printers are commonplace, fake IDs of the highest quality are easily
obtainable from a number of locations including college campuses and from multiple sites on the Internet. These
fakes appear so real, even law enforcement agencies have encountered difficulty distinguishing them from legally
issued documents. Additionally, these high-tech devices have the ability to easily alter properly issued ID.
Therefore, anyone can gain access to a false identity that gives them the ability, in a commercial transaction, to
present fake and stolen credit cards or checks that are supported by false identification. Additionally, starting with
only a fraudulent driver license, an individual may be able to create multiple identities, commit fraud, buy age
restricted products such as alcohol and tobacco while underage, evade law enforcement and engage in other criminal
activities, such as:
committing identity theft;
improperly boarding airplanes;
committing credit card, debit card and check
cashing fraud;
illegally purchasing firearms;
unlawfully committing pharmacy fraud,
including false narcotic prescriptions;
committing refund fraud;
gaining entrance to high profile buildings
and sensitive infrastructures,
engaging in medical fraud;
purchasing age restricted products such as
alcohol and tobacco while under age; and
obtaining welfare or other government
benefits.
Given the ease with which identification can be falsified, simply looking at a driver license may not be
sufficient to verify age or identity and determine whether or not it is fraudulent. Since merchants are facing
significant economic losses due to these frauds, we believe that a document verification system which can accurately
read the electronically stored information is needed. We possess patented technology that provides an analysis of the
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data contained on the encoded formats of these identification documents by reading and analyzing the encoded
format on the magnetic stripe or bar code on the driver license and comparing it against known standards. We
believe that we are the only company able to do this for all U.S. jurisdictions and that no other company could
provide a similar service without infringing on our patents.
OUR PRODUCTS AND SERVICES
Our Products and Services are sold as Software as a Service (“SaaS”) where customers pay for cloud based
service.
Identity Systems Products and Services
Our Identity Systems are marketed to the Commercial and Government identification sectors.
Commercial Identification
ID√Check® Family — Solutions and Benefits
Our patented ID√Check® technology is our advanced document verification software. ID√Check® is
contained in our software products and is capable of reading and verifying in one swipe or scan the encoded format
contained on U.S. and Canadian driver licenses, state issued non-driver identification cards, and military IDs. Our
technology has the ability to verify the encoded formats on all currently encoded documents, even those that do not
comply with the standards of the American Association of Motor Vehicle Administrators (‘‘AAMVA’’), the
American National Standards Institute (‘‘ANSI’’) and the International Standards Organization (‘‘ISO’’).
We believe that ID√Check® and our family of software solutions contain the most advanced, reliable and
effective technology, providing users with an easy, reliable, and cost-effective method of document and age
verification. We have received/acquired encoding formats from multiple sources. This information, combined with
our patented technology, enables all of our ID√Check® software products to read, decode, process and verify the
encoded formats on driver licenses. As jurisdictions change their documents and guidelines, we believe our software
can be adapted to these changes.
The ID√Check® technology is embedded in many of our product lines including Retail ID™, Law ID™,
Defense ID®, Age ID™, Guest ID™, Access ID™, and TWIC ID™ some of which are discussed below.
ID√Check® software does not require a connection to a central database to operate, thus negating privacy
concerns. Many of our products have the ability to operate add-on peripherals such as printers, fingerprint readers
and other devices.
The ID√Check® process is quick, simple and easy to use. After matching the driver license photograph to
the person presenting the document for identification, the user simply scans or swipes the driver license through a
data capture device. The software quickly determines if:
the format of the document is valid;
the document has been altered or is fake, by displaying the parsed, encoded data for comparison with
the printed information;
the document has expired; and
the encoded data contains a date of birth equal to or greater than the legal age to purchase age restricted
products, such as alcohol and tobacco.
Then, the ID√Check® software applications can:
respond to the user by displaying the format verification result and the parsed information;
save information that is permissible by law to memory; and
print a record of the transaction including the verification results if a printer is part of the hardware
configuration.
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ID√Check® SDK
Our software product, ID√Check® SDK, is designed for software developers that wish to incorporate our
proprietary ID√Check® technology into their applications. We currently have multiple license agreements with third
parties for integration and sub-licensing of our software applications into their core applications. The SDK is
available for multiple platforms such as Microsoft Windows, Windows Mobile, AIX, certain versions of Linux and
is also offered as a SaaS product that provides a platform independent & centralized update solution for quicker and
easier integration. It can easily be ported to other platforms as the need arises. New integrations are being sold as
hosted cloud based SaaS products and the customer purchases annual (or longer) subscriptions for use of the
software.
Retail IDTM
Our Retail IDTM application is a proven identity authentication solution that can instantly and accurately
authenticate identification documents such as a driver license. This solution is designed to deliver better service,
increase loyalty and credit card programs and reduce fraud. Retail IDTM reduces liability risks and ensures
compliance by checking all retrieved data against each state’s privacy laws and regulatory requirements.
Retail ID OnlineTM
Retail ID OnlineTM instantly and accurately authenticates an on-line user’s identification documents such as
a driver license and helps eliminate fraud associated with online transactions. With online fraud growing daily, this
new product is the right solution at the right time.
Retail ID MobileTM
Retail ID MobileTM provides the fraud reduction benefits of Retail IDTM, without the time and expense of
integrating the Retail IDTM application into the customer’s point of sale system. With Retail ID MobileTM, the
customer simply downloads the application to a mobile device such as a tablet or smartphone and instantly begin
receiving the benefits from Retail ID’s fraud reduction capabilities.
Age IDTM
Age IDTM is the designation for multiple hand held devices that we offer our customers. The form-factor is
a small, lightweight mobile computer with a durable housing design that has 2-D bar code and magnetic stripe
reading capabilities. By allowing the user to move between locations, Age IDTM products provide the ability to
check the encoded format of ID documents at multiple entry points. It additionally has the capability of providing a
yes/no response when used for age verification purposes.
Guest IDTM
Guest IDTM is a software application that speeds up check-in and ID verification at hotels and motels. This
product enhances user productivity by automating data entry thus improving accuracy. Guest IDTM speeds up the
hotel check-in process and is incorporated into legacy Property Management Systems.
ID√Check® POS
ID√Check® POS is a software application that runs on multiple VeriFone devices, such as the Omni 37xx
series. Our software uses both the onboard magnetic stripe reader and an optional external 2-D bar code reader that
plugs into an open port on the back of the unit. The terminal has an integrated, high-speed thermal printer. The
VeriFone devices are multi-application terminals that allow the ID√Check® software to run side by side with credit
card processing software as well as other value added software applications certified by VeriFone. We have been
designated as a VeriFone value added partner.
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ID√Check® BHO
This software product, formerly called the Web Form Filler product, is a Browser Helper Object (“BHO”)
for the Microsoft Browser. The BHO allows our customers to seamlessly integrate our core ID√Check® technology
into their web based applications. The BHO can be programmed through a series of drop down menus to populate
driver license data in the fields of specific web pages based on web page URLs and web page field names. The
technology also provides the ability to check the encoded formats of ID documents.
ID√Check® PC
ID√Check® PC is a standalone software solution that is designed to provide the features of ID√Check® for
Windows based platforms. It allows the user to instantly view data from government issued IDs such as driver
licenses and contains features such as recurring entry and age verification.
State Aware Software
State Aware Software provides or restricts information that is electronically scanned from an ID based
on the electronic reading laws according to the state in which the ID is scanned. For example, scanning an ID in
New Hampshire for law enforcement purposes is allowed, whereas electronically scanning an ID for a mailing list is
not allowed. With all the various uses of scanning and verifying an ID, it is important for responsible users to be
aware of the different state laws. State Aware Software incorporates each state’s requirements around electronic
capture of ID barcode data directly into hosted ID Check software.
Data Collection Devices
Our software products are designed for use with multiple data collection devices, which are commercially
available in various compact forms and may contain either one or both of 2-D bar code and magnetic stripe readers.
These devices enable our software applications to be used on a variety of commercially available data processing
devices, including credit card terminals, PDAs, tablets, laptops, desktops and point-of-sale terminals. Many of these
devices contain an electronic serial number (ESN) to prevent unauthorized use of our software.
Instant Credit Application Kiosk Software Applications
These are custom software applications that Intellicheck Mobilisa has developed for a variety of major
financial service companies and retail stores. The software installed on multiple kiosk devices provides the
customers of the major financial service companies and retail stores with the ability to perform in-store instant credit
approval on these devices. The hardware platforms, on which the software applications run, range from stationary
devices to handhelds to tablet PCs. The process involves the swiping or scanning of the driver license to verify the
encoded format and after verification, the information parsed from the encoded data is populated into the proper
fields on the application displayed on the kiosk. The applicant then completes the application by entering the
remaining required information that is not encoded on the driver license, such as social security and telephone
numbers. The software application then sends the data to the financial service company’s backend ‘‘decisioning’’
tool for credit approval. If approved, the applicant is granted instant credit which can then be used to make
purchases.
Upgrade Capability
Our ID√Check® Products and related databases are constantly updated to stay current with identification
formats and new forms of ID.
Government Identification
Defense ID® System
Our Defense ID® System offers law enforcement personnel and military security officers additional
information for protecting their facilities. The Defense ID System uses rugged, handheld, mobile devices and
desktop visitor/vendor approval workstations to read barcodes, magnetic stripes, RFID (radio frequency
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identification) and OCR (optical character recognition) codes printed on current forms of identification cards. By
scanning and comparing the information contained on the ID card to over 100 databases, Defense ID® can
immediately determine if the card has been reported lost or stolen, the individual’s identity information matches
watch lists or law enforcement databases, or if they are on an authorized roster of previously-cleared personnel.
Law ID™
A mobile app for bona fide law enforcement officers that performs real time queries against State DMV,
State Criminal Justice Databases and FBI NCIC (National Crime Information Center) records. Every day officers
turn their backs on potentially dangerous persons. Now, the Law Enforcement Officer (“LEO”) can instantly have
DOL/DMV, State and Federal search results instantly while maintaining subject visibility. Without the need to
return to a vehicle to enter driver license data or to contact dispatch by radio, the app uses the Smart Phone camera
to extract the 2D barcode information from driver licenses and other identification documents, instantly returning to
the officer query results from DOL/DMV, State and Federal criminal justice databases. These results include
DOL/DMV photos, vehicle/weapon registration information and a wealth of additional information that may be
critical to officer safety.
TWIC ID™
Provides ports and facilities with an innovative, integrated, efficient way to validate ID credentials of
individuals requesting entry to secure areas. Our TWIC reading software and hardware meets all TSA requirements
for portable readers and is listed on the TSA’s QTL (Qualified Technology List). The TWIC™ ID Reader is proving
to be an instrumental component to port security as we continue to help many U.S. ports of all sizes in further
protecting their facilities.
Visitor Center (IM 3000)
The Visitor Center is a component of our Defense ID® system and makes it faster and easier to process
visitors and vendors. Using the visitor center system, it pre-populates fields by scanning the government-issued ID,
performs a real-time background check utilizing over 100 databases to verify the individual is not on a wanted list
and if the individual has been pre-approved to access the facility or building. The Visitor Center can then take
photos and prints a visit pass or new local ID card, all in a matter of seconds.
Upgrade Capability
Like our ID√Check® products, our Defense ID® products are constantly updated to stay current with
identification formats and new forms of ID. In addition, we continuously update the databases related to lost or
stolen cards, watch lists and law enforcement database updates, and authorized rosters of cleared personnel. Our
Defense ID® Systems are maintained via annual subscriptions that are purchased by our customers.
STRATEGY
Our objective is to be a leading security company providing world class solutions in the identity sector.
These solutions include our commercial identity systems focusing on work-flow, productivity enhancement, fraud
protection and risk management segments; our government identity systems focusing on access control, vendor
validation, and suspect identification. Key elements of our strategy are as follows:
Commercial Systems
Productivity Enhancement. We market our technology as a key productivity enhancement tool. Our
patented ID√Check® software can add functionality to virtually any given software application to automatically
populate fields within a given form, when a government-issued photo ID is presented. Our ability to correctly read
and authenticate all U.S. jurisdictions, coupled with our patented technology, is a key differentiator from our
competitors. The automation resulting from the intelligence added to the form dramatically increases throughput and
data integrity, and it significantly enhances the customer's experience.
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Develop Additional Strategic Alliances with Providers of Security Solutions. We have entered into
strategic alliances to utilize our systems and software as the proposed or potential enrollment application for their
technologies and to jointly market these security applications with multiple biometric companies: Lenel, AMAG
Technology, Inc., in the defense industry; Zebra Technologies hardware manufacturers; and MorphoTrust USA now
part of Safran, producers of driver licenses for approximately 85% of the jurisdictions in North America. We are an
associate member of AAMVA and a member of AAMVA’s Industry Advisory Board. We believe these
relationships will broaden our marketing reach through their sales efforts and we intend to develop additional
strategic alliances with additional providers of security solutions.
Strengthen Sales and Marketing Efforts. We intend to capitalize on the growth in demand for document
verification and productivity enhancement by continuing to market and support our systems and software. Our sales
and marketing departments are organized by target sector rather than geographic area to provide focus and create
experts in each area. Our recent focus has been on SaaS license arrangements in the financial services, retail, and
hospitality services industries.
Enter into Additional Licensing Agreements. We intend to continue to license our software for use with a
customer's system. We are currently licensing our ID√Check® SDK software product for Windows, Windows CE,
Windows Mobile and other operating system platforms and intend to similarly continue to license our ID√Check®
PC software solutions. Our software is intended to be used with a compatible hardware device. We have entered into
multiple licensing agreements to date.
Protect Intellectual Property. We intend to protect our intellectual property portfolio to preserve value and
obtain favorable settlements where warranted.
Government Identity Systems
Product Enhancement. Due to the success of Defense ID® in the military and government industry sectors,
we have enhanced our product line to support other entities such as law enforcement, port security and commercial
installations. We continue our ongoing efforts to research and implement the use of new identification cards,
additional databases and upgraded equipment form factors to increase the efficiency and performance of the system.
