UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No.: 000-50296
Intellicheck, 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.)
535 Broad Hollow Road, Suite B51, Melville, NY 11747
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (516) 992-1900
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value
(Title of Class)
NYSE AMERICAN
(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 [X]
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 [X]
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated
filer [ ]
Accelerated
filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting
company [X]
Emerging Growth
Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting stock held by non-affiliates of the Issuer: $28,833,510 (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,
2018)).
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)
15,638,765
(No. of Shares Outstanding at March 21, 2019)
DOCUMENTS INCORPORATED BY REFERENCE: Proxy for Annual Meeting of Stockholders May 8, 2019
TABLE OF CONTENTS
PART I
Item 1.
Business ..............................................................................................................................................
Item 1A. Risk Factors ........................................................................................................................................
Item 1B. Unresolved Staff Comments ...............................................................................................................
Properties ............................................................................................................................................
Item 2.
Item 3.
Legal Proceedings ..............................................................................................................................
Item 4. Mine Safety Disclosures .....................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .................................................................................................................................
Item 6.
Selected Financial Data ......................................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..............
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................
Item 8.
Financial Statements and Supplementary Data ..................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ...........
Item 9A. Controls and Procedures .....................................................................................................................
Item 9B. Other Information ...............................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance .................................................................
Item 11. Executive Compensation ....................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ...................................
Item 14. Principal Accounting Fees and Services ............................................................................................
PART IV
Item 15. Exhibits and Financial Statement Schedules ......................................................................................
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i
Item 1. Business
OVERVIEW
PART I
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. On May 4, 2017, with the approval of our shareholders, we changed our name to Intellicheck, Inc.
(“Intellicheck,” “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. Effective March 19, 2018,
we relocated our corporate headquarters from Jericho, New York to Melville, New York. On December 31, 2018, we
formally merged the Mobilisa and Positive Access subsidiaries into one corporation under the name Intellicheck, Inc.
We are a prominent technology company 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®, a 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.
We plan to expand our business in the near term by pursuing a strategy designed to increase market share in our
existing markets and expand into new product markets that are expected to benefit from fraud prevention, enhanced safety
and regulatory compliance. 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. We have also
incorporated biometric, facial recognition and other enhancements to several of our current product offerings.
We plan to leverage our intellectual property in the markets we are targeting to strengthen our competitive
position.
Our primary businesses include Identity Systems products, which include commercial applications of identity card
reading authentication 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, e-commerce as well as other types of fraud such as identity theft
that principally use fraudulent identification documents 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
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.
1
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 AAMVA/ANSI/ISO standards). Today, all
50 states, the District of Columbia and all 13 Canadian 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 can perform 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
many 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 can 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
● 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.
false narcotic prescriptions;
committing refund fraud;
●
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 if it is fraudulent. Since merchants are facing significant economic losses due to
these frauds, we believe that a document authentication system which can accurately read the electronically stored
information is needed. We possess patented technology that provides an analysis of the 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.
OUR PRODUCTS AND SERVICES
Our Products and Services are generally sold as Software as a Service (“SaaS”) where customers pay for our cloud
based service.
Identity Systems Products and Services
Our Identity Systems are marketed to the Commercial and Government identification sectors.
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Commercial Identification
ID Check® Family — Solutions and Benefits
Our 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 proprietary technology,
enables all 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 PORT 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, vaping, cannabis 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.
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 monthly, quarterly, annually or longer subscriptions for use of the software.
Retail ID®
Our Retail ID® application is a proven identity authentication solution that can instantly and accurately
authenticate identification documents such as a driver license and is available in several deployment strategies. This
solution is designed to deliver better service, increase loyalty and credit card programs and reduce fraud. Retail ID® reduces
liability risks and ensures compliance by checking all retrieved data against each state’s privacy laws and regulatory
requirements.
Retail ID Online®
Retail ID Online® 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.
3
Retail ID Mobile®
Retail ID Mobile® provides the fraud reduction benefits of Retail ID®, without the time and expense of
integrating the Retail ID® application into the customer’s point of sale system. With Retail ID Mobile®, 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 ID®
Age ID® 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 ID® 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 ID®
Guest ID® 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 ID® 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.
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.
4
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 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.
PORT ID™
Provides ports and facilities with an innovative, integrated, efficient way to validate ID credentials of individuals
requesting entry to secure areas. Our Transportation Worker Identification Credential (TWIC® - TWIC is a federally
registered trademark owned by the Department of Homeland Security and use herein does not imply endorsement) reading
software and hardware meets all TSA requirements for portable readers and is listed on the TSA’s QTL (Qualified
Technology List). The PORT™ 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.
5
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 proprietary
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 proprietary 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.
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 Idemia Identity & Security USA. 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 geographic area to provide focus and proximity to build solid long-term
relationships. 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.
Transportation Worker Identification Credential 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 ® reader applications to provide customers with the
benefits of each product in a single device and was 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.
6
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;
■ Revenue sharing and marketing arrangements through strategic alliances and partnerships; and
■ Sale of software upgrades and extended maintenance programs
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
authentication 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
■ Auto dealerships and rental car agencies
■ Casinos for enrollment of guests
■ Hospital patient admissions
■ Lodging Industry
■ Airlines
Commercial fraud protection
■ Mass merchandisers and retailers
■ Banks and other financial institutions
■ Credit unions
■ Credit card issuers
■ Check cashing services
■ Auto dealerships and rental car agencies
■ Casino cage operations
■ Hospitals, medical facilities and health plans
■ Lodging Industry
■ Pharmacies
Access control
■ Airports and airlines
■ Departments of Motor Vehicles
■ Notable buildings
■ Court houses
■ Nuclear facilities
■ Oil refineries and storage facilities
■ Prisons
■ Law enforcement agencies
■ Military establishments
■ College campuses
■ Department of Homeland Security
■ Bus, rail and port facilities
Age verification
■ Bars and night clubs
■ Convenience stores
■ Grocery chains
■ Restaurants
■ Cannabis Industry
Government Identity Systems
■ 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 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.
7
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
■ Customs
■ Department of Homeland Security
■ Drug Enforcement Administration
■ Local Sheriffs
■
■ Department of Transportation
■ Border Patrol
Intelligence Agencies
MARKETING AND DISTRIBUTION
Commercial Identity Systems
Our objective is to become a 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 financial institutions, mass merchandisers,
government, airlines, airports, high profile buildings or infrastructure, grocery, convenience and pharmacy chains, and
casinos.
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
■ Web seminars, as well as our own website; and
groups and trade associations;
■ Trade publications;
■ Trade shows;
■ Various conventions and industry specific seminars.
We intend to continue to develop and market other related software applications.
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.
8
We have our corporate headquarters in Melville, New York to fully support our current and potential customers.
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 2018, our top ten customers accounted for
approximately 52% of total revenues. In 2017, our top ten customers accounted for approximately 57% 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 our Identity System products are subject to regulation, such as on data protection and storage,
by government authorities. We work on an ongoing basis with our customers to facilitate their compliance with such
regulations. 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 Idemia USA 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 Zebra and Honeywell are offering an embedded driver’s license reading solution on a
tether scanner. The solutions simply read the barcode as opposed to authenticating.
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. Most 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 (“R&D”) 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, 2018 and 2017 was $2,904,166 and
$1,916,107, respectively.
9
INTELLECTUAL PROPERTY
We currently hold sixteen (16) U.S. patents, one (1) Canadian patent and one (1) United Kingdom patent. At
present, we have six 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’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. For example, information on at least two different
documents can be 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.
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.
10
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 were also granted two patents in 2016 in Canada. The first patent is related to a system and method for
comparing documents. The second patent is related to identity matching in response to threat levels.
We were granted one patent in 2017 that was also a continuation of an earlier filed application. The patent is
related to checking the validity of identification documents using a remote database.
In 2018, we were granted one patent that was also a continuation of an earlier filed application to a document
comparison that compares information contained in documents.
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 a
former 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 this former officer was identified as an inventor. Cumulatively through December 31,
2018 total fees paid under this agreement were approximately $2,000.
EMPLOYEES
As of March 21, 2019, we had thirty-four full-time employees. Three are engaged in executive management,
nineteen in information technology, nine in sales and marketing and three 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.
Item 1A. Risk Factors
RISK FACTORS
Risks Related to Our Business and Industry
We have incurred 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 incurred net losses of $3,963,576 and $6,020,505 for the fiscal years ended December 31, 2018 and 2017,
respectively, and our accumulated deficit was $114,386,401 as of December 31, 2018. 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.
11
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.
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.
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:
establish and maintain relationships with distributors;
■ build and train our sales force;
■
■ 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.
■
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.
12
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 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 21, 2019, 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.
13
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.
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.
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.
14
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.
Security breaches and other disruptions could potentially compromise our information and expose us to liability,
which would be harmful to our business.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our
proprietary business information and that of our customers, and personally identifiable information of our customers, their
customers our employees, in our data centers and on our networks. The secure processing, maintenance and transmission,
when applicable, of this information is critical to our operations and business strategy. Despite our security measures, our
information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error,
malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could
be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal
claims or proceedings, potential liability under laws that protect the privacy of personal information, and regulatory
penalties. This in turn could disrupt our operations and the services we provide to customers, damage our reputation, and
potentially cause a loss of confidence in our products and service offerings, which could adversely affect our business and
competitive position.
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.
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.
15
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.
Our percentage of revenues and customer concentration is significant.
Revenues from our ten largest customers accounted for 52% of total net revenues in 2018 and 57% of total net
revenues in 2017. Two customers accounted for 30% and 26% of revenues in 2018 and 2017, respectively. Our loss of one
or more significant customers could have a significant adverse impact on our business, financial condition and results of
operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters is currently located in Melville, New York, where we occupy approximately 5,400
square feet of office space pursuant to a lease that expires on March 31, 2021. 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
throughout the country. 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
16
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.
2017
First quarter ..................................................................................... $
Second quarter ................................................................................. $
Third quarter .................................................................................... $
Fourth quarter .................................................................................. $
2018
First quarter ..................................................................................... $
Second quarter ................................................................................. $
Third quarter .................................................................................... $
Fourth quarter .................................................................................. $
Low
High
1.98 $
2.78 $
2.42 $
2.11 $
1.60 $
1.74 $
1.91 $
1.96 $
3.10
4.20
3.84
3.05
2.87
2.36
2.75
2.63
2019
First quarter* ................................................................................... $
2.10 $
2.76
* Portion of first fiscal quarter through March 20, 2019.
(b) As of March 20, 2019, there were 47 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, 2018.
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
The following table provides information as of December 31, 2018, with respect to the shares of our common
stock that may be issued under our existing equity compensation plans.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights (a)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
1,072,332 $
$
1,072,332 $
1.44
N/A
1.44
746,103
N/A
746,103
Plan Category
Equity compensation plans approved by
security holders (1) ........................................
Equity compensation plans not approved
by security holders .......................................
Total .........................................................
(1) Represents 1,020,534 options under the 2015 Omnibus Incentive Plan and 51,798 options under the 2006
Equity Incentive Plan.
(e) Recent Sales of Unregistered Securities
None.
(f) Repurchases of Equity Securities
There were no shares purchased during 2018.
17
(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, 2018, are derived from our financial statements.
The selected financial data should be read in conjunction with the financial statements as of December 31, 2018 and 2017
and for each of the two years in the period ended December 31, 2018, 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:
Revenues .................................................... $
Loss from operations .................................
Net loss ......................................................
Net loss per common share
Basic ......................................................
Diluted ...................................................
Common shares used in computing per
share amounts
2014
Years Ended December 31,
2015
2017
2016
(In thousands, except per share data)
2018
6,613 $
(7,645 )
(7,644 )
7,015 $
(5,480 )
(5,334 )
3,839 $
(5,750 )
(5,735 )
3,598 $
(6,080 )
(6,021 )
(1.59 )
(1.59 )
(0.55 )
(0.55 )
(0.58 )
(0.58 )
(0.48 )
(0.48 )
4,433
(4,093 )
(3,964 )
(0.26 )
(0.26 )
Basic ......................................................