TWIC Program. We were on the first list of ICE (Initial Capability Evaluation) readers and will continue to
provide our software on additional hardware platforms to address the unique needs of each port and facility. We
have combined our Defense ID® and TWIC reader applications to provide customers with the benefits of each
product in a single device and are the first company to have readers listed on the TSA’s QTL (Qualified Technology
List).
Strengthen Sales and Marketing Efforts. As the need for access control systems continues to grow, our
experienced sales and marketing departments are adjusting to target new sectors. Sales and marketing materials are
specially designed to clearly outline the capabilities of the system and how it is valuable to each of these specific
sectors. We have sales staff and office locations on the East and West Coasts, which allows a quick response to
questions and personalized assistance for each customer based on location.
Additional Access to Multiple Databases. We continue to increase the data source information accessed
through our Defense ID® system. This is achieved by increasing the capabilities of our internally-developed scraping
programs for publicly-available information as well as by negotiating additional data source agreements with
various law enforcement and government agencies. In addition to these general databases, we can customize
databases for each individual customer based on information provided by the customer.
Our Revenue Sources
We derive our revenue from the following sources:
Sales of our systems by both our own direct sales force and marketing partners;
Per transaction or subscription fees (SaaS) from the licensed use of our technology;
Royalties and licensing fees from licensing our patented technology to third parties;
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Revenue sharing and marketing arrangements through strategic alliances and partnerships;
Sale of software upgrades and extended maintenance programs; and
Government grants for research and development projects.
Our Target Industry Sectors
Commercial Identity Systems
The use of false identification cards, primarily driver licenses and non-driver identification cards, to engage
in commercial fraud, to gain access to unauthorized areas and to gain entry to critical infrastructure is all too
common and the problem is growing with each passing day. Given the ease with which identification can be
falsified, we believe that simply looking at a driver license is not sufficient to verify identity and determine if such
an identification card is fraudulent. Since merchants are facing significant economic losses due to these frauds, we
believe that what they need is a document verification system that can accurately read the electronically stored
information. We target the industry sectors that would most benefit from our systems and software.
We also market our products to opportunities where our ID√Check® technology can be used to enhance
productivity. We have made significant progress in the sectors for the retail issuance of instant credit. We believe
there are financial benefits and compelling business models for customers in this sector to utilize our technology.
Productivity Enhancement
Mass merchandisers and retailers
Banks and other financial institutions
Credit unions
Credit card issuers
Check cashing services
Commercial fraud protection
Mass merchandisers and retailers
Banks and other financial institutions
Credit unions
Credit card issuers
Check cashing services
Access control
Airports and airlines
Departments of Motor Vehicles
Notable buildings
Court houses
Nuclear facilities
Oil refineries and storage facilities
Age verification
Bars and night clubs
Convenience stores
Grocery chains
Restaurants
Government Identity Systems
Auto dealerships and rental car agencies
Casinos for enrollment of guests
Hospital patient admissions
Lodging Industry
Airlines
Auto dealerships and rental car agencies
Casino cage operations
Hospitals, medical facilities and health plans
Lodging Industry
Pharmacies
Prisons
Law enforcement agencies
Military establishments
College campuses
Department of Homeland Security
Bus, rail and port facilities
Stadiums and arenas
Casinos and gaming establishments
Sellers of sexually explicit material
Firearm dealers
Our Defense ID® system is tailored to locations that validate identification cards as a means of access.
Historically, the military sector has been the primary focus, followed closely by sea ports, oil refineries and the law
10
enforcement sector. Military bases, for example, are an ideal location for the use of the Defense ID® system because
individual ID cards are checked prior to allowing base access and, in most cases, bases issue visitor/vendor passes to
individuals needing access that do not possess a military ID.
Because Defense ID® is customizable, it can be used in many different environments. The information
provided via instant access to multiple law enforcement databases proves invaluable to gate officers and law
enforcement personnel ensuring the security of a facility. Current targets include:
Military
Army
Air Force
Coast Guard
Military and Veterans Hospitals
Airports and Seaports
Law Enforcement/Government
Navy
Marines
Military Academies
Oil Refineries
FBI
State & Local Police
Bureau of Alcohol, Tobacco, Firearms, and Explosives Intelligence Agencies
Customs
Department of Homeland Security
Department of Transportation
Border Patrol
Drug Enforcement Administration
Local Sheriffs
REPRESENTATIVE CUSTOMERS
Commercial Identity Systems
We have generated revenues from our customers from the sale of systems, licensing of software and sale of
software upgrades. The following representative customers have used or are using our systems and software for
commercial fraud protection and productivity enhancement:
Fidelity Information Services
MGM Grand
Caesar’s Palace
Enterprise
Toys R Us
Alliance Data
Rooms to Go
Walmart
Hertz
Foxwoods Resorts and Casino
Mohegan Sun Resort Casino
Barclaycard USA
JPMorgan Chase
LL Bean
Synchrony Financial
AT&T
Winn Dixie
Verizon
The following representative customers and programs have used or are using our systems and software for
access control:
John F. Kennedy International Airport in New York
O’Hare International Airport in Chicago
Reagan National Airport in Washington, DC
New York Stock Exchange
Fort Sam Houston
Fort Hood
Force Protection Industries
New York Department of Motor Vehicles
Vermont Department of Motor Vehicles
Delaware Department of Motor Vehicles
Port of Houston
Port of New Orleans
New Hampshire Dept. of Motor Vehicles
Port Authority of New York and New Jersey
Port of Hawaii
United States Supreme Court
Registered Traveler Program
Delaware Department of Motor Vehicles
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The following representative customers are using or have used our systems and software for age
verification:
Idaho State Liquor Dispensary
Sunoco
Exxon/Mobil franchisees
Government Identity Systems
Drake Petroleum
Houston’s Restaurants
We have generated revenue from our customers from the sale of systems, licensing of software and sale of
extended service agreements. The following representative customers have used or are using our systems and
software for security and identification purposes.
The United States Air Force Academy
Fort Wainwright
Elmendorf Air Force Base (“AFB”)
Andrews AFB
Fort Meade
Fort Belvoir
USMC Parris Island
The U.S. Military Academy at West Point
Bangor Naval Submarine Base
Fort Jackson
Fort Leonard Wood
Fort Benning
MARKETING AND DISTRIBUTION
Commercial Identity Systems
Fort Richardson
Bolling AFB
Fort Polk
Fort Dix
Yuma Marine Corps Base
Walter Reed Army Hospital
McChord AFB
Claremont County Sheriff Department
Fort Sill
29 Palms
Camp Atterbury
Fort Stewart
Our objective is to become the leading developer and distributor of document and age verification
products. To date, our marketing efforts have been through direct sales by our sales and marketing personnel,
through resellers and license agreements. We are marketing our products through direct marketing approaches such
as web marketing, a small number of select trade shows and well known public interest and trade associations.
We generate revenues from the licensing of our software and the selling of bundled solutions that contain
hardware and software. Depending on the specific needs of our clients, we tailor the right solution for them. Our
bundled solutions are sold on a SaaS basis.
Our ID√Check® software is available to customers via the cloud (SaaS) and available for Microsoft
Windows and Windows Mobile platforms, Android and iOS in addition to devices such as credit card terminals and
other operating systems such as Linux. We are marketing our ID√Check® technology to the government, airlines,
airports, high profile buildings or infrastructure, mass merchandisers, grocery, convenience and pharmacy chains,
casinos and banks.
We have developed a comprehensive marketing plan to build customer awareness and develop brand
recognition in our target industry sectors. We promote the advantages and ease of use of our products through:
Endorsements by nationally known public
interest groups and trade associations;
Trade publications;
Trade shows;
Web seminars, as well as our own website; and
Various conventions and industry specific seminars.
We intend to continue to develop and market other related software applications.
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Government Identity Solutions
We have sector-specific brochures for each product in our product line for both the military, port and law
enforcement sectors that the sales force utilizes when demonstrating the Defense ID® system to potential customers.
These brochures serve as a quick reference guide outlining the capabilities of our technology. Once customers have
a clear understanding of our products, they can use these brochures to discuss their individual needs and ordering
requirements.
When dealing with military and government entities, we must comply with applicable procurement
regulations.
In addition to sole source awards, we also respond to Requests for Proposal (“RFPs”) and Requests for
Qualifications (“RFQs”) when our technological capabilities meet that of the desired system. In many cases, we are
the only company that can meet the requirements in the RFP, which can lead to a quick and easy award.
Also, we have all Defense ID® products, as well as individual labor services, listed on GSA Schedule 70.
This makes it possible for government entities to make direct purchases of equipment and services for a pre-
negotiated price without having to go through the formal RFP/Bid process.
We have offices in New York and Washington State to fully support our current and potential customers.
This makes it easy to schedule and complete installations and maintenance in an efficient, time-conscious manner.
MAJOR CUSTOMERS
Although the composition of our largest customers has changed from year to year, a significant portion of
our revenues have been attributable to a limited number of major customers. In 2016, our top ten customers
accounted for approximately 50% of total revenues. In 2015, our top ten customers accounted for approximately
59% of total revenues. While we believe that one or more major customers could account for a significant portion
of our sales for at least the next two years, we anticipate that our customer base will continue to expand and that in
the future we will be less dependent on major customers.
REGULATION
The sale and use of the Company’s Identity System products are not subject to regulation by government
authorities. We believe we are currently in compliance with applicable United States, state and local laws and
regulations relating to the protection of the environment.
COMPETITION
Commercial Identity Systems
We compete in an industry that is intensely competitive and rapidly changing. Unless a device can read,
decode and analyze all the information that is legally permitted to be analyzed, which is electronically stored on a
driver license, the user may not obtain accurate and reliable confirmation that a driver license is valid and has not
been altered or tampered with. We are aware of several companies that are currently offering products that
electronically read and calculate age from a driver license. We have tested and compared some of these products to
ID√Check® and believe that our product is superior in quality and functionality. We believe that units unable to read
bar codes are at a significant disadvantage because all states and Canadian provinces currently utilize bar codes to
encode their driver licenses, as well as all U.S. military IDs and uniformed services cards.
In the government identity sector, there are several companies, including MorphoTrust USA, EID Passport
and HID Global that are currently offering products that compete with the Defense ID® system. The U.S.
government also has DBIDS and AIE that compete with our products.
We are also aware that Motorola and Honeywell are offering an embedded driver’s license reading solution
on a tether scanner.
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We have experienced and expect to continue to experience increased competition in the document
verification sector. If any of our competitors were to become the industry standard or were to enter or expand
relationships with significantly larger companies through mergers, acquisitions or otherwise, our business and
operating results could be seriously harmed. In addition, potential competitors could bundle their products or
incorporate functionality into existing products in a manner that discourages users from purchasing our products.
MANUFACTURING
We do not manufacture readers or input devices, but use products from several manufacturers. Some of
these devices are private labeled and programmed by the supplier to work with our ID√Check® technology. The
majority of our hardware consists of commercial off-the-shelf (“COTS”) products. We rely on a small number of
suppliers to provide our COTS products.
Our government identity systems products are created with COTS items that we customize with software
and specialized configurations. All products are customized, assembled, and tested in-house and then installed and
placed by our employees in the field.
RESEARCH AND DEVELOPMENT
Our research and development efforts are mainly concentrated in two areas. The most significant effort is
concentrated in the identity sector. We modify existing software applications based on customer’s requirements,
which are fee based. In addition, we develop new software solutions and make improvements to existing software
platforms, which are funded internally. R&D spending during the years ended December 31, 2016 and 2015 was
$2,405,593 and $2,594,678, respectively.
INTELLECTUAL PROPERTY
We currently hold twenty-two (22) U.S. patents, two (2) Canadian patents and one (1) United Kingdom
patent. At present, we have other patent applications pending in the U.S. Patent and Trademark Office as well as
internationally. These patents cover commercially important aspects of our capabilities relating to the authentication
and verification of identification documents, and relating to our Defense ID® System technology. We will continue
to pursue patents for all of our new technologies arising from our research and development efforts.
In January 1999, the U.S. Patent and Trademark Office granted us a patent on our ID√Check® software
technology. In October 2002, we were granted another patent relating to our document authentication and age
verification technology. In January 2009, we were granted another patent that is a continuation of our patents
relating to our document authentication and age verification technology. Upon our acquisition of the assets of
IDentiScan, we also received equitable ownership and sole ownership rights to its intellectual property, including
other patents and patent applications relating to age verification technology.
During 2010, we were granted two additional patents. The first patent was for a software key control for
mobile devices. It is used to get a registration key for the parser that is based on the unique internal ID of one mobile
device. The Mobile Key Manager communicates with the mobile device, reading its ID, and then requests a
registration key specific for that ID from Intellicheck Mobilisa’s server. This server maintains a database of all
customers using IDecode Mobile Parsers, including the number of licenses they have purchased, the latest software
version for which they have paid support, and the registration keys and unique device IDs associated with those
licenses. The server generates a new registration key unique to the device ID and returns it to the Mobile Key
Manager to register that device. In this way, the customer can deploy the IDecode Mobile Parser to only one mobile
device for each parser purchased.
The second patent was related to a document comparison system and reinforces the innovative nature of
Intellicheck Mobilisa's security solutions involving documents. The technology described in the patent relates to a
system and method for comparing information contained in at least two documents. Like information on different
documents is compared to determine whether the information is the same on each document. For instance, a name
contained on an individual’s driver’s license is automatically compared with a name contained on the individual's
airline boarding pass.
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In 2011, we were issued another patent. This patent allows for verifying and authenticating the encoded
information on driver licenses of all 50 states and other North American driver licenses and allows the information
to be electronically transferred in a secure environment to a local or remote jurisdiction for age verification, organ
donor, or criminal activity checks critical in fighting both crime and terrorism.
In 2012, we were granted a patent relating to a system and method for comparing information contained in
at least two documents, but not limited to just a driver license and passport. This patent compares “like information”
on different documents to determine whether the information is the same on each document. As an example, a
passport is compared to a boarding pass to determine if “like information” matches, for instance name and birthdate.
We were also granted a patent related to a system that uses environmental information to determine a level
of scrutiny that is to be applied to identification information received at a location where user identification is being
checked. Depending on the level of scrutiny that is applied and on generated candidate scores, the system will
display many potential persons of interest that match the received identification information.
In 2013, we were granted four patents that are continuations of earlier-filed applications we previously
filed. One patent is related to a document comparison system that compares information contained in two documents
to determine whether the information is substantially identical on each document. An indication is provided as to
whether the two documents identify the same entity or do not identify the same entity. The second patent relates to
improvements to software key control for mobile devices. The third patent relates to an apparatus for extracting date
of birth information from driver’s licenses and displaying a calculated age along with a license background graphic.
Finally, the fourth patent is related to a system that uses environmental information to determine a level of scrutiny
that is to be applied to identification information received at a location and to display many potential persons of
interest that match the received identification information based on the applied level of scrutiny.
In 2014, we were granted one patent that was also a continuation of an earlier-filed application. The patent
is related to a document comparison system that compares information contained in two documents to determine
whether certain information is substantially identical on each document. The system provides a positive or negative
indication as to whether portions of the two documents are substantially identical.
In 2015, we acquired an intellectual property portfolio that includes four patents involving technologies for
checking the validity of identification documents using a remote database. Certain patents in this portfolio address
the use of biometric information and identification credentials as part of the process to control access to a secured
area.
We were also granted two patents in 2015. The first patent is related to a system and method for comparing
documents. The second patent is identity matching in response to threat levels.
We own multiple copyrights in the United States, which are effective in Canada and in other major
industrial countries. The copyright protection covers software source codes and supporting graphics relating to the
operation of ID√Check® and other software products. We also have several trademarks relating to our company, its
product names and logos.
In connection with the sales or licensing of our intellectual property, we have entered into an agreement
with Mr. Kevin Messina, our former Senior Executive V.P. and Chief Technology Officer, under which we will pay
royalties equal to 0.005% of cumulative gross sales for cumulative gross sales of $2,000,000 to $52,000,000 and
0.0025% of cumulative gross sales for cumulative gross sales more than $52,000,000 pertaining to those patents on
which Mr. Messina was identified as an inventor. Cumulatively, as of December 31, 2016 total fees paid under this
agreement were approximately $1,800.
EMPLOYEES
As of March 30, 2017, we had twenty-four full-time employees. Three are engaged in executive
management, eight in information technology, nine in sales and marketing and four in administration. All employees
are employed “at will.” We believe our relations with our employees are generally positive and we have no
collective bargaining agreements with any labor unions.
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Item 1A. Risk Factors
RISK FACTORS
Risks Related to Our Business and Industry
We have incurred principally losses since inception and losses may continue, which could result in a decline in
the value of our securities and a loss of your investment.
We sustained net losses of $5,734,681 and $5,333,951 for the fiscal years ended December 31, 2016 and
2015, respectively, and our accumulated deficit was $104,368,426 as of December 31, 2016. Since we expect to
incur additional expenditures in line with the sales growth of our business, we may not achieve operating profits in
the near future. This could lead to a decline in the value of our securities.
Our proprietary software relies on reference data provided by government and quasi-government agencies. If
these governmental and quasi-government agencies were to stop sharing data with us, the utility of our
proprietary software would be diminished in those jurisdictions and our business would be damaged.
Currently, the fifty states, ten Canadian provinces and the District of Columbia, in most instances, conform
to the guidelines established by certain organizations responsible for implementing industry standards, cooperate
with us by providing sample identification cards so that we may modify all our hardware and software products to
read and analyze the encoded information found on such jurisdiction’s identification cards. If one or more of these
jurisdictions do not continue to provide this reference data, the utility of our proprietary software may be diminished
in those jurisdictions.
Our business strategy exposes us to long sales and implementation cycles for our products.
Our target customers in the commercial fraud protection, access control and age verification industry
sectors include large retailers and government agencies, which typically require longer sales and implementation
cycles for our products than do our potential customer base solely interested in age verification, such as restaurant,
bar and convenience store operators. The longer sales and implementation cycles for larger retail companies
continue to have an adverse impact on the timing of realizing our revenues. In addition, budgetary constraints and
potential economic slowdowns may also continue to delay purchasing decisions by these prospective customers.
These initiatives have costs associated with them, and we cannot assure you that they ultimately will prove
successful, or result in, an increase to our revenues or profitability.
In addition, the loss or significant reduction in government spending by government entities could
materially limit our ability to obtain government contracts. These limitations, if significant, could also have a
material adverse effect on our business, financial condition and results of operations. In addition, we will need to
develop additional strategic relationships with large government contractors to successfully compete for government
contracts. Should we lose or fail to develop these strategic relationships we may not be able to implement our
business strategy.
The industry for our systems and software is evolving and its growth is uncertain.
Demand as well as industry acceptance for recently introduced and existing systems, and software and sales
from such systems and software, are subject to a high level of uncertainty and risk. With changing administration in
government, changes in government budgets, and slowly evolving government standards on use of identity products,
the government sector is slowly developing. The commercial sector can develop faster than the government sector,
but it is also subject to a higher level of uncertainty because of potential uncertainty in the continued financial health
of our commercial customers, as well as long sales cycles. Our business may suffer if the industry develops more
slowly than anticipated and does not sustain industry acceptance.
Failure to manage our operations if they expand could impair our future growth.
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If we can expand our operations, particularly through multiple sales to large retailers and government
agencies in the document verification industry, the expansion will place significant strain on our management,
financial controls, operating systems, personnel and other resources. Our ability to manage future growth, should it
occur, will depend upon several factors, including our ability to do the following:
build and train our sales force;
establish and maintain relationships with distributors;
develop customer support systems;
develop expanded internal management and financial controls adequate to keep pace with growth in
personnel and sales, if they occur; and
manage the use of third-party manufacturers and suppliers.
If we can grow our business but do not manage our growth successfully, we may experience increased
operating expenses, loss of customers, distributors or suppliers and declining or slowed growth of revenues.
Failure to protect our proprietary technology may impair our competitive position.
We continue to allocate significant resources to developing new and innovative technologies that are
utilized in our products and systems. Because our continued success depends on, to a significant degree, our ability
to offer products providing superior functionality and performance over those offered by our competitors, we
consider the protection of our technology from unauthorized use to be fundamental to our success. This is done by
processes aimed at identifying and seeking appropriate protection for newly-developed intellectual property,
including patents, trade secrets, copyrights and trademarks, as well as policies aimed at identifying unauthorized use
of such property. These processes include:
contractual arrangements providing for nondisclosure of proprietary information;
maintaining and enforcing issued patents and filing patent applications on innovative solutions to
commercially important problems;
protecting trade secrets;
protecting copyrights and trademarks by registration and other appropriate means;
establishing internal processes for identifying and appropriately protecting new and innovative
technologies; and
establishing practices for identifying unauthorized use of intellectual property.
We are currently involved in two lawsuits as a plaintiff to enforce our patent rights. Litigation can be very
costly and divert management’s attention. An adverse outcome in any litigation may have a severe negative effect
on our financial results. To determine the priority of inventions, we may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or oppositions in foreign patent and trademark
offices, which could result in substantial cost and limitations on the scope or validity of our patents or trademarks.
Additionally, third parties, including our competitors or licensees, may seek to have our patents reviewed
by the Patent Trial and Appeal Board of the United States Patent and Trademark Office in a post grant proceeding,
such as post grant review or an inter parties review. Such proceedings, if instituted could cancel our patents or
narrow the scope of our patent claims. We cannot predict the effect that such proceedings, if instituted, may have on
our business or revenue received from licensing our patents.
In addition, foreign laws treat the protection of proprietary rights differently from laws in the United States.
The failure of foreign laws or judicial systems to adequately protect our proprietary rights or intellectual property,
including intellectual property developed on our behalf by foreign contractors or subcontractors, may have a
material adverse effect on our business, operations and financial results.
If our future products incorporate technologies that infringe the proprietary rights of third parties, and we
do not secure licenses from them, we could be liable for substantial damages.
We are not aware that our current products infringe the intellectual property rights of any third parties. We
also are not aware of any third party intellectual property rights that may hamper our ability to provide future
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products and services. However, we recognize that the development of our services or products may require that we
acquire intellectual property licenses from third parties to avoid infringement of those parties’ intellectual property
rights. These licenses may not be available at all or may only be available on terms that are not commercially
reasonable. If third parties make infringement claims against us whether or not they are upheld, such claims could:
consume substantial time and financial resources;
divert the attention of management from growing our business and managing operations; and
disrupt product sales and shipments.
If any third party prevails in an action against us for infringement of its proprietary rights, we could be
required to pay damages and either enter into costly licensing arrangements or redesign our products so as to
exclude any infringing use. As a result, we would incur substantial costs, delays in product development, sales and
shipments, and our revenues may decline substantially. Additionally, we may not be able to achieve the minimum
necessary growth for our continued success.
Failure to attract and retain management and other personnel may damage our operations and financial
results and cause our stock price to decline.
We depend, to a significant degree, on the skills, experience and efforts of our executive officers and other
key management, technical, finance, sales and other personnel. Our failure to attract, integrate, motivate and retain
existing or additional personnel could disrupt or otherwise harm our operations and financial results. We do not
carry key man life insurance policies covering any employees. The loss of services of certain of our key employees,
an inability to attract or retain qualified personnel in the future, or delays in hiring additional personnel could delay
the development of our business and could cause our stock price to decline.
Our share price may be volatile and could decline substantially
The market price of our common stock, like the price of shares of technology companies generally, has
been and may continue to be volatile. From January 1, 2002 to March 29, 2017, the closing price of our common
stock has varied from a high of $140.00 to a low of $0.82 per share, as reported on the NYSE MKT. Many factors
may cause the market price for our common stock to decline, including:
shortfalls in revenues, cash flows or continued losses from operations;
delays in development or roll-out of any of our products;
announcements by one or more competitors of new product acquisitions or technological innovations;
and
unfavorable outcomes from outstanding litigation.
In addition, the stock market experiences extreme fluctuations in price and volume that particularly affect
the market price of shares of technology companies, such as ours. These price and volume fluctuations are often
unrelated or disproportionate to the operating performance of the affected companies. Because of this volatility, we
may fail to meet the expectations of our stockholders or of securities analysts and our stock price could decline as a
result. Declines in our stock price for any reason, as well as broad-based market fluctuations or fluctuations related
to our financial results or other developments, may adversely affect your ability to sell your shares at a price equal to
or above the price at which you purchased them. Decreases in the price of our common stock may also lead to de-
listing of our common stock.
We incur significant accounting and other control costs that impact our financial condition.
As a publicly traded corporation, we incur certain costs to comply with regulatory requirements. If
regulatory requirements were to become more stringent or if controls thought to be effective later fail, we may be
forced to make additional expenditures, the amounts of which could be material. Some of our competitors are
privately owned, so their accounting and control costs could create a competitive advantage over us. Should our
sales decline or if we are unsuccessful at increasing prices to cover higher expenditures for internal controls and
audits, our costs associated with regulatory compliance will rise as a percentage of sales.
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Securing government contracts typically involves a lengthy competitive bidding process. Often,
unsuccessful bidders have the ability to challenge contract awards. Such challenges may increase costs, result in
delays and risk the loss of the contract by the winning bidder. Protests or other delays related to material government
contracts that may be awarded to us could result in revenue volatility. State and local government agency contracts
may depend on the availability of matching funds from federal, state or local entities. State and local government
agencies are subject to political, budgetary, purchasing and delivery constraints that may result in irregular revenue
and operating results. Revenue volatility makes management of our business difficult. Outright loss of any material
government contract through the protest process or otherwise, could significantly reduce our revenues.
We could be adversely affected by a negative audit by the U.S. government.
We, like other government contractors, are subject to various routine audits, reviews and investigations by
U.S. government agencies, including the Defense Contract Audit Agency and various agency inspectors. These
agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws,
regulations, and standards. Any costs found to be misclassified may be subject to repayment. If an audit or
investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and
suspension or prohibition from doing business with the U.S. government.
Our business strategy exposes us to long sales and implementation cycles for our products.
Historically, some of our primary target customers have been government agencies and branches of the
U.S. military, both of which require long sales and implementation cycles for products, which may result in a long
period of time prior to revenue realization. The loss or significant reduction in government spending could limit our
ability to obtain government contracts. These limitations, if significant, could significantly reduce our revenues. We
will need to develop additional strategic relationships with large government contractors in order to successfully
compete for government contracts. Should we lose or fail to develop these strategic relationships, we may not be
able to implement our business strategy.
We cannot be certain that our backlog estimates will result in actual revenues in any particular fiscal period
because our clients may modify or terminate projects or may decide not to exercise contract options.
Our backlog represents sales value of firm orders for products and services not yet delivered and, for long-
term, executed contractual arrangements (contracts, subcontract and customer commitments), the estimated future
sales value of product shipments, transactions processed and services to be provided over the term of the contractual
arrangements, including anticipated renewal options. For contracts with indefinite quantities, our backlog is
estimated based on current activity levels. Our backlog includes estimates of revenues, the receipt of which require
future government appropriations, depend on option exercise by clients or are subject to contract modification or
termination. At December 31, 2016, our backlog approximated $133,000. These estimates are based on our
experience under such contracts and similar contracts, and we believe that such estimates are reasonable. If we do
not realize a substantial amount of our backlog, as we presently anticipate, our operations could be harmed and
future revenues could be significantly reduced.
Long lead times for the components used in certain products creates uncertainty in our supply chain and may
prevent us from making required deliveries to our customers on time.
We rely exclusively on commercial off-the-shelf technology in manufacturing our products. The lead-time
for ordering certain components used in our products and for the production of products can be lengthy. As a result,
we must, from time to time, order products based on forecasted demand. If demand for products lags significantly
behind forecasts, we may purchase more product than we can sell. Conversely, if demand exceeds forecasts, we may
not have enough products to meet our obligations to our customers.
We obtain certain hardware and services, as well as some software applications, from a limited group of
suppliers, and our reliance on these suppliers involves significant risks, including reduced control over
quality and delivery schedules.