Diluted ...................................................
4,801
4,801
9,658
9,658
9,915
9,915
12,429
12,429
15,542
15,542
2014
2015
As of December 31,
2016
(In thousands)
2017
2018
Balance sheet data:
Cash ........................................................... $
Working capital .........................................
Total assets ................................................
Total liabilities ...........................................
Stockholders’ equity ..................................
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
8,010 $
7,340
17,882
1,873
16,009
4,376
4,244
14,461
1,541
12,920
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a prominent 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®, a 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.
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 (“GAAP”) 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 consideration and valuation of goodwill and 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.
18
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, 2018,
the balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and
amortization and impairments, were $264,583, $8,101,661 and $306,575, respectively. As of December 31, 2017, the
balances of property and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization
and impairments, were $211,602, $8,101,661 and $463,578, 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 as of December 31, 2018 and 2017. This goodwill resulted from the acquisition
of Mobilisa, Inc. and Positive Access Corporation.
For the years ended December 31, 2018 and 2017, we performed our annual impairment test of goodwill in the
fourth quarter. Under authoritative guidance, we can use industry and Company specific qualitative factors to determine
whether it is more likely than not that impairment exists, before using a two-step quantitative analysis. Events or changes
in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market
conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
We performed the first step of the goodwill impairment test in order to identify potential impairment by comparing our fair
value of the Company to our carrying amount, including goodwill. The fair value was determined using the weighting of
certain valuation techniques, including both income and market approaches which include a discounted cash flow analysis,
an estimation of an implied control premium, in addition to our market capitalization on the measurement date. The implied
control premium selected was developed based on certain observable market data of comparable companies. The market
capitalization is sensitive to the volatility of our stock price. Although we believe that the factors considered in the
impairment analysis are reasonable, changes in any one of the assumptions used could have produced a different result
which may have led to an impairment charge. Any future impairment loss could have a material adverse effect on our long-
term assets and operating expenses in the period in which impairment is determined to exist.
For the years ended December 31, 2018 and 2017, we determined that the fair value was more than our carrying
amount and therefore the second step of the goodwill impairment test was not required.
Intangible Assets
Intangible assets include trade names, patents 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 Accounting Standards Codification (“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.
19
As a result of a projected loss of revenue from certain customers moving to another platform along with a shift in
our marketing strategy for 2018, we performed a quantitative impairment test as of December 31, 2017 for the patents,
tradenames and customer relationships acquired in the Mobilisa acquisition. We utilized the income approach to test our
patent and tradenames, specifically the Relief-from-Royalty method, which assumes that a user of that intangible asset
would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring
the intangible asset, the user avoids these payments. As a result of the analysis, $250,582 and $287,928, respectively, of
impairment was recorded due to the decline in the valuation of tradenames and patents. We utilized the income approach
to test our customer relationships, specifically the Multi-Period Excess Earnings Method, which estimates the cash flows
attributable to the customer relationships, after considering the return associated with other contributing assets. As a result
of the analysis, $836,912 of impairment was recorded due to the decline in the valuation of the customer relationships.
Application of the impairment test requires judgement, including determination of royalty rates, and projecting revenue
attributable to the assets in order to determine fair value. These impairments, totaling $1,375,422, are recorded as
Impairment of Intangible Assets on our Consolidated Statements of Operations. No impairments were recognized during
the year ended December 31, 2018.
Revenue Recognition and Deferred Revenue
Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from
Contacts with Customers (“ASC 606”). In accordance with ASC 606, our analysis indicated that there was no change to
how we record revenue and that the standard only impacted enhanced disclosure regarding revenue recognition, including
disclosures of revenue streams, performance obligations and the related judgments and estimates necessary to apply the
new standard.
ASC 606 was applied using the modified retrospective method. There was no cumulative effect of the initial
application to be recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative
periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition.
The majority of license fees and services revenue are generated from a combination of fixed-price and per-scan
contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity
document, such as a driver’s license, with our software. Under the fixed-price revenue model customers are charged a fixed
monthly fee either per device or physical business location to access our software. In certain instances, customization
services are determined to be essential to the functionality of the delivered software. Under ASC 606, revenue is recognized
when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be
received in exchange for those goods or services. We measure revenue based on the consideration specified in a customer
arrangement, and revenue is recognized when the performance obligations in an arrangement are satisfied. A performance
obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is
allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit
of the performance obligation. Customers typically receive the benefit of our services as they are performed. Substantially
all customer contracts provide that we are compensated for services performed to date.
Invoicing is based on schedules established in customer contracts. Payment terms are generally established at 30
days from the invoice date. Product returns are recorded as a reduction to revenue.
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales
incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods
or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange
for those goods or services. Furthermore, we recognize revenue when we satisfies a performance obligation by transferring
control over a product or service to a customer.
Stock-Based Compensation
We account for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which
requires that the cost resulting from all share based payment transactions be recognized in the financial statements. This
pronouncement establishes fair value as the measurement objective in accounting for share based payment arrangements
and requires all companies to apply a fair value based measurement method in accounting for all share based payment
transactions with employees.
Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and net operating loss carry forwards. Deferred tax assets and liabilities are measured using expected tax rates in effect for
the year in which those temporary differences are expected to be recovered or settled. We have recorded a full valuation
allowance for our net deferred tax assets as of December 31, 2018 and 2017, due to the uncertainty of the realizability of
those assets.
20
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 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, 2018
TO THE YEAR ENDED DECEMBER 31, 2017
REVENUES. Revenues for the year ended December 31, 2018 increased 23% to $4,433,000 compared to
$3,598,000 for the year ended December 31, 2017. The increase in revenues in 2018 is a primarily the result of higher
commercial revenues offset by a decrease in Defense ID® revenues. Software as a Service (“SaaS”) revenue, which consists
of software licensed on a subscription basis, increased $1,037,000 or 63% to $2,696,000 for the year ended December 31,
2018 compared to $1,659,000 for the year ended December 31, 2017.
GROSS PROFIT. Gross profit increased by $970,000 to $4,047,000 for the year ended December 31, 2018 from
$3,076,000 in the year ended December 31, 2017. Our gross profit, as a percentage of revenues, was 91% and 85% in 2018
and 2017, respectively. The increase in percentage in 2018 is due to higher revenues on our SaaS model and product mix.
As discussed previously, we believe our margins will normalize in the 85% to 90% range.
OPERATING EXPENSES. Operating expenses, which consist of selling, general and administrative expenses,
research and development expenses and an impairment charge on our intangible assets, decreased by $1,017,000 or 11%
to $8,140,000 for the year ended December 31, 2018 from $9,157,000 for the year ended December 31, 2017. Selling,
general and administrative expenses decreased 11% to $5,236,000 for the year ended December 31, 2018 from $5,865,000
for the year ended December 31, 2017, as a result of the impact of severance costs in the prior year, reductions in legal
fees, facility expenses and lower stock-based compensation costs offset by increases in sales personnel and expanded
marketing efforts. Research and development expenses increased 52% to $2,904,000 for the year ended December 31,
2018 from $1,916,000 for the year ended December 31, 2017, due to increased headcount for development personnel and
accelerated research and development efforts. We recognized an impairment charge on our intangible assets of $1,375,000
for the year ended December 31, 2017 which is fully described in Critical Accounting Policies and the Use of Estimates.
INTEREST AND OTHER INCOME. Interest and other income was $130,000 for the year ended December 31,
2018 as compared to $60,000 during the year ended December 31, 2017.
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 $3,964,000 for the year ended
December 31, 2018 as compared to a net loss of $6,021,000 for the year ended December 31, 2017.
Liquidity and Capital Resources (All figures were rounded to the nearest $1,000)
As of December 31, 2018, we had cash of $4,376,000, working capital (defined as current assets minus current
liabilities) of $4,244,000, total assets of $14,461,000 and stockholders’ equity of $12,920,000.
For the year ended December 31, 2018, our cash decreased by $3,634,000. Cash used in operating activities was
$4,221,000 for the year ended December 31, 2018 as compared to cash used in operating activities of $3,745,000 for the
year ended December 31, 2017. We used cash of $101,000 in investing activities for the year ended December 31, 2018
compared to cash generated from investing activities of $5,000 for the year ended December 31, 2017. Cash generated in
financing activities was $688,000 for the year ended December 31, 2018 as compared to $8,658,000 for the year ended
December 31, 2017 as a result of the capital raise for the year ended December 31, 2017.
On August 4, 2017, we completed a public offering of 4,168,750 shares of its common stock, offered to the public
at $2.25 per share. Net proceeds from this offering were approximately $8,670,000 after deducting underwriting discounts
and commissions paid by the Company. Direct offering costs totaling approximately $157,000 were recorded as a reduction
to the net proceeds on the consolidated statements of stockholders’ equity.
21
During 2018 we had a revolving credit facility with Northwest Bank (“Northwest”) that allows for borrowings to
the lesser of (i) $2,000,000 or (ii) 95% of the balance in our money market account less $250,000. The borrowings are
secured by our existing deposit and money market accounts with Northwest. The facility bears interest at a rate consistent
with Northwest’s money market account (1.51% at December 31, 2018) plus 3%. Interest is payable monthly and the
principal is due upon maturity on May 22, 2019. As of December 31, 2018, there were no amounts outstanding under this
facility and unused availability under this facility was $2,000,000.
On January 10, 2019 we terminated the above facility with Northwest and on February 6, 2019 we entered into a
similar facility with Citibank that allows borrowings up to $2,000,000 and are secured by collateralized accounts. The
facility bears interest at a rate of Citibank’s Base Rate minus 2%. Interest is payable monthly. As of March 21, 2019, 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.
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 and other income, income taxes, impairments of long-lived assets and goodwill,
depreciation, amortization and stock-based compensation expense. Adjusted EBITDA is provided to investors to
supplement the results of operations reported in accordance with GAAP. Management believes that Adjusted EBITDA
provides an additional tool for investors to use in comparing our financial results with other companies that also use
Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived
assets and goodwill, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest
and income taxes, investors can evaluate our operations and can compare 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, 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.
22
A reconciliation of GAAP net loss to Adjusted EBITDA follows:
Year Ended December 31,
2017
2018
Net loss ..................................................................................... $
Reconciling items:
Interest and other ......................................................................
Depreciation and amortization .................................................
Stock-based compensation expense .........................................
Impairment of intangible assets ................................................
(3,963,576 ) $
(6,020,505 )
(129,923 )
245,548
186,707
-
(59,841 )
412,351
435,679
1,375,422
Adjusted EBITDA .................................................................... $
(3,661,244 ) $
(3,856,894 )
Net Operating Loss Carry Forwards
Our available net operating loss (“NOL”) at December 31, 2018 was approximately $15 million. The federal and
state NOLs are available to offset future taxable income and expire from 2019 through 2038 if not utilized.
Contractual Obligations
Below is a table, which presents our contractual obligations and commitments as of December 31, 2018:
Payments Due by Period
Total
Less than
1 year
1-3 years 3-5 years 5 years
More than
Operating Leases ....................................... $
Total Contractual Obligations .................... $
290,939 $
290,939 $
127,117 $
127,117 $
163,822 $
163,822 $
- $
- $
-
-
Recently Issued Accounting Pronouncements
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 FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The
core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in
an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-
09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under existing GAAP. In addition, this guidance requires new or
expanded disclosures related to the judgments made by companies when following this framework and additional
quantitative disclosures regarding contract balances and remaining performance obligations. ASU No. 2014-09 may be
applied using either a full retrospective approach, under which all years included in the financial statements will be
presented under the revised guidance, or a modified retrospective approach, under which financial statements will be
prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will
recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts
that still require performance by the entity.
On January 1, 2018, we adopted ASC 606 using the modified retrospective method. Results for reporting periods
beginning after January 1, 2018 are presented under ASC 606, while the comparative information will not be restated and
will continue to be reported under the accounting standards in effect for those periods.