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Any financial instability of our suppliers could result in having to find new suppliers. We may experience
significant delays in manufacturing and deliveries of products and services to customers if we lose our sources or if
supplies and services delivered from these sources are delayed. As a result, we may be required to incur additional
development, manufacturing and other costs to establish alternative supply sources. It may take several months to
locate alternative suppliers, if required. We cannot predict whether we will be able to obtain replacement hardware
within the required time frames at affordable costs, or at all. Any delays resulting from suppliers failing to deliver
hardware or delays in obtaining alternative hardware, in sufficient quantities and of sufficient quality, or any
significant increase in the cost of hardware from existing or alternative suppliers could result in delays on the
shipment of product which, in turn, could result in the loss of customers we may not be able to successfully
complete.
Our Defense ID® system relies on access to databases run by various government agencies. If these
governmental agencies were to stop sharing data with us, the utility of the Defense ID system would be
diminished and business would be damaged.
Currently, our Defense ID® system accesses over 100 separate databases run by various government and
law enforcement agencies. We cannot be assured that each of these agencies will continue to cooperate with us. In
the event that one or more of these agencies does not continue to provide access to these databases, the utility of the
Defense ID® system may be diminished and, as a result, our sales could suffer.
Our Defense ID® system requires permission from each branch of the U.S. military in the form of an
Authority to Operate (ATO). If an existing ATO is revoked, we would risk losing our ability to install our
Defense ID® system at military bases.
It is our current understanding that our Defense ID® system requires authority to operate at each Defense
Department installation. There are, however, several views within the Defense Department pertaining to
authorizations and accreditations required for information technology systems. We continue to work with the
Defense Department to clarify these requirements that generate uncertainty for Defense Department contractors.
Authority to operate is granted to each installation and requires the installation to expend resources in the
authorization process. The time required for this process can be lengthy, given resource availability.
We cannot be assured that Defense Department installations will have the resources necessary to pursue
their respective authorities to operate, or that the authority to operate can be granted in a timely manner. The results
of this may include loss or delay of projected Defense ID sales.
Our Defense ID® system manages private personal information and information related to sensitive
government functions and a breach of the security systems protecting such information may result in a loss of
suppliers or customers or result in litigation.
The protective security measures designed to protect sensitive information and contained in our products
may not prevent all security breaches. Failure to prevent security breaches may disrupt our business, damage our
reputation and expose us to litigation and liability. A party who is able to circumvent protective security measures
used in these systems could misappropriate sensitive information or cause interruptions or otherwise damage our
products, services and reputation as well as the property and privacy of customers. If unintended parties obtain
sensitive data and information, or create bugs or viruses or otherwise sabotage the functionality of our products, we
may receive negative publicity, incur liability to our customers or lose the confidence of our customers, any of
which may cause the termination or modification of contracts. Further, our existing insurance coverage may be
insufficient to cover losses and liabilities that may result from such events.
In addition, we may be required to expend significant capital and other resources to protect against the
threat of security breaches or to alleviate problems caused by the occurrence of any such breaches. However,
protective or remedial measures may not be available at a reasonable price or at all, or may not be entirely effective
if commenced.
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Future government regulation restricting the capture of information electronically stored on identification
cards could adversely affect our business.
The Defense ID® system is designed to read, verify and capture information from identification cards.
Currently, some jurisdictions have restrictions on what can be done with this information. Because issues of
personal privacy continue to be a major topic of public policy debate, it is possible that, in the future, these or other
jurisdictions may introduce similar or additional restrictions on capturing this information. Therefore, the
implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or
regulatory bodies could require us to incur significant compliance costs, cause the development of the affected
industry sectors to become impractical and reduce our revenues and potential revenues.
We are subject to risks associated with product failure and technological flaws.
Our products are complex and may contain undetected errors or result in failures when first introduced or
when new versions are released. Despite vigorous product testing efforts and testing by current and potential
customers, it is possible that errors will be found in a new product or enhancement after commercial shipments have
commenced. The occurrence of product defects or errors could result in negative publicity, delays in product
introduction and the diversion of resources to remedy defects and loss of or delay in industry acceptance or claims
by customers against us and could cause us to incur additional costs, any one of which could adversely affect our
business. Because of the risk of undetected error, we may be compelled to accept liability provisions that vary from
our preferred contracting model in certain critical transactions. There is a risk that in certain contracts and
circumstances we may not be successful in adequately minimizing product and related liabilities or that the
protections negotiated will not ultimately be deemed enforceable.
We carry product liability insurance, but existing coverage may not be adequate to cover potential claims.
The failure of our products to perform as promised could result in increased costs, lower margins, liquidated damage
payment obligations and harm to our reputation.
We may not be able to keep up with rapid technological change.
The sectors for all our products are characterized by rapid technological advancements. Significant
technological change could render existing technology obsolete. If we are unable to successfully respond to these
developments, or do not respond in a cost-effective manner, our business, financial condition and results of
operations will be materially adversely affected.
Future capital requirements may require incurring debt or dilution of existing stockholders.
Acquisition and development opportunities and other contingencies may arise, which could require us to
raise additional capital or incur debt. If we raise additional capital through the sale of equity, including preferred
stock, or convertible debt securities, the percentage ownership of our then existing stockholders will be diluted.
Because we do not intend to pay dividends on our Common Stock, stockholders will benefit from an
investment in our stock only if it appreciates in value.
We have never declared or paid any cash dividends on our shares of stock. We currently intend to retain all
future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash
dividends will be at the discretion of our Board of Directors and will depend on factors the Board of Directors
deems relevant, including among others, our results of operations, financial condition and cash requirements,
business prospects, and the terms of our credit facilities and other financing arrangements. Accordingly, realization
of a gain on stockholders’ investments will depend on the appreciation of the price of our stock. There is no
guarantee that our stock will appreciate in value.
Item 1B. Unresolved Staff Comments
Not applicable.
21
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22
Item 2. Properties
Our corporate headquarters is currently located in Jericho, New York, where we occupy approximately
9,233 square feet of office space pursuant to a lease that expires on March 1, 2018. Many administrative and
technical personnel for all product divisions are based at this location, with a certain number of individuals operating
out of home offices. We believe that our existing facility is adequate to meet current requirements and that
additional or substitute space will be available as needed to accommodate any expansion of operations.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
None
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
(a)
Our common stock is traded on the NYSE MKT Stock Exchange under the symbol “IDN.” The
following table indicates high and low sales prices for the periods indicated.
2015
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter*
Low
High
$
$
$
$
$
$
$
$
$
1.39
1.34
0.86
0.82
0.85
1.38
1.27
1.55
$
$
$
$
$
$
$
$
2.78
1.77
1.44
1.17
1.60
2.14
1.80
2.84
2.27
$
3.10
* Portion of first fiscal quarter through March 29, 2017.
(b)
As of March 29, 2017, there were approximately 53 shareholders of record of our common stock.
(c)
No cash dividends or other cash distributions made by us during the fiscal year ended December
31, 2016. Future dividend policy will be determined by our Board of Directors based on our earnings, financial
condition, capital requirements and other then existing conditions. It is anticipated that cash dividends will not be
paid to the holders of our common stock in the foreseeable future.
(d)
Securities Authorized for Issuance Under Equity Compensation Plans
our common stock that may be issued under our existing equity compensation plans.
The following table provides information as of December 31, 2016, with respect to the shares of
Plan Category
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights (a)
Weighted-average
exercise price of
outstanding options,
warrants and
rights (b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
1,698,134 $
-
1,698,134
$
$
1.41
-
1.41
900,013
-
900,013
(1)
Represents 1,529,872 options and 32,714 restricted stock units under the 2015 Omnibus Incentive
Plan, 134,298 options under the 2006 Equity Incentive Plan and 1,250 options under the 2003 Stock Option Plan.
(e)
Recent Sales of Unregistered Securities
None.
24
(f)
Repurchases of Equity Securities
There were no shares purchased during 2016.
(g)
Reverse Stock Split
Effective on August 12, 2014 and commencing with the opening of trading on August 13, 2014, we
effected a reverse stock split of our issued and outstanding common stock, $0.001 par value per share, at a ratio of
one-for-eight, with each eight (8) issued and outstanding shares of the common stock automatically combined and
converted into one (1) issued and outstanding share of the common stock. The reverse stock split was approved by
stockholders holding a majority of the outstanding voting power at a special meeting of stockholders held on August
12, 2014.
Item 6. Selected Financial Data
The following selected financial data presented under the captions “Statement of Operations Data” and
“Balance Sheet Data” as of the end of each of the five years ended December 31, 2016, are derived from our
financial statements. The selected financial data should be read in conjunction with the financial statements as of
December 31, 2016 and 2015 and for each of the two years in the period ended December 31, 2016, the
accompanying notes and the report of independent registered public accounting firms thereon, which are included
elsewhere in this Form 10-K. Our consolidated financial statements include our accounts and our wholly owned
subsidiaries, Mobilisa and Positive Access.
Statement of Operations Data:
Revenue
Loss from operations
Net loss
Net loss per common share
Basic
Diluted
Common shares used in computing per
share amounts
Basic
Diluted
Balance sheet data:
Cash and cash equivalents
Working capital
Total assets
Total liabilities
Stockholders’ equity
2012
Years Ended December 31,
2013
2015
2014
(In thousands, except per share data)
2016
$
8,803 $
(2,261)
(2,260)
7,298 $
(2,424)
(2,424)
6,613 $
(7,645)
(7,644)
7,015 $
(5,480)
(5,334)
(0.65)
(0.65)
(0.70)
(0.70)
(1.59)
(1.59)
(0.55)
(0.55)
3,839
(5,750)
(5,735)
(0.58)
(0.58)
3,466
3,466
3,487
3,487
4,801
4,801
9,658
9,658
9,915
9,915
2012
2013
As of December 31,
2014
(In thousands)
2015
2016
$
1,686 $
744
20,461
2,782
17,679
224 $
(720)
17,902
2,546
15,356
2,966 $
1,880
15,814
2,666
13,148
5,953 $
5,659
18,473
2,146
16,326
3,092
2,471
14,534
1,598
12,935
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a technology company that provides identity systems for various applications including mobile and
handheld access control and security systems for the government, military and commercial markets. Our products
include the Defense ID® and Fugitive Finder systems, advanced ID card access control products currently protecting
military and federal locations, and ID√Check®, a patented technology that instantly reads, analyzes, and verifies
encoded data in magnetic stripes and barcodes on government-issue IDs from U.S. and Canadian jurisdictions
designed to improve the Customer Experience for the financial, hospitality and retail sectors.
Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the amounts reported in our
financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in
the financial statements include impairment of goodwill, valuation of intangible assets, deferred tax valuation
allowances, allowance for doubtful accounts, revenue allocation of multi-element arrangements and the fair value of
stock options granted under our 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.
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, goodwill and intangible asset valuation and impairment, and commitments and
contingencies. These policies and our procedures related to these policies are described in detail below.
Valuation of goodwill and other long-lived assets
Our long-lived assets include property and equipment, goodwill and intangible assets. As of December 31,
2016, the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation
and amortization, were $270,776, $8,101,661 and $2,154,563, respectively. As of December 31, 2015, the balances
of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization,
were $325,427, $8,101,661 and $2,470,127, respectively.
We depreciate property and equipment and amortize intangible assets that have finite lives over their
estimated useful lives. For purposes of determining whether there are any impairment losses, as further discussed
below, management evaluates the carrying amounts of identifiable long-lived tangible and intangible assets,
including their estimated useful lives, when indicators of impairment are present as more fully described below.
Based on our review of the carrying amounts of the long-lived tangible and intangible assets with finite lives, we
may also determine that shorter estimated useful lives are appropriate. In that event, we record depreciation and
amortization over shorter future periods, which would reduce our earnings.
Goodwill
The excess of the purchase consideration over the fair value of the assets of the 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 at December 31, 2016 and 2015. This goodwill resulted
from the acquisition of Mobilisa, Inc. and Positive Access Corporation.
For the years ended December 31, 2016 and 2015, 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. We performed the first step of the goodwill impairment test in order to identify potential
26
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.
For the years ended December 31, 2016 and 2015, we determined that the fair value was in excess of our
carrying amount and therefore the second step of the goodwill impairment test was not required.
We considered whether long-lived assets were also impaired. As required by ASC 360, compared the
carrying amounts of the identified asset groups (including goodwill as required by ASC 360 to the undiscounted
cash flow of the asset groups and determined that our intangible assets were not impaired at December 31, 2016 and
2015.
Intangible Assets
Intangible assets include trade names, patents, developed technology and non-contractual customer
relationships as described more fully in Note 5. We use the straight-line method to amortize these assets over their
estimated useful lives. We review our 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, we evaluate the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair
value. No impairments were recognized during the years ended December 31, 2016 and 2015.
Revenue Recognition and Deferred Revenue
Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred,
the fee is fixed and determinable, collectability is probable, and there is no future Company involvement or
commitment. We sell our commercial products directly through its sales force and through distributors. Revenue
from direct sales of products is recognized when shipped to the customer and title has passed.
Under the provisions of ASC Topic 605-25, “Revenue Arrangements with Multiple Deliverables,” for
multi-element arrangements that include tangible products containing software essential to the tangible product’s
functionality and undelivered software elements relating to the tangible product’s essential software, we allocate
revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to
determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence
of fair value (“VSOE”), (ii) third-party evidence of selling price and (iii) best estimate of the selling price (“ESP”).
VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that
deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold
regularly on a stand-alone basis.
We also recognize revenues from licensing of its patented software to customers. The licensed software
requires continuing service or post contractual customer support and performance; accordingly, a portion of the
revenue is deferred based on its fair value and recognized ratably over the period in which the future service, support
and performance are provided, which is generally one to three years. Royalties from the licensing of our technology
are recognized as revenues in the period they are earned.
Revenue from research and development contracts are generally with government agencies under long-term
cost-plus fixed-fee contracts, where revenue is based on time and material costs incurred. Revenue from these
arrangements is recognized as time is spent on the contract and materials are purchased. Research and development
costs are expensed as incurred.
27
We also perform consulting work for other companies. These services are billed based on time and
materials. Revenue from these arrangements is also recognized as time is spent on the contract and materials are
purchased.
Subscriptions to database information can be purchased for month-to-month, one, two, and three year
periods. Revenue from subscriptions are deferred and recognized over the contractual period, which is typically
three years.