In August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule amending certain
disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the
amendments expand the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must
be provided in a note or separate statement. The rule was effective on November 5, 2018 and will be effective for the
quarter that begins after the effective date. Since we include a year to date statement of stockholders’ equity in our interim
financial statement filings, the adoption of this guidance will result in the inclusion of a quarter to date statement of
stockholders’ equity in its June and September interim financial statement filings and the corresponding prior periods
statement of stockholders’ equity for all periods presented.
23
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer
changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply
modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as
an equity or liability instrument are the same immediately before and after the change. On January 1, 2018, we adopted
ASU 2017-09 prospectively to awards after this adoption date and did not 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments to measure credit losses on financial instruments, including trade
receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to
recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of
all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions.
The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis
and the adoption of the remaining amendments must be applied on a prospective basis. We are in the process of evaluating
the impact of this standard on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which provides guidance on
accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the
balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued
additional guidance, which offers a transition option to entities adopting the new lease standards. Under the transition
option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in
which the new lease standard is adopted, rather than to the earliest comparative period presented in their financial
statements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is
permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients.
We adopted ASU 2016-02 effective January 1, 2019 and elected the optional transitional method to apply this standard as
of this effective date and therefore, we will not apply this standard to the comparative periods presented in our consolidated
financial statements. The impact of adoption will be the recognition of a right-to-use asset and corresponding liability on
our consolidated financial statements in the amount of approximately $266,000 and will not have a significant impact on
our consolidated statement of operations.
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.
24
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, 2018.
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 Annual Report on
Form 10-K. As of December 31, 2018, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-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, 2018 (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, 2018.
Item 9B. Other Information
None.
25
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated herein by reference from our 2019 definitive Proxy
Statement (which will be filed with the SEC within 120 days after December 31, 2018 in connection with the solicitation
of proxies for the Company’s 2019 annual meeting of stockholders) (“2019 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 2019 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 2019 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 2019 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 2019 Proxy Statement under
the caption “Proposal 2 – Ratification of the Selection of Independent Auditors.”
26
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017
(b)
Exhibits
Exhibit No.
3.1
3.2
3.3
3.4
4.1
10.1
Description
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 535 Realty Management Corp., dated as of
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
14.1
21
23.1
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
December 27, 2017
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) *
Bill Roof Chief Executive Officer Employment Agreement (9)
Bill White Severance Agreement (9)
Bill Roof Separation and Consulting Agreement dated November 2, 2017*
Bryan Lewis’ Employment Agreement dated February 1, 2018 *, **
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 **
* Denotes a management contract or compensatory plan, contract or arrangement.
** Filed herewith.
(1) Incorporated by reference to Registration Statement on Form SB-2 (File No. 333-87797) filed
September 24, 1999.
(2) Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed May 31, 2001.
(3) Incorporated by reference to Registrant’s Proxy Statement on Schedule 14A filed June 13, 2003.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed August 10, 2010.
(5) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 25, 2014.
(6) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 30, 2004.
(7) Incorporated by reference to Registrant’s Annual Report on Form 10-K filed March 11, 2010.
(8) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 13, 2014.
(9) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed November 4, 2014.
(10) Incorporated by reference to Registrant’s Current Report on Form 8-K filed October 20, 2014.
(11) Incorporated by reference to Registrant’s Current Report on Form 8-K filed October 28, 2009.
(12) Incorporated by reference to Registrant’s Current Report on Form 8-K filed August 14, 2007.
(13) Incorporated by reference to the Registrant’s Proxy Statement on Schedule 14A filed April 9, 2015.
27
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 21, 2019
INTELLICHECK, INC.
By: /s/ Bryan Lewis
Bryan Lewis
President and 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 21, 2019
Date: March 21, 2019
Date: March 21, 2019
Date: March 21, 2019
Date: March 21, 2019
Date: March 21, 2019
Date: March 21, 2019
Date: March 21, 2019
INTELLICHECK, INC.
By: /s/ Bryan Lewis
Bryan Lewis
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Bill White
Bill White
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Guy L. Smith
Guy L. Smith, 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/ Amelia Ruzzo
Amelia Ruzzo, Director
By: /s/ David E. Ullman
David E. Ullman, Director
28
FINANCIAL STATEMENTS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2018 and 2017 ........................................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 ............................... F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017 ............... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 .............................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................................................................. F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Intellicheck, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Intellicheck, Inc. (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, 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.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2010.
/s/ EisnerAmper LLP
EISNERAMPER LLP
Iselin, New Jersey
March 21, 2019
F-2
INTELLICHECK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 and 2017
CURRENT ASSETS:
ASSETS
Cash ....................................................................................................... $
Accounts receivable, net of allowance of $24,675 and $18,750 as of
December 31, 2018, and 2017, respectively ..........................................
Inventory ................................................................................................
Other current assets ................................................................................
Total current assets ............................................................................
NOTE RECEIVABLE, net of current portion ...........................................
PROPERTY AND EQUIPMENT, net ......................................................
GOODWILL ..............................................................................................
INTANGIBLE ASSETS, net .....................................................................
OTHER ASSETS .......................................................................................
2018
2017
4,376,017 $
8,010,161
1,019,434
82,337
271,415
5,749,203
29,017
264,583
8,101,661
306,575
9,742
652,627
85,321
218,835
8,966,944
71,138
211,602
8,101,661
463,578
67,181
Total assets ......................................................................................... $
14,460,781 $
17,882,104
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................................... $
Accrued expenses ..................................................................................
Deferred revenue, current portion ..........................................................
Total current liabilities .......................................................................
73,334 $
726,918
704,536
1,504,788
71,578
815,350
739,980
1,626,908
OTHER LIABILITIES
Deferred revenue, long-term portion .....................................................
Other long-term liabilities ......................................................................
29,486
6,802
87,736
158,407
Total liabilities ...................................................................................
1,541,076
1,873,051
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock – $.001 par value; 40,000,000 shares authorized;
15,638,765 and 15,009,246 shares issued and outstanding as of
December 31, 2018 and 2017, respectively ...........................................
Additional paid-in capital ......................................................................