We offer enhanced extended warranties for its sales of hardware and software at a set price. The revenue
from these sales are deferred and recognized on a straight-line basis over the contractual period, which is typically
one to three years.
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 December 31, 2016 and 2015, due to the
uncertainty of the realizability of those assets.
Commitments and Contingencies
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.
The above listing is not intended to be a comprehensive list of all 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 were rounded to the nearest $1,000)
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2016
TO THE YEAR ENDED DECEMBER 31, 2015
REVENUE. Total revenues were approximately 45% lower in the year ended December 31, 2016 as
compared to the year ended December 31, 2015.
Identity Systems
Other
Year Ended December 31,
2016
2015
% Change
$
$
3,825,000
$ 6,646,000
14,000
369,000
3,839,000
$ 7,015,000
(42) %
(96) %
(45) %
28
The decrease in the Identity Systems revenues in 2016 is a result of our strategic change in sales mix
towards more of a SaaS model, resulting in lower commercial and Defense ID® sales. The decrease in other
revenues in 2016 is a result of the sale of the wireless assets on August 31, 2015.
As of December 31, 2016, our backlog, which represents non-cancelable sales orders for products not yet
shipped and services to be performed, was approximately $133,000. The backlog consists primarily of Defense ID®
contracts and commercial sales orders. As of December 31, 2015, our backlog was approximately $339,000. Period
to period comparisons may not be indicative of future operating results, since we still face long sales cycles, and
therefore, we cannot predict with certainty in which period the opportunities currently in the pipeline will develop
into sales or if they will develop at all.
GROSS PROFIT. Gross profit decreased by $939,000 or 23% to $3,070,000 for the year ended December
31, 2016 from $4,008,000 in the year ended December 31, 2015. Our gross profit, as a percentage of revenues, was
80% and 57% in 2016 and 2015, respectively. The increase in percentage in 2016 is due to higher revenues on our
SaaS model and lower equipment sales that typically have a lower margin.
OPERATING EXPENSES. Operating expenses, which consist of selling, general and administrative and
research and development expenses decreased by $669,000 or 7% to $8,820,000 for the year ended December 31,
2016 from $9,489,000 for the year ended December 31, 2015. Selling, general and administrative expenses
decreased 7% to $6,414,000 for the year ended December 31, 2016 from $6,894,000 for the year ended December
31, 2015, principally as a result of lower amortization of an intangible asset that became fully amortized. Research
and development expenses decreased 7% to $2,406,000 for the year ended December 31, 2016 from $2,595,000 for
the year ended December 31, 2015, mainly due to decreased the of a specialized consulting firm for certain research
and development projects.
OTHER INCOME AND EXPENSE. Other income and expense was insignificant for the year ended
December 31, 2016. Other income and expense of $146,000 for the year ended December 31, 2015 consisted
primarily of the gain on the sale of the wireless assets on August 31, 2015 amounting to $109,000 for the year ended
December 31, 2015.
INCOME TAXES. We have incurred net losses to date; therefore, we have paid nominal income taxes.
NET LOSS. As a result of the factors noted above, we incurred a net loss of $5,735,000 for the year ended
December 31, 2016 as compared to a net loss of $5,334,000 for the year ended December 31, 2015.
Liquidity and Capital Resources (All figures were rounded to the nearest $1,000)
As of December 31, 2016, we had cash and cash equivalents of $3,092,000, working capital (defined as
current assets minus current liabilities) of $2,471,000, total assets of $14,534,000 and stockholders’ equity of
$12,936,000.
During 2016, our cash and cash equivalents decreased by $2,861,000. Cash used in operating activities
was $4,240,000 in 2016 as compared to cash used in operating activities of $4,436,000 in 2015. The decrease in
cash used in operations in 2016 is primarily a result of our net loss. We used cash of $28,000 in investing activities
during 2016 compared to $177,000 in 2015. Cash generated in financing activities was $1,408,000 in 2016 as
compared to $7,601,000 in 2015 as a result of less capital raising in 2016.
On January 14, 2015, we announced the closing of an underwritten public offering of 4,857,143 shares of
our common stock, offered to the public at $1.75 per share. Net proceeds from this offering were approximately
$7,845,000 after deducting underwriting discounts and commissions we paid.
On February 24, 2016, we entered into a stock repurchase agreement with two former directors, who were
also members of management (the “Former Executives”) for the repurchase of all 979,114 shares owned by the
Former Executives of our common stock for $1,096,608. The transaction was finalized on March 4, 2016.
29
On June 15, 2016, we completed a public offering of 1,200,000 shares of our common stock and five year
warrants to purchase 600,000 shares with an exercise price of $2.20 per share, at a combined public offering of
$1.75 per share and half-warrant. Net proceeds from this offering were approximately $1,902,000 after deducting
underwriting discounts and commissions paid by us. Direct offering costs totaling approximately $124,000 were
recorded as a reduction to the net proceeds on the consolidated statement of stockholders’ equity. As part of the
offering, there was an overallotment option for the underwriters to purchase up to 180,000 shares of common stock
at a purchase price of $1.63 per share and/or up to 90,000 additional warrants at a purchase price of $0.0001 per
warrant. On June 20, 2016, the underwriters exercised their right to purchase 23,320 warrants resulting in net
proceeds of $2 which are included in these proceeds. In November and December 2016, certain warrant holders
exercised their right to purchase 153,000 shares of our common stock which resulted in net proceeds of
approximately $337,000.
On August 31, 2015, we sold our 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. We recognized a gain on the sale of approximately $109,000 which is included in interest and other
income for the year ended December 31, 2015. Total assets disposed include certain trade names associated with the
wireless assets with a net book value of approximately $65,000 and certain fixed assets with a net book value of
approximately $56,000. Any gain on contingent consideration will be recognized as it is earned. Under the terms of
the promissory note, monthly payments in the amount of $3,683 including principal and interest at 4%, are to be
made over a 60-month term expiring in August 2020. At December 31, 2016, the total note receivable was
$153,679, of which $38,758 and $114,909 is included in Other Current Assets and Notes Receivable, net of current
portion, respectively on the Consolidated Balance Sheets.
We have a revolving credit facility with Silicon Valley Bank that allows for maximum borrowings of
$2,000,000. The borrowings are secured by certain collateralized accounts totaling $2,000,000. The facility bears
interest at a rate of U.S. prime (3.75% at December 31, 2016). Interest is payable monthly and the principal is due
upon maturity on October 5, 2017. At December 31, 2016, 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, as well as cash from the previously mentioned stock
offerings, and 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 statement with the SEC on July 31, 2013 and it was declared
effective August 6, 2013. We renewed this registration statement 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.
30
The shelf registration statement is designed to give us 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.
Adjusted EBITDA
We use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is
calculated by adding back to net loss interest, 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 its
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.
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 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 us may not be comparable with
similarly named measures provided by other entities.
A reconciliation of GAAP net loss to Adjusted EBITDA follows:
Net loss
Reconciling items:
Interest and other, net
Depreciation and amortization
Stock-based compensation costs
Year Ended December 31,
(Unaudited)
2016
2015
$ (5,734,681 ) $ (5,333,951)
(146,258)
(14,930 )
434,291 1,020,679
878,112
935,899
Adjusted EBITDA
$ (4,379,421 ) $ (3,581,418)
Related Party Transactions
the separation, we entered
On September 30, 2014, the CEO and a Senior Vice President (collectively, the “Executives”), who were
also board members, retired from the Company and simultaneously resigned from the board of directors. In
connection with
the
Executives. Included as part of the arrangement, we committed to payments totaling $587,500 to be made over a
period of 15 months. In exchange for the consideration, the Executives agreed not to compete with the Company,
solicit any employee, contractor or consultant of the Company to terminate employment or contractual relationship
with the Company, as well refrain from other activities, as defined in the agreement. At September 30, 2014, we
recorded the future payments of the agreement as a liability and as a non-compete intangible asset totaling
into a separation and consulting agreement with
31
$587,500. The costs of the non-compete were amortized over the 15-month term of the agreement. For the years
ended December 31, 2015 and 2014, amortization expense recognized was $470,000 and $117,500, respectively.
We made payments under this agreement in 2015 and 2014 of $417,500 and $170,000, respectively and the balance
was paid in full as of December 31, 2015.
Our subsidiary, Mobilisa, Inc. leased office space from a company (“Lessor Company”) that is wholly-
owned by the Executives ending in 2017. The base annual rent for this facility was $96,010 was subject to annual
increases based on the increase in the CPI index plus 1%. On February 24, 2016, Mobilisa and the Lessor Company
entered into a lease amendment agreement reducing the space under this lease that took effect on March 31, 2016
thereby closing the office facility and occupied storage space that expired on December 31, 2016. As a result of this
amended agreement, we made a $100,000 termination payment to the Lessor in full satisfaction of our remaining
obligations under the original lease. For the years ended December 31, 2016 and 2015, total rent payments for this
facility was $124,001 (including this termination payment) and $94,783, respectively.
On February 24, 2016, we entered into a stock repurchase agreement with the Executives for the repurchase
of all 979,114 shares of our common stock owned by the Executives for $1,096,608. The transaction was finalized
on March 4, 2016.
Net Operating Loss Carry Forwards
In March 2016, we completed an Internal Revenue Code Section 382 study which determined that a
cumulative three-year ownership change in excess of 50% had occurred in March 2016 due to a share repurchase;
see “Recent Developments.” As a result, our available net operating loss (“NOL”) was reduced from $47.4 million
to $2.2 million during the first quarter of 2016. Our available NOL at December 31, 2016 was approximately $7
million. The federal and state NOLs are available to offset future taxable income and expire from 2017 through 2036
if not utilized.
Contractual Obligations
Below is a table, which presents our contractual obligations and commitments at December 31, 2016:
Payments Due by Period
Less than
Total
1 year
1-3 years
3-5 years
More than
5 years
Operating Leases
Consulting Agreements
Purchase Obligations
Total Contractual Obligations
$
405,240 $
322,913 $
-
-
-
-
$
405,240 $
322,913 $
82,327 $
-
-
82,327 $
- $
-
-
- $
-
-
-
-
Recently Issued Accounting Pronouncements Not Yet Effective
Except as discussed below, we do not expect the impact of the future adoption of recently issued
accounting pronouncements to have a material impact on our financial statements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 completes the joint effort by
the FASB and International Accounting Standards Board (“IASB”) to improve financial reporting by creating
common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). In
August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date, which defers the effective date by one year, with early adoption on the original effective date
permitted. As a result, ASU 2014-09 will be effective for annual and interim periods beginning after December 15,
2017.
32
We are in the process of evaluating the impact of our pending adoption of this ASU on revenue
transactions, including any impacts on associated processes, systems, and internal controls. Our evaluation includes
the determination whether the unit of account (i.e., performance obligations) will change as compared to current
GAAP, as well as determining the standalone selling price of each performance obligation. Standalone selling prices
under the new guidance may not be substantially different from our current methodologies of establishing fair value
on multiple element arrangements. We have started reviewing each of our revenue streams that may have an impact
on our consolidated financial statements and also assessing the capitalizing of its sales commissions upon adoption
of the new ASU and is in the process of evaluating the period over which to amortize these capitalized costs. We
continue to evaluate the impact of this guidance on our consolidated financial statements and any preliminary
assessments are subject to change and expect completion of this evaluation by the second quarter of 2017.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”), which defines management’s responsibility to evaluate, at each annual and interim reporting
period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a
going concern within one year after the date the financial statements are issued and to provide related footnote
disclosures in certain circumstances. In connection with each annual and interim period, management must assess if
there is substantial doubt about the company’s ability to continue as a going concern within one year after the
issuance date. Disclosures are required if conditions give rise to substantial doubt. This standard is effective for all
companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early
adoption permitted. The adoption of this standard did not have a material impact on our consolidated financial
statements.
In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying
the Measurement of Inventory (“ASU 2015-11”) which changes the measurement principle for inventory from the
lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning
after December 15, 2016, with early adoption permitted. We do not expect the adoption of ASU-2015-11 to have a
material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes which simplifies the presentation of deferred income taxes by eliminating the
separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the
consolidated balance sheet. The amendments in the update require that all deferred tax liabilities and assets be
classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual
periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or
retrospectively to all periods presented. Early adoption is permitted. We do not expect the adoption of ASU 2015-17
to have a material impact on our 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. We are currently evaluating the impact
this guidance is expected to have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share Based Payment
Accounting which simplifies several aspects of the accounting for share-based payment transactions, including
income tax consequences, classification of awards, forfeitures and classification on the statement of cash flows. The
provisions of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within
those fiscal years. We will adopt the new standard in the first quarter of 2017 and do not expect this will not have a
material effect on our consolidated financial statements. We have elected to account for forfeitures as they occur,
rather than estimate expected forfeitures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Clarification of
Certain Cash Receipts and Cash Payments which would eliminate the diversity in practice related to the
33
classification of certain receipts and payments in the statement of cash flows, by adding or clarifying guidance on
eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after
December 15, 2017 for public entities with early adoption permitted. The amendments in this update should be
applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application
is permitted. We do not expect the implementation of this standard to have a material effect on our 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. We are in the process of evaluating the impact of this
standard on our consolidated financial statements.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have never 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 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash and cash
equivalents. We maintain cash between three financial institutions. The marketable securities and short term
investments are invested in money market funds and bank certificates of deposit. We perform periodic evaluations
of the relative credit standing of these institutions.
Item 8. Financial Statements and Supplementary Data
Our financial statements and supplementary data are attached hereto beginning on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There have been no changes in or disagreements with our principal independent registered public
accounting firm for the two-year period ended December 31, 2016.
Item 9A. 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
34
Annual Report on Form 10-K. As of December 31, 2016, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15I,
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 Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Annual Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 15d-15(f) under the Exchange Act) for the Company. Management, with the
participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2016 (the end of our fiscal year), based on the
framework and criteria established in the 2013 Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of December 31, 2016.
Item 9B. Other Information
None.
35
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated herein by reference from our 2017 definitive Proxy
Statement (which will be filed with the SEC within 120 days after December 31, 2016 in connection with the
solicitation of proxies for the Company’s 2017 annual meeting of stockholders) (“2017 Proxy Statement”) under the
captions “Proposal 1 – Election of Directors,” “Other Information – Executive Officers,” and “Beneficial Ownership
Reporting Compliance under Section 16(a) of the Exchange Act.”
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from our 2017 Proxy Statement
under the captions “Executive Compensation” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference from our 2017 Proxy Statement
under the captions “Other Information—Security Ownership of Certain Beneficial Owners and Management” and
“Other Information – Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from our 2017 Proxy Statement
under the captions “Other Information – Related Party Transactions Overview,” “Other Information – Certain
Transactions with Related Persons” and “Director Attributes and Independence.”
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from our 2017 Proxy Statement
under the caption “Proposal 2 – Ratification of the Selection of Independent Auditors.”
36
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016
and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
(b)
Exhibits
Exhibit No. Description
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Certificate of Incorporation of the Company (1)
Amendment to the Certificate of Incorporation of the Company (11)
Certificate of Amendment to the Certificate of Incorporation of the Company (8)
Amended and Restated By-laws of the Company (12)
Specimen Stock Certificate (7)
Agreement of Lease between the Company and JQ1 Associates, LLC, dated as of April 19, 2010 (4)
Agreement of Lease between Mobilisa and Eagle Coast, LLC, dated as of August 1, 2007. (7)
1998 Stock Option Plan (1) *
1999 Stock Option Plan (1) *
2001 Stock Option Plan (2) *
2003 Stock Option Plan (3) *
2006 Equity Incentive Plan (5) *
2015 Omnibus Incentive Plan (13) *
Employment Agreement by and between Robert N. Williamsen and the Company *
Nelson Ludlow Separation and Consulting Agreement (9) *
Bonnie Ludlow Separation and Consulting Agreement (9) *
Bill Roof Chief Executive Officer Employment Agreement (9) *
Bill White Severance Agreement (9) *
Fourth Amendment to Loan and Security Agreement, dated as of October 15, 2014, by and between
the Company and Silicon Valley Bank (10)
Code of Business Conduct and Ethics (6)
List of Subsidiaries (7)
Consent of EisnerAmper LLP **
Certification of CEO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 **
Certification of CFO pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 **
Certification of CEO and CFO pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 **
XBRL Instance Document **
XBRL Taxonomy Extension Schema **
XBRL Taxonomy Extension Calculation Linkbase **
XBRL Taxonomy Extension Definition Linkbase **
XBRL Taxonomy Extension Label Linkbase **
XBRL Taxonomy Extension Presentation Linkbase **
14.1
21
23.1
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
**
(1)
(2)
(3)
(4)
Denotes a management contract or compensatory plan, contract or arrangement.
Filed herewith.
Incorporated by reference to Registration Statement on Form SB-2 (File No. 333-87797) filed September 24,
1999.
Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed May 31, 2001.
Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed June 13, 2003.
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed August 10, 2010.
37
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 25, 2014.
Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 30, 2004.
Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 11, 2010.
Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 13, 2014.
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed November 4, 2014.
Incorporated by reference to Registrant’s Current Report on Form 8-K filed October 20, 2014.
Incorporated by reference to Registrant’s Current Report on Form 8-K filed October 28, 2009.
Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 14, 2007.
Incorporated by reference to the Registrant’s Proxy Statement on Schedule 14A filed April 9, 2015.
38
FINANCIAL STATEMENTS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2016 and 2015 ........................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015 .................. F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015 .. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 ................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................................................................... F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Intellicheck Mobilisa, Inc.
We have audited the accompanying consolidated balance sheets of Intellicheck Mobilisa, Inc. (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the years then ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Intellicheck Mobilisa, Inc. as of December 31, 2016 and 2015, and the
consolidated results of their operations and their cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
March 30, 2017
Iselin, New Jersey
F-2
INTELLICHECK MOBILISA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 and 2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net of allowance of $74,354 and $18,411
as of December 31, 2016 and 2015, respectively
Inventory
Other current assets
Total current assets
NOTE RECEIVABLE, net of current portion
PROPERTY AND EQUIPMENT, net
GOODWILL
INTANGIBLE ASSETS, net
OTHER ASSETS
2016
2015
$
3,092,172 $ 5,953,257
502,126
70,547
165,473
1,158,972
74,732
178,362
3,830,318 7,365,323
114,909
270,776
150,496
325,427
8,101,661 8,101,661
2,154,563 2,470,127
59,800
61,298
Total assets
$ 14,533,525 $ 18,472,834
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Deferred revenue, current portion
Total current liabilities
OTHER LIABILITIES
Deferred revenue, long-term portion
Deferred rent
Total liabilities
COMMITMENTS AND CONTINIGENCIES
$
14,140 $
519,957
825,538
260,276
536,316
909,233
1,359,635 1,705,825
177,306
61,133
341,242
99,355
1,598,074 2,146,422
STOCKHOLDERS’ EQUITY:
Common stock – $.001 par value; 40,000,000 shares authorized; 10,718,553 and
9,878,906 shares issued and outstanding as of December 31, 2016 and 2015,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
10,719
9,879
117,293,158 114,950,278
(104,368,426) (98,633,745)
12,935,451 16,326,412
Total liabilities and stockholders’ equity
$ 14,533,525 $ 18,472,834
The accompanying notes are an integral part of these consolidated statements.
F-3
INTELLICHECK MOBILISA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
REVENUES
COST OF REVENUES
Gross profit
OPERATING EXPENSES
Selling, general and administrative
Research and development
Total operating expenses
Loss from operations
OTHER INCOME (EXPENSE)
Interest and other income
Interest expense
Net loss
PER SHARE INFORMATION:
Loss per common share -
Basic/Diluted
2016
2015
$ 3,838,963 $ 7,014,665
(3,006,359)
4,008,306
(769,048)
3,069,915
6,413,933
2,405,593
6,893,837
2,594,678
8,819,526
9,488,515
(5,749,611)
(5,480,209)
14,930
-
149,575
(3,317)
$ (5,734,681) $ (5,333,951)
$
(0.58) $
(0.55)
Weighted average common shares used in computing per share amounts -
Basic/Diluted
9,914,809
9,658,346
The accompanying notes are an integral part of these consolidated statements.
F-4
INTELLICHECK MOBILISA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Common Stock
Shares
Additional
Paid-in
Amount Capital
Accumulated
Deficit
Total
BALANCE, December 31, 2014
4,934,601 $ 4,934 $106,442,897 $ (93,299,794) $13,148,037
Stock-based compensation expense (employees
and directors)
Issuance of common stock, net of costs
Exercise of stock options
Vesting of restricted stock
Net loss
-
-
4,857,143 4,857
313
86,849
-
1
87
-
878,112
7,625,900
3,456
(87)
-
-
878,112
- 7,630,757
3,457
-
-
-
(5,333,951) (5,333,951)
BALANCE, December 31, 2015
9,878,906 $ 9,879 $114,950,278 $ (98,633,745) $16,326,412
Stock-based compensation expense (employees
and directors)
Issuance of common stock, net of costs
Purchase and retirement of common stock
Exercise of stock options
Exercise of warrants
Vesting of restricted stock
Net loss
-
-
1,200,000 1,200
(979,114)
345,127
153,000
120,634
-
(979)
345
153
121
-
935,899
1,776,750
(1,095,629)
389,534
336,447
(121)
-
-
935,899
- 1,777,950
- (1,096,608)
389,879
-
336,600
-
-
-
(5,734,681) (5,734,681)
BALANCE, December 31, 2016
10,718,553 $10,719 $117,293,158 $(104,368,426) $12,935,451
The accompanying notes are an integral part of these consolidated statements.
F-5
INTELLICHECK MOBILISA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
2016
2015
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$ (5,734,681) $ (5,333,951)
Depreciation and amortization
Noncash stock-based compensation expense
Noncash change in provision for doubtful accounts
Gain on sale of wireless assets
Gain on sale of property and equipment
Deferred rent
Decrease (Increase) in accounts receivable
Decrease in inventory
Decrease (Increase) in other current assets
(Increase) Decrease in other assets
(Decrease) in accounts payable and accrued expenses
(Decrease) Increase in deferred revenue
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Purchases of patents
Proceeds from sale of property and equipment
Proceeds from sale of wireless assets
Collection on note receivable
Net cash used in investing activities
434,291
935,899
74,354
-
-
(38,222)
582,492
4,185
12,889
(1,498)
(262,496)
(247,631)
(4,240,418)
1,020,679
878,112
(60,313)
(108,825)
(31,500)
(29,091)
(306,587)
40,289
(30,127)
15,207
(164,410)
(325,747)
(4,436,264)
(64,075)
-
-
-
35,587
(28,488)
(126,618)
(125,000)
31,500
30,000
12,633
(177,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock
Net proceeds from issuance of common stock from exercise of stock options
Net proceeds from the issuance of common stock from exercise of warrants
Purchase and retirement of common stock
Payments on note payable
Net cash provided by financing activities
1,777,950
389,879
336,600
(1,096,608)
-
1,407,821
7,630,757
977
-
-
(31,078)
7,600,656
Net (decrease) increase in cash and cash equivalents
(2,861,085)
2,986,907
CASH AND CASH EQUIVALENTS, beginning of year
5,953,257
2,966,350
CASH AND CASH EQUIVALENTS, end of year
$ 3,092,172 $ 5,953,257
Supplemental disclosure of noncash investing and financing activities:
Issuance of note receivable related to sale of wireless assets
Financing of property and equipment
$
$
- $
- $
200,000
31,078
The accompanying notes are an integral part of these consolidated statements.
F-6
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
1 NATURE OF BUSINESS
Business
Intellicheck Mobilisa, Inc. (the “Company” or “Intellicheck”) is a leading technology company that is engaged in
developing, integrating and marketing threat identification and identity authentication solutions to address
challenges that include retail fraud prevention, law enforcement threat identification, and mobile and handheld
access control and security for the government, military and commercial markets. Intellicheck’s products include
Retail ID™, the industry leading solution for preventing fraud in the retail industry; Age ID™, a smartphone or
tablet-based solution for preventing sale of age-restricted products to minors; Law ID™, a smartphone-based
solution used by law enforcement officers to identify and mitigate threats; 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
over 25 patents.
Liquidity
For the year ended December 31, 2016, the Company incurred a net loss of $5,734,681 and used cash in operations
of $4,240,418. As of December 31, 2016, the Company had cash and cash equivalents of $3,092,172 and an
accumulated deficit of $104,368,426. In June 2016, the Company completed an equity raise with gross proceeds of
approximately $1,902,000 before deducting the underwriting discount and other offering expenses. Based on our
business plan and, cash resources, we expect our existing and future resources and revenues generated from
operations to satisfy our 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 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 the Company 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
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or
less when purchased. There were no cash equivalents held on December 31, 2016 and 2015.
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.
F-7
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
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 December 31, 2016, the majority of our inventory related
to Government and Commercial Identity products for intended near-term sales.
Long-Lived Assets and Impairment of Long-Lived Assets
The Company’s long-lived assets include property and equipment, goodwill and intangible assets.
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 350 and 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.
Impairment is measured at fair value.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their estimated useful lives ranging from three
to ten-years using the straight-line method. Leasehold improvements are amortized utilizing the straight-line method
over the lesser of the term of the lease or estimated useful life of the asset.
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 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.
The Company performed its annual impairment test of goodwill in the fourth quarter for the years ended December
31, 2016 and 2015. For the years ended December 31, 2016 and 2015, the Company determined no impairment
charge was required.
Intangible Assets
Intangible assets include trade names, patents and non-contractual customer relationships as described more fully in
Note 5. 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. Impairment is measured at fair
value. No impairments were recognized during the years ended December 31, 2016 and 2015.
Deferred Rent
The Company received certain rent abatements and incentives from landlord as an inducement to move into its New
York office facility. The Company is amortizing these incentives on a straight-line basis over the period of its
respective lease.
F-8
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition and Deferred Revenue
Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed and determinable, collectability is probable, and there is no future Company involvement or commitment.
The Company sells its commercial products directly through its sales force and through distributors. Revenue from
direct sales of products is recognized when shipped to the customer and title has passed.
Under the provisions of ASC Topic 605-25, “Revenue Arrangements with Multiple Deliverables,” for multi-element
arrangements that include tangible products containing software essential to the tangible product’s functionality and
undelivered software elements relating to the tangible product’s essential software, the Company allocates revenue
to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to
determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence
of fair value (“VSOE”), (ii) third-party evidence of selling price and (iii) best estimate of the selling price (“ESP”).
VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by
the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements
would be if they were sold regularly on a stand-alone basis.
The Company also recognizes revenues from licensing of its patented software to customers. The licensed software
requires continuing service or post contractual customer support and performance; accordingly, a portion of the
revenue is deferred based on its fair value and recognized ratably over the period in which the future service, support
and performance are provided, which is generally one to three years. Royalties from the licensing of the Company’s
technology are recognized as revenues in the period they are earned.
The Company also performs consulting work for other companies. These services are billed based on time and
materials. Revenue from these arrangements is also recognized as time is spent on the contract and materials are
purchased.
Subscriptions to database information can be purchased for month-to-month, one, two, and three year periods.
Revenue from subscriptions are deferred and recognized over the contractual period, which is typically three years.
The Company offers enhanced extended warranties for its sales of hardware and software at a set price. The revenue
from these sales are deferred and recognized on a straight-line basis over the contractual period, which is typically
one to three years.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Shipping Costs
The Company’s shipping and handling costs are included in cost of revenues for all periods presented.
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. Deferred tax
assets are recognized subject to management’s judgment that realization is more likely than not. The Company has
recorded a full valuation allowance for its net deferred tax assets as of December 31, 2016 and 2015, due to the
uncertainty of the realizability of those assets.
F-9
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
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 and cash equivalents, accounts
receivable, note receivable, accounts payable and accrued expenses. At December 31, 2016 and 2015, the carrying
value of the Company’s financial instruments approximated fair value, due to their short-term nature.
Business Concentration and Credit Risk
Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash and
cash equivalents. The Company maintains cash with one financial institution. The cash equivalents consist of money
market funds. The Company performs periodic evaluations of the relative credit standing of these institutions.