Accumulated deficit ...............................................................................
Total stockholders’ equity .....................................................................
15,639
127,290,467
(114,386,401 )
12,919,705
15,009
126,416,869
(110,422,825 )
16,009,053
Total liabilities and stockholders’ equity ........................................... $
14,460,781 $
17,882,104
The accompanying notes are an integral part of these consolidated statements.
F-3
INTELLICHECK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
REVENUES .............................................................................................. $
COST OF REVENUES .............................................................................
Gross profit ........................................................................................
4,433,454 $
(386,617 )
4,046,837
OPERATING EXPENSES
Selling, general and administrative ........................................................
Research and development ....................................................................
Impairment of intangible assets .............................................................
5,236,170
2,904,166
-
3,598,296
(521,835 )
3,076,461
5,865,278
1,916,107
1,375,422
2018
2017
Total operating expenses ...................................................................
8,140,336
9,156,807
Loss from operations .........................................................................
(4,093,499 )
(6,080,346 )
OTHER INCOME
Interest and other income .......................................................................
129,923
59,841
Net loss ...................................................................................................... $
(3,963,576 ) $
(6,020,505 )
PER SHARE INFORMATION:
Loss per common share -
Basic/Diluted ..................................................................................... $
(0.26 ) $
(0.48 )
Weighted average common shares used in computing per
share amounts -
Basic/Diluted .....................................................................................
15,542,480
12,428,652
The accompanying notes are an integral part of these consolidated statements.
F-4
INTELLICHECK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated Stockholders’
Deficit
Equity
Total
BALANCE, December 31, 2016 .............. 10,718,553 $
10,719 $ 117,293,158 $ (104,368,426 ) $ 12,935,451
Cumulative adjustment upon modified
retrospective adoption of ASU 2016-09 ...
-
-
33,894
(33,894 )
-
Balance after adoption of recent
accounting pronouncement ....................... 10,718,553
Stock-based compensation expense
(employees and directors) .........................
-
Issuance of common stock, net of costs .... 4,168,750
10,000
Exercise of stock options ..........................
63,500
Exercise of warrants .................................
Vesting of restricted stock ........................
50,207
Shares forfeited in exchange for payment
of withholding taxes .................................
Net loss .....................................................
(1,764 )
-
10,719 117,327,052 (104,402,320 ) 12,935,451
-
435,679
4,169 8,508,692
10,090
139,637
(50 )
10
63
50
-
-
-
-
-
435,679
8,512,861
10,100
139,700
-
(2 )
-
(4,231 )
-
-
(6,020,505 )
(4,233 )
(6,020,505 )
BALANCE, December 31, 2017 .............. 15,009,246 $
15,009 $ 126,416,869 $ (110,422,825 ) $ 16,009,053
Stock-based compensation expense
(employees and directors) .........................
Exercise of stock options ..........................
Vesting of restricted stock ........................
Net loss .....................................................
-
593,838
35,681
-
-
594
36
-
186,707
686,927
(36 )
-
-
-
-
(3,963,576 )
186,707
687,521
-
(3,963,576 )
BALANCE, December 31, 2018 .............. 15,638,765 $
15,639 $ 127,290,467 $ (114,386,401 ) $ 12,919,705
The accompanying notes are an integral part of these consolidated statements.
F-5
INTELLICHECK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................................. $
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...........................................................
Stock-based compensation expense ...................................................
Change in provision for doubtful accounts ........................................
Deferred rent ......................................................................................
Impairment of intangible assets .........................................................
Changes in assets and liabilities:
(Increase) in accounts receivable ...................................................
Decrease (increase) in inventory ....................................................
(Increase) in other current assets ....................................................
Decrease (increase) in other assets .................................................
(Decrease) increase in accounts payable and accrued expenses ....
(Decrease) in deferred revenue ......................................................
(Decrease) increase in other long-term liabilities ..........................
Net cash used in operating activities ..........................................
CASH FLOWS FROM INVESTING ACTIVITIES:
2018
2017
(3,963,576 ) $
(6,020,505 )
245,548
186,707
5,925
(5,202 )
-
(372,732 )
2,984
(50,931 )
57,439
(74,672 )
(93,694 )
(158,407 )
(4,220, 611 )
412,351
435,679
-
(47,628 )
1,375,422
(150,501 )
(14,774 )
(52,051 )
(5,883 )
339,326
(175,128 )
158,407
(3,745,285 )
Purchases of property and equipment ....................................................
Collection on note receivable.................................................................
Net cash (used in) provided by investing activities ....................
(141,526 )
40, 472
(101,054 )
(37,614 )
42,460
4,846
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 .................................................................................................
Withholding taxes paid on vesting of restricted stock units ...................
Net cash provided by financing activities ..................................
-
8,512,861
687,521
10,100
-
-
687,521
139,700
(4,233 )
8,658,428
Net (decrease) increase in cash ..................................................
(3,634,144 )
4,917,989
CASH, beginning of year ...........................................................................
8,010,161
3,092,172
CASH, end of year ..................................................................................... $
4,376,017 $
8,010,161
The accompanying notes are an integral part of these consolidated statements.
F-6
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Business
Intellicheck, Inc. (the “Company” or “Intellicheck”) is a prominent 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®, a 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 eighteen issued patents and six pending.
Liquidity
For the year ended December 31, 2018, the Company incurred a net loss of $ 3,963,576 and used cash in operations
of $4,220,751. As of December 31, 2018, the Company had cash of $4,376,017 and an accumulated deficit of
$114,386,401. On August 4, 2017, the Company completed a public offering of 4,168,750 shares of its common stock,
offered to the public at $2.25 per share resulting in net proceeds to the Company of approximately $8,513,000 after
deducting underwriter’s discounts and commissions paid by the Company. Intellicheck intends to use these net proceeds
for general corporate purposes including product development in key markets, the integration of new features into existing
new products and expansion of its sales force and engineering personnel. Based on the Company’s business plan and cash
resources, Intellicheck expects its existing and future resources and revenues generated from operations to satisfy its
working capital requirements for at least the next 12 months.
However, if performance expectations fall short or expenses exceed expectations, the Company may need to
secure additional financing or reduce expenses to continue operations. Failure to do so would have a material adverse
impact on its 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. On December 31, 2018, the Company merged its subsidiaries into
Intellicheck, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The
Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s
customers, current economic conditions and other factors that may affect customers’ ability to pay.
Inventory
Inventory is stated at the lower of cost or market and cost is determined using the first-in, first-out method.
Inventory is primarily comprised of finished goods. As of December 31, 2018, most 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.
F-7
Property and Equipment
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2018 and 2017. For the years ended December 31, 2018 and 2017, 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.
As a result of a projected loss of revenue from certain customers moving to another platform along with a shift in
the Company’s marketing strategy for 2018, the Company performed a quantitative impairment test as of December 31,
2017 for the patents, trade names and customer relationships acquired in the Mobilisa acquisition. The Company utilized
the income approach to test its patent and tradenames, specifically the Relief-from-Royalty method, which assumes that a
user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to
use that asset. By acquiring the intangible asset, the user avoids these payments. As a result of the analysis, $250,582 and
$287,928, respectively, of impairment was recorded due to the decline in the valuation of trade names and patents. The
Company utilized the income approach to test its customer relationships, specifically the Multi-Period Excess Earnings
Method, which estimates the cash flows attributable to the customer relationships, after considering the return associated
with other contributing assets. As a result of the analysis, $836,912 of impairment was recorded due to the decline in the
valuation of the customer relationships. Application of the impairment test requires judgement, including determination of
royalty rates, and projecting revenue attributable to the assets in order to determine fair value. These impairments, totaling
$1,375,422 in 2017, are recorded as Impairment of Intangible Assets on our Consolidated Statements of Operations. No
impairment charge was made for fiscal year 2018.
Deferred Rent
The Company received certain rent abatements and incentives from landlord as an inducement to move into its
Melville, New York office facility. The Company is amortizing these incentives on a straight-line basis over the period of
its respective lease.
Revenue Recognition and Deferred Revenue
General
Effective January 1, 2018, the Company adopted ASC 606. In accordance with ASC 606, the Company’s analysis
indicated that there was no change to how the Company records revenue and that the standard only impacted enhanced
disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations and the related
judgments and estimates necessary to apply the new standard.
F-8
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
ASC 606 was applied using the modified retrospective method. There was no cumulative effect of the initial
application to be recognized as an adjustment to opening retained earnings at January 1, 2018. Accordingly, comparative
periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition.
The majority of license fees and services revenue are generated from a combination of fixed-price and per-scan
contracts. Under the per-scan revenue model, customers are charged a fee each time the customer scans an identity
document, such as a driver’s license, with the Company’s software. Under the fixed-price revenue model customers are
charged a fixed monthly fee either per device or physical business location to access the Company’s software. In certain
instances, customization services are determined to be essential to the functionality of the delivered software. Under ASC
606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the
consideration expected to be received in exchange for those goods or services. The Company measures revenue based on
the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in an
arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer.
The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or
as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of the
Company’s services as they are performed. Substantially all customer contracts provide that the Company is compensated
for services performed to date.
Invoicing is based on schedules established in customer contracts. Payment terms are generally established at 30
days from the invoice date. Product returns are recorded as a reduction to revenue.
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales
incentives and amounts collected on behalf of third parties. Revenues are recognized when control of the promised goods
or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled
to in exchange for those goods or services. Furthermore, the Company recognizes revenue when it satisfies a performance
obligation by transferring control over a product or service to a customer.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well
as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:
Hosted Subscription Services Revenue
Subscription services allows customers to access a set of data for a predetermined period of time. As the customer
obtains access at a point in time but continues to have access for the remainder of the subscription period, the customer is
considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs.
Accordingly, subscription revenue should be recognized over time based on the usage of the hosted subscription services,
which can vary from month to month. The revenue is typically based on a formula such as number of stores using the
service in a given month multiplied by a fee per store.
License Revenue
The Company also recognizes revenues from licensing of its software to customers. The license allows customers
to access a set of data for a predetermined period of time. The licensed software requires continuing service or post
contractual customer support and performance. As the customer obtains access at a point in time but continues to have
access for the remainder of the subscription period, the customer is considered to simultaneously receive and consume the
benefits provided by the entity’s performance as the entity performs. Accordingly, the revenue should be recognized over
time based on usage, which can vary from month to month. The revenue is typically based on a formula such as number of
stores in a given month multiplied by a fee per store. Royalties from the licensing of the Company’s technology are
recognized as revenues in the period they are earned.
Equipment Revenue
Revenue from the sale of equipment is recognized at a point in time. The point in time that the revenue is
recognized is when the customer has control of the equipment which is when the customer receives the benefit and the
Company’s performance obligation has been satisfied. Depending on the contract terms, that could either be at the time the
equipment is shipped or at the time the equipment is received.
F-9
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Non-Recurring Services Revenue
The non-recurring services include items such as training, installation, customization, and configuration. The
Company recognizes revenue from non-recurring services contracts ratably over the service contract period as the customer
consumes the benefit as it is provided and the Company’s performance obligation has been satisfied.
Extended Warranty
Extended warranty revenues is generated when a warranty is provided to the customer separately of other
performance obligations when the equipment is sold. As the customer obtains access at a point in time and continues to
have access for the remainder of the warranty term, the customer is considered to simultaneously receive and consume the
benefits provided by the Company’s performance as the Company performs. The related revenue is recognized ratably
over the specified term of the warranty period. The extended warranty is separate to the Company’s standard warranty of
usually one year that it receives from its vendor.
Disaggregation of revenue
In the following tables, revenue is disaggregated by product and service and the timing of revenue recognition.
The table also includes a reconciliation of the disaggregated revenue.
For the Years Ended December 31,
2018
2017
Products and services
Hosted subscription services .................................................... $
Licensing ..................................................................................
Equipment ................................................................................
Non-recurring services .............................................................
Extended warranties on equipment ..........................................
Other .........................................................................................