The Company’s sales are principally made to large retail customers, financial institutions concentrated in the United
States of America and to U.S. government entities. The Company performs ongoing credit evaluations, generally
does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of customers, historical trends and other information.
During the year ended December 31, 2016, the Company did not have any single customer account for 10% of
revenue. During the year ended December 31, 2015, the Company had one customer that accounted for 31% of
revenue. The revenue was associated with a commercial identity sales customer. This customer represented 11% of
total accounts receivable at December 31, 2015.
As of December 31, 2016, the Company had three suppliers to produce its input devices. The Company has
modified its software to operate in windows based systems and can integrate with different hardware platforms that
are readily available in the marketplace. The Company does not maintain a manufacturing facility of its own and is
not dependent on maintaining its production relationships due to the flexibility of its software to run on multiple
existing platforms.
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
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.
Year Ended
December 31,
2016
2015
$ (5,734,681)
$
(5,333,951)
9,914,809
9,658,346
Numerator:
Net Loss
Denominator:
Weighted average common shares –
Basic/Diluted
Net Loss per share –
F-10
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
Basic/Diluted
$
(0.58)
$
(0.55)
The following table summarizes the common stock equivalents excluded from loss per diluted share because their
effect would be anti-dilutive:
Stock Options
Warrants
Restricted Stock
Total
Share Based Compensation
2016
2015
1,665,420
535,301
32,714
2,233,435
1,901,298
64,981
67,077
2,033,356
The Company accounts for the issuance of equity awards to employees in accordance ASC Topic 715 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. Period compensation costs are included in selling, general and
administrative and research and development expenses.
The Company recognizes compensation expense related to stock option grants on a straight-line basis over the
vesting period.
Comprehensive Loss
The Company’s comprehensive loss is equal to its net loss for the years ended December 31, 2016 and 2015.
Segment Information
The Company adheres to the provisions of ASC Topic 280, which establishes standards for the way public business
enterprises report information about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial statements issued to shareholders.
Management has determined that it has only one reporting segment.
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 of goodwill and intangible assets, deferred
tax valuation allowances, allowances for doubtful accounts, revenue allocation of multi-element arrangements and
the fair value of options granted under the Company’s share based compensation plans. Due to the inherent
uncertainties involved in making estimates, actual results reported in future periods may be different from those
estimates.
Recent Accounting Pronouncements Not Yet Effective
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the
FASB and International Accounting Standards Board (“IASB”) to improve financial reporting by creating common
revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2014-
09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015,
F-11
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date by one year, with early adoption on the original effective date permitted. As a
result, ASU 2014-09 will be effective for annual and interim periods beginning after December 15, 2017.
The Company is in the process of evaluating the impact of its pending adoption of this ASU on revenue transactions,
including any impacts on associated processes, systems, and internal controls. The Company’s evaluation includes
the determination whether the unit of account (i.e., performance obligations) will change as compared to current
GAAP, as well as determining the standalone selling price of each performance obligation. Standalone selling prices
under the new guidance may not be substantially different from the Company’s current methodologies of
establishing fair value on multiple element arrangements. The Company has started reviewing each of its revenue
streams that may have an impact on its consolidated financial statements and is also assessing the capitalizing of its
sales commissions upon adoption of the new ASU and is in the process of evaluating the period over which to
amortize these capitalized costs. The Company continues to evaluate the impact of this guidance on its consolidated
financial statements and any preliminary assessments are subject to change and expects completion of this
evaluation by the second quarter of 2017.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”) which defines management’s responsibility to evaluate, at each annual and interim reporting period,
whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern within one year after the date the financial statements are issued and to provide related footnote disclosures
in certain circumstances. In connection with each annual and interim period, management must assess if there is
substantial doubt about the company’s ability to continue as a going concern within one year after the issuance
date. Disclosures are required if conditions give rise to substantial doubt. This standard is effective for all
companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early
adoption permitted. The adoption of ASU 2014-15 did not have a material impact on the Company’s consolidated
financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”) which changes the measurement principle for inventory from the lower of cost or market to the
lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new
guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016,
with early adoption permitted. The Company does not expect the adoption of ASU 2015-11 to have a material
impact on its consolidated financial statements,
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes which simplifies the presentation of deferred income taxes by eliminating the separate classification
of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet.
The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the
consolidated balance sheet. The amendments in this update are effective for annual periods beginning after
December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all
periods presented. Early adoption is permitted. The Company does not expect the adoption of ASU 2015-17 to have
a material impact 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 is expected to have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share Based Payment Accounting
which simplifies several aspects of the accounting for share-based payment transactions, including income tax
consequences, classification of awards, forfeitures and classification on the statement of cash flows. The provisions
F-12
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal
years. The Company will adopt the new standard in the first quarter of 2017 and does not expect this will not have a
material effect on its consolidated financial statements. The Company has elected to account for forfeitures as they
occur, rather than estimate expected forfeitures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Clarification of Certain
Cash Receipts and Cash Payments which would eliminate the diversity in practice related to the classification of
certain receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash
flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017
for public entities with early adoption permitted. The amendments in this update should be applied retrospectively
to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The
Company does not expect the implementation of this standard to 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.
3. ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from the Company’s customers and are presented net of allowance for
doubtful accounts. The components of accounts receivable, net are as follows:
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
4. PROPERTY AND EQUIPMENT
2016
2015
576,480 $
(74,354)
502,126 $
1,177,383
(18,411)
1,158,972
$
$
Property and equipment are comprised of the following as of December 31, 2016 and 2015:
Computer equipment
Furniture and fixtures
Leasehold improvements
Office equipment
Vehicles
Less – Accumulated depreciation and amortization
2016
2015
$
$
930,028 $
73,305
174,619
577,002
30,676
1,785,630
1,514,854
270,776 $
879,738
73,305
174,619
563,216
30,676
1,721,554
1,396,127
325,427
Depreciation expense for the years ended December 31, 2016 and 2015 amounted to $118,727 and $122,828,
respectively.
F-13
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
5. GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets
The changes in the carrying amount of intangible assets for the year ended December 31, 2016 and 2015 were as
follows:
Balance at beginning of year
Addition: Acquisition of patent
Deduction: Disposal of trademarks
Deduction: Amortization expense
Balance at end of year
2016
2015
$
2,470,127 $
-
-
$
(315,564)
2,154,563 $
3,307,797
125,000
(64,819)
(897,851)
2,470,127
The following table sets forth the components of intangible assets as of December 31, 2016 and 2015:
As of December 31, 2016
Estimated
Useful
Life
Adjusted
Carrying
Amount
Accumulated
Amortization
Net
Trade name
Patents and copyrights
Non-contractual customer
relationships
20 years $
17 years
590,172 $
1,242,842
(297,992 ) $
(644,231 )
292,180
598,611
15 years
$
3,268,568
5,101,582 $
(2,004,796 )
(2,947,019 ) $
1,263,772
2,154,563
As of December 31, 2015
Adjusted
Carrying
Amount
Accumulated
Amortization
Net
Trade name
Patents and copyrights
Non-contractual customer relationships
$
$
590,172 $
1,242,842
3,268,568
5,101,582 $
(271,924 ) $
(576,680 )
(1,782,851 )
(2,631,455 )
318,248
666,162
1,485,717
2,470,127
The following summarizes amortization of acquisition related intangible assets included in the statement of
operations:
Cost of sales
General and administrative
Years Ended December 31,
2016
2015
$
$
236,651 $
78,913
315,564 $
348,061
549,790
897,851
F-14
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
The Company expects that amortization expense for the next five succeeding years will be as follows:
2017
2018
2019
2020
2021
$315,564
$315,564
$290,897
$241,564
$241,564
These amounts are subject to change based upon the review of recoverability and useful lives that are performed at
least annually.
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. The Company had goodwill of $8,101,661 at December 31, 2016 and 2015. This goodwill resulted
from the acquisition of Mobilisa, Inc. and Positive Access Corporation.
For the years ended December 31, 2016 and 2015, the Company performed its annual impairment test of goodwill in
the fourth quarter. Under authoritative guidance, the Company 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. The Company performed the first step of the goodwill impairment test in
order to identify potential impairment by comparing fair value of the Company to its 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 the Company’s 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 the Company’s stock price. Although the Company believes 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.
For the years ended December 31, 2016 and 2015, the Company 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.
Accumulated impairment charges on goodwill through December 31, 2016 and 2015 are $30,085,862.
6. NOTE RECEIVABLE
On August 31, 2015, the Company sold its 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. The Company recognized a gain on the sale of approximately $109,000 which is included in interest and
other income for the year ended December 31, 2015. Total assets disposed include certain trade names associated
with the wireless assets with a net book value of approximately $65,000 and certain fixed assets with a net book
value of approximately $56,000. Any gain on contingent consideration will be recognized as it is earned.
Under the terms of the promissory note, monthly payments in the amount of $3,683 including principal and interest
at 4%, are to be made over a 60-month term expiring in August 2020. At December 31, 2016, the total note
receivable was $153,667, of which $38,758 and $114,909 is included in Other Current Assets and Notes Receivable,
net of current portion, respectively on the Consolidated Balance Sheets.
F-15
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
7. DEBT
Revolving Line of Credit
The Company has a revolving credit facility with Silicon Valley Bank that allows for maximum borrowings of
$2,000,000. The borrowings are secured by certain collateralized accounts totaling $2,000,000. The facility bears
interest at a rate of U.S. prime (3.75% at December 31, 2016). Interest is payable monthly and the principal is due
upon maturity on October 5, 2017. At December 31, 2016, there were no amounts outstanding under this facility
and unused availability under this facility was $2,000,000.
8. ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 2016 and 2015:
Professional fees
Payroll and related
Severance payment to former officer
Other
9. INCOME TAXES
2016
2015
73,999 $
310,996
91,460
43,502
519,957 $
172,766
313,003
-
50,547
536,316
$
$
The Company is subject to federal and state income taxes as regular (Subchapter C) corporation. As a result of
continuing losses for tax purposes, the Company has historically not paid income taxes and has recorded a full
valuation allowance against the net deferred tax asset.
The Company’s deferred tax assets are primarily the result of net operating losses (or NOLs). The Company has
recorded a valuation allowance against its net deferred tax assets at December 31, 2016 as it is more likely than not
that not all of the deferred tax assets will be realized. The valuation is based on management’s assessment that it is
more likely than not the NOL carryforwards may not be realized in the foreseeable future due to objective negative
evidence that the Company would not generate sufficient taxable income to realize the deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred tax assets for federal and state income taxes as of December 31, 2016 and
2015 are as follows:
$
Deferred tax assets:
Net operating loss carryforwards
Stock-based compensation
Reserves
Deferred rent
Research and development tax credits
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Depreciation
Reserves
Total deferred tax liabilities
Net deferred tax assets
Less: Valuation allowance
Deferred tax assets, net of allowance
$
F-16
2016
2015
2,760,000 $
121,000
-
24,000
166,000
3,071,000
(628,000)
(48,000)
(22,000)
(698,000)
2,373,000
(2,373,000)
- $
18,950,000
275,000
24,000
38,000
136,000
19,423,000
(698,000)
(83,000)
-
(781,000)
18,642,000
(18,642,000)
-
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
There were no tax interest or penalties recorded in the consolidated financial statements for the years ended
December 31, 2016 and 2015.
In March 2016, the Company completed an Internal Revenue Code Section 382 study which determined that a
cumulative three-year ownership change in excess of 50% had occurred in March 2016 due to a share repurchase.
As a result, the Company’s available NOL was reduced from $47.4 million to $2.2 million during the first quarter of
2016. The Company’s available NOL at December 31, 2016 was approximately $7 million. The federal and state
NOL’s are available to offset future taxable income and expire from 2017 through 2036 if not utilized.
The Company files numerous tax returns in various jurisdictions. The Company is not currently under examination
by any taxing authority, nor has the Company signed any waiver of the statute of limitations with any taxing
authority. The Company remains open to examination by major taxing jurisdictions from 2013 to date. The
Company believes there are no unresolved tax issues or tax claims likely to be material to its financial position.
The effective tax rate for the years ended December 31, 2016 and 2015 is different from the tax benefit that would
result from applying the statutory tax rates primarily due to the recognition of valuation allowances. In 2016, the
valuation allowance decreased approximately $16,269,000 primarily related to the reduction in the Company’s
available NOLs.
ASC Topic 740-10 requires evaluation of uncertain tax positions. As of December 31, 2016, the Company has no
material uncertain tax positions.
10. STOCKHOLDERS’ EQUITY
Series A Convertible Preferred Stock
In January 1997, the Board of Directors authorized the creation of a class of Series A Convertible Preferred Stock
with a par value of $.01. The Series A Convertible Preferred Stock is convertible into an equal number of common
shares at the holder’s option, subject to adjustment for anti-dilution. The holders of Series A Convertible Preferred
Stock are entitled to receive dividends as and if declared by the Board of Directors. In the event of liquidation or
dissolution of the Company, the holders of Series A Convertible Preferred Stock are entitled to receive all accrued
dividends, if applicable, plus the liquidation price of $1.00 per share. As of December 31, 2016, and 2015, there
were no outstanding shares of Series A Convertible Preferred Stock.
Stock Options and Share Based Compensation
In order to retain and attract qualified personnel necessary for the success of the Company, the Company adopted
the 2015 Omnibus Incentive Plan (the “Plan”) covering up to 3,000,000 of the Company’s common shares, pursuant
to which officers, directors, key employees and consultants to the Company are eligible to receive incentive stock
options, nonqualified stock options and restricted stock units. All of the Plans prior to Company’s 2015 Omnibus
Incentive Plan have been closed. The Compensation Committee of the Board of Directors administers this Plan and
determines the terms and conditions of options granted, including the exercise price. This Plan generally provides
that all stock options will expire within ten years of the date of grant. Incentive stock options granted under this Plan
must be granted at an exercise price that is not less than the fair market value per share at the date of the grant and
the exercise price must not be less than 110% of the fair market value per share at the date of the grant for grants to
persons owning more than 10% of the voting stock of the Company. This Plan also entitles non-employee directors
to receive grants of non-qualified stock options as approved by the Board of Directors.
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.