$
2,225,724 $
1,461,753
367,675
298,619
60,007
19,676
4,433,454 $
1,579,733
1,270,127
424,588
216,602
86,676
20,570
3,598,296
Timing of revenue recognition
Products transferred at a point in time ...................................... $
Services transferred over time ..................................................
$
387,351 $
4,046,103
4,433,454 $
445,158
3,153,138
3,598,296
Contract balances
The current portion of deferred revenue at December 31, 2018 and December 31, 2017 was $704,536 and
$739,980, respectively, and primarily consists of revenue that is recognized over time for one-year software license
contracts and hosted subscription services. The changes in these balances are related to the satisfaction or partial satisfaction
of these contracts. Of this balance as of December 31, 2017, $738,815 was recognized as revenue for the year ended
December 31, 2018. The long-term portion of deferred revenue is $29,486 and $87,736 as of December 31, 2018 and
December 31, 2017, respectively.
The Company did not recognize any material revenue in the current reporting period for performance obligations
that were fully satisfied in previous periods.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance
obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
2019
2020
2021
Total
Hosted subscription services ................... $
Licensing .................................................
Non-recurring services ............................
Extended warranties on equipment .........
$
447,433 $
200,335
392
56,376
704,536 $
- $
3,782
-
18,943
22,725 $
- $
1,250
-
5,511
6,761 $
447,433
205,367
392
80,830
734,022
F-10
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
All consideration from contracts with customers is included in the amounts presented above.
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, 2018 and 2017, due to the uncertainty of the realizability of
those assets.
Fair Value of Financial Instruments
The Company adheres to the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This
pronouncement requires that the Company calculate the fair value of financial instruments and include this additional
information in the notes to financial statements when the fair value is different than the book value of those financial
instruments. The Company’s financial instruments include cash, accounts receivable, note receivable, accounts payable
and accrued expenses. At December 31, 2018 and 2017, 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 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, 2018, the Company had two customers that accounted for 31% of revenue.
The revenue was associated with two commercial identity sales customers. These customers represented 8% of total
accounts receivable as of December 31, 2018. During the year ended December 31, 2017, the Company had two customers
that accounted for 26% of revenue.
As of December 31, 2018, 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.
F-11
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended
December 31,
2018
2017
Numerator:
Net Loss ................................................................................... $
(3,963,576 ) $
(6,020,505 )
Denominator:
Weighted average common shares –
Basic/Diluted ........................................................................
15,542,480
12,428,652
Net Loss per share –
Basic/Diluted ........................................................................ $
(0.26 ) $
(0.48 )
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 .....................................................................................
1,072,332
471,801
-
1,544,133
1,631,358
471,801
5,859
2,109,018
2018
2017
Share Based Compensation
The Company accounts for the issuance of equity awards to employees in accordance 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. 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, 2018 and 2017.
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 consideration and valuation 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.
F-12
Recent Accounting Pronouncements
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue
recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more
judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.
In addition, this guidance requires new or expanded disclosures related to the judgments made by companies when
following this framework and additional quantitative disclosures regarding contract balances and remaining performance
obligations. ASU No. 2014-09 may be applied using either a full retrospective approach, under which all years included in
the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which
financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the
latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the
effective date for contracts that still require performance by the entity.
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for
reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information will
not be restated and will continue to be reported under the accounting standards in effect for those periods. See the section
“Revenue Recognition and Deferred Revenue” for a detailed disclosure later in this footnote titled Significant Accounting
Policies in these consolidated financial statements.
In August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule amending certain
disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the
amendments expand the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must
be provided in a note or separate statement. The rule was effective on November 5, 2018 and will be effective for the
quarter that begins after the effective date. Since the Company includes a year to date statement of stockholders’ equity in
its interim financial statement filings, the adoption of this guidance will result in the inclusion of a quarter to date statement
of stockholders’ equity in its June and September interim financial statement filings and the corresponding prior periods
statement of stockholders’ equity for all periods presented.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting (“ASU 2017-09”) which clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer
changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply
modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as
an equity or liability instrument are the same immediately before and after the change. On January 1, 2018, the Company
adopted ASU 2017-09 prospectively to awards after this adoption date and did not have a material effect on its consolidated
financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying
the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a
hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount
by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-
04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and
early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its consolidated
financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments to measure credit losses on financial instruments, including trade
receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to
recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of
all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions.
The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis
and the adoption of the remaining amendments must be applied on a prospective basis. The Company is in the process of
evaluating the impact of this standard on its consolidated financial statements.
F-13
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which provides guidance on
accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the
balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued
additional guidance, which offers a transition option to entities adopting the new lease standards. Under the transition
option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in
which the new lease standard is adopted, rather than to the earliest comparative period presented in their financial
statements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is
permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients.
The Company has adopted ASU 2016-02 effective January 1, 2019 and has elected the optional transitional method to
apply this standard as of this effective date and therefore, it will not apply this standard to the comparative periods presented
in its consolidated financial statements. The impact of adoption will be the recognition of a right-to-use asset and
corresponding liability on the Company’s consolidated financial statements in the amount of approximately $266,000 and
will not have a significant impact on its consolidated statement of operations.
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 .......................................................... $
1,044,109 $
(24,675 )
1,019,434 $
671,377
(18,750 )
652,627
2018
2017
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of December 31, 2018 and 2017:
Computer equipment ................................................................ $
Furniture and fixtures ...............................................................
Leasehold improvements ..........................................................
Office equipment ......................................................................
Less – Accumulated depreciation and amortization .................
$
2018
2017
992,336 $
136,524
41,257
589,357
1,759,474
(1,494,891 )
264,583 $
965,797
73,305
43,249
578,846
1,661,197
(1,449,595 )
211,602
Depreciation expense for the years ended December 31, 2018 and 2017 amounted to $88,545 and $96,788,
respectively.
5. GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets
The changes in the carrying amount of intangible assets for the year ended December 31, 2018 and 2017 were as
follows:
Balance at beginning of year .................................................... $
Deduction: Impairment charge .................................................
Deduction: Amortization expense ............................................
Balance at end of year .............................................................. $