F-17
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the
following assumptions and weighted average fair values as follows:
Valuation assumptions:
Grant price
Exercise price
Expected dividend yield
Expected volatility
Expected life (in years)
Risk-free interest rate
Twelve Months Ended
December 31,
2016
2015
$1.01 - $2.79
$1.01 - $2.79
0%
96.77% - 98.05%
5
0.94% - 2.10%
$1.15 - $1.56
$1.15 - $1.56
0%
95.5%-99.2%
5
1.37% - 1.62%
Stock option activity under the Plans during the periods indicated below is as follows:
Number of
Shares
Subject to
Issuance
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2014
235,478 $
5.95
4.44 years
$
-
Granted
Forfeited or expired
Exercised
Outstanding at December 31, 2015
Granted
Forfeited or expired
Exercised
Outstanding at December 31, 2016
1,689,882 $
(23,749)
(313)
1,901,298 $
269,543 $
(160,294)
(345,127)
1,665,420 $
1.18
25.82
3.12
1.46
1.31
2.58
1.13
1.40
4.51 years
$
-
3.62 years
$
2,414,446
Exercisable at December 31, 2016
1,051,358 $
1.38
3.60 years
$
1,538,447
The following is a summary of stock options as of December 31, 2016:
Range of Exercise Prices
$1.15 to $1.56
$1.75 to $2.79
$3.12 to $5.68
Options Outstanding
Options Exercisable
Number of
Options
1,493,298
61,000
111,122
1,665,420
Weighted-
average
Remaining Life
3.66 years
4.53 years
2.63 years
3.62 years
Weighted-
average
Exercise
Price
Weighted-
average
Exercise
Price
Number of
Options
$
$
$
$
1.16
2.10
4.19
1.40
969,236 $
11,000 $
71,122 $
1,051,358 $
1.16
2.79
4.11
1.38
The weighted-average fair value of the options granted during the years ended December 31, 2016 and 2015 is $0.96
and $0.86, respectively.
F-18
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2016, the Company had 900,013 shares available for future grants under the Plans.
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. The Company issues RSUs to certain directors as compensation which
vest with the passage of time. The vesting of all RSUs is contingent on continued board services.
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.
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic
Value
Number of
Shares
Outstanding at December 31, 2014
31,807
$
3.93 $
Granted
Vested and Settled in Shares
Canceled / Expired
Outstanding at December 31, 2015
Granted
Vested and Settled in Shares
Canceled / Expired
Outstanding at December 31, 2016
122,119
(86,849)
-
67,077
86,271
(120,634)
-
32,714 $
1.24
1.98
-
1.56 $
1.76
1.60
-
1.89 $
-
-
26,010
As of December 31, 2016, there was $507,727 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 1.8 years.
Share based compensation expense for the years ended December 31, 2016 and 2015 is as follows:
Compensation cost recognized:
Stock options
Restricted stock units
Years Ended December 31,
2016
2015
$
$
775,338 $
160,561
935,899 $
686,797
191,315
878,112
Share based compensation is included in operating expenses as follows:
General and administrative
Research and development
Years Ended December 31,
2015
2016
$
$
873,392
62,507
935,899
$
$
829,208
48,904
878,112
F-19
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
The Company has a net operating loss carry-forward as of December 31, 2016, and no excess tax benefits for the tax
deductions related to share based awards were recognized in the statements of operations. Additionally, no
incremental tax benefits were recognized from stock options exercised in 2016 that would have resulted in a
reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided
by financing activities.
All stock options have been issued with an exercise price that is equal or above the fair market value of the
Company’s Common Stock on the date of grant.
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 December 31, 2016, the Company had 535,301
remaining warrants outstanding which are exercisable through 2019. As of December 31, 2016, 153,000 warrants
were exercised at a price of $2.20 per share. No warrants were exercised in 2015.
11. ISSUANCE OF COMMON STOCK
On January 14, 2015, the Company completed a public offering of 4,857,143 shares of its common stock, offered to
the public at $1.75 per share. Net proceeds to the Company from this offering were approximately $7,845,000 after
deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling
approximately $214,000 were recorded as a reduction to the net proceeds on the consolidated statement of
stockholders’ equity.
On February 24, 2016, the Company entered into a stock repurchase agreement with two former directors, who were
also members of management (the “Former Executives”) for the repurchase of all 979,114 shares owned by the
Former Executives of the Company’s common stock for $1,096,608. The transaction was finalized on March 4,
2016.
On June 15, 2016, the Company completed a public offering of 1,200,000 shares of its common stock and five year
warrants to purchase 600,000 shares with an exercise price of $2.20 per share, at a combined public offering of
$1.75 per share and half-warrant. Net proceeds to the Company from this offering were approximately $1,902,000
after deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling
approximately $124,000 were recorded as a reduction to the net proceeds on the consolidated statement of
stockholders’ equity. As part of the offering, there was an overallotment option for the underwriters to purchase up
to 180,000 shares of common stock at a purchase price of $1.63 per share and/or up to 90,000 additional warrants at
a purchase price of $0.0001 per warrant. On June 20, 2016, the underwriters exercised their right to purchase
23,320 warrants resulting in net proceeds of $2 which are included in these net proceeds. In November and
December 2016, certain warrant holders exercised their right to purchase 153,000 shares of our common stock
which resulted in net proceeds of approximately $337,000.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases an office in Jericho, New York which expires in March 2018. Future minimum lease payments
under these lease agreements are as follows for the years ended December 31:
2017
2018
Total
$
$
322,913
82,327
405,240
Rent expense for the years ended December 31, 2016 and 2015 amounted to $406,308 and $409,460, respectively.
F-20
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
Royalty and License Agreements
The Company entered into an agreement with a former officer of the Company during 1996 to license certain
software. The agreement stipulated, among other provisions, that the officer would receive royalties equal to a
percentage of the Company’s gross sales. This agreement was terminated in May 1999 and was superseded by a new
agreement which calls for payment of royalties of 0.005% on gross sales from $2,000,000 to $52,000,000 and
.0025% on gross sales more than $52,000,000 pertaining to those patents on which Mr. Messina was identified as an
inventor. As of December 31, 2016, total fees paid under this agreement amounted to approximately $1,800.
Legal Proceedings
The Company is not aware of any infringement by our 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.
Severance and Change-in-Control Agreements
On September 30, 2014, the Company entered into a Severance Agreement with Bill White, the Company’s Chief
Financial Officer. Under the agreement, if Mr. White is terminated for any reason other than cause, the Company
would pay Mr. White one (1) year base salary in accordance with the Company’s regular payroll schedule. Mr.
White would also be entitled to a gross amount equal to any quarterly bonus target applicable during the quarter,
accelerated vesting of all outstanding stock options and coverage of health benefits for a period of up to 12 months.
The agreement has a term of three years.
Effective October 1, 2014, the Company entered into an Executive Employment Agreement with Dr. William Roof,
the Company’s Chief Executive Officer. The agreement provides for an annual base salary of $250,000. Under the
agreement, if Dr. Roof is terminated for any reason other than cause, it would pay Dr. Roof the greater as follows:
(a) 12 months if the Separation Date occurs less than 24 months after commencement of Dr. Roof’s employment as
Chief Executive Officer, and (b) 24 months if the Separation Date occurs 24 months or more after the
commencement of Dr. Roof’s employment as Chief Executive Officer.
On May 19, 2016, Mr. Robert Williamsen, the Company’s Vice President and Chief Revenue Officer departed the
Company, via mutual consent, to pursue other interests. Pursuant to Mr. Williamsen’s employment agreement with
the Company, Mr. Williamsen will receive a payment of his monthly salary, subject to all applicable withholdings,
for a period of 12 months following May 19, 2016, which the first payment commenced on July 7, 2016, and partial
reimbursement for continued health, dental, and vision coverage through August 2016. Pursuant to the terms of Mr.
Williamsen’s stock option agreements, Mr. Williamsen exercised his vested stock option awards. At the time of
separation, the Company immediately recorded an expense for this one-year base salary of $225,000 and accelerated
his portion of the Company’s stock-based compensation of approximately $149,000. At December 31, 2016, the
remaining amount of this severance liability of approximately $91,000 is included in Accrued Expenses on the
Consolidated Balance Sheets.
Each of the agreements requires the executive to devote substantially all his time and efforts to our business and
contains non-competition and nondisclosure covenants of the officer for the term of his employment and for a one-
year period thereafter. Each agreement provides that we may terminate the agreement for cause.
401(k) Plan
The Company has a retirement savings 401(k) plan. The plan permits eligible employees to make voluntary
contributions to a trust, up to a maximum of 35% of compensation, subject to certain limitations. The Company has
elected to contribute a matching contribution equal to 50% of the first 6% of an eligible employee’s deferral
F-21
INTELLICHECK MOBILISA, INC.
NOTES TO FINANCIAL STATEMENTS
election. The Company may also make discretionary contributions, subject to certain conditions, as defined in the
plan. The Company’s matching contributions were $27,163 and $32,398 for 2016 and 2015, respectively.
13. RELATED PARTY TRANSACTIONS
On September 30, 2014, the CEO and a Senior Vice President (collectively, the “Executives”), who were also board
members, retired from the Company and simultaneously resigned from the board of directors. In connection with
the separation, the Company entered into a separation and consulting agreement with the Executives. Included as
part of the arrangement, the Company committed to payments totaling $587,500 to be made over a period of 15
months. In exchange for the consideration, the Executives agreed not to compete with the Company, solicit any
employee, contractor or consultant of the Company to terminate employment or contractual relationship with the
Company, as well refrain from other activities, as defined in the agreement. At September 30, 2014, the Company
recorded the future payments of the agreement as a liability and as a non-compete intangible asset totaling
$587,500. The costs of the non-compete were amortized over the 15-month term of the agreement. For the years
ended December 31, 2015 and 2014, amortization expense recognized was $470,000 and $117,500, respectively.
The Company made payments under this agreement in 2015 and 2014 of $417,500 and $170,000, respectively and
the balance was paid in full as of December 31, 2015.
Mobilisa leased office space from a company (“Lessor Company”) that is wholly-owned by two former directors,
who were also members of management. The Company entered into a 10-year lease for the office space ending in
2017. The base annual rent for this facility was $96,010 was subject to annual increases based on the increase in the
CPI index plus 1%. On February 24, 2016, the Company and the Lessor Company entered into a lease amendment
agreement reducing the space under this lease that took effect on March 31, 2016 thereby closing its office facility
and occupied storage space that expired on December 31, 2016. As a result of this amended agreement, the
Company made a $100,000 termination payment to the Lessor in full satisfaction the Company’s remaining
obligations under its original lease. For the years ended December 31, 2016 and 2015, total rent payments for this
facility was $124,001 (including this termination payment) and $94,783, respectively.
On February 24, 2016, the Company entered into a stock repurchase agreement with the Executives for the
repurchase of all 979,114 shares owned by the Executives of the Company’s common stock for $1,096,608. The
transaction was finalized on March 4, 2016.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited financial data for each of the Company’s last eight fiscal quarters.
Year Ended December 31, 2016
Year Ended December 31, 2015
First
Quarter
Second
Quarter
Third
Quarter
Second
Quarter
(Dollars in thousands, except per share data)
First
Quarter
Fourth
Quarter
Third
Quarter
Fourth
Quarter
Income Statement Data:
Revenues
Gross profit
Loss from operations
Net loss
Net loss per common share:
$
951 $
788
(2,149)
(2,143)
940 $ 1,214 $
749
(1,779)
(1,775)
946
(730)
(727)
734 $
587
(1,092)
(1,090)
987 $ 2,292 $ 2,199 $ 1,537
976
595
(1,556)
(1,327)
(1,550)
(1,302)
1,041
(1,218) (1,379)
(1,214) (1,268)
1,396
Basic
Diluted
$
$
(0.22) $ (0.19) $ (0.07) $ (0.10) $ (0.14) $ (0.12) $
(0.22) $ (0.19) $ (0.07) $ (0.10) $ (0.14) $ (0.12) $
(0.13) $ (0.16)
(0.13) $ (0.16)
Due to rounding, quarterly net loss per share may not add up to the total net loss for the year.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant
had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
March 30, 2017
INTELLICHECK MOBILISA, INC.
By: /s/ William H. Roof
William H. Roof, Ph.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date:
March 30, 2017
Date:
March 30, 2017
Date:
March 30, 2017
Date:
March 30, 2017
Date:
March 30, 2017
Date:
March 30, 2017
Date:
March 30, 2017
INTELLICHECK MOBILISA, INC.
By: /s/ William H. Roof
William H. Roof, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Bill White
Bill White
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Michael D. Malone
Michael D. Malone, Chairman and Director
By: /s/ Emil R. Bedard
Lt. Gen. Emil R. Bedard, Director
By: /s/ Jack A. Davis
Jack A. Davis, Director
By: /s/ William P. Georges
William P. Georges, Director
By: /s/ Guy L. Smith
Guy L. Smith, Director
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Intellicheck Mobilisa, Inc. on Form
S-1 (333-201168), S-3 (No. 333-214193) and Form S-8 (Nos. 333-211298, 333-204308, 333-151097 and 333-
143448) of our report dated March 30, 2017, on our audits of the consolidated financial statements as of December
31, 2016 and 2015 and for each of the years then ended, which report is included in this Annual Report on Form 10-
K to be filed March 30, 2017.
/s/ EISNERAMPER LLP
Iselin, New Jersey
March 30, 2017
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William H. Roof, certify that:
1.
I have reviewed this annual report on Form 10-K of Intellicheck Mobilisa, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
Date: March 30, 2017
/s/ William H. Roof
Name: William H. Roof, Ph.D.
Title: Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bill White, certify that:
1.
I have reviewed this annual report on Form 10-K of Intellicheck Mobilisa, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
Date: March 30, 2017
/s/ Bill White
Name: Bill White
Title: Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code), each of the undersigned officers of Intellicheck Mobilisa, Inc. (the
“Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2016 of the Company fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in
the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated:
March 30, 2017
Dated:
March 30, 2017
/s/ William H. Roof
Name: William H. Roof, Ph.D.
Title: Chief Executive Officer
/s/ Bill White
Name: Bill White
Title: Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not
being filed as part of the Form 10-K or as a separate disclosure document.
BR45817G-0417-10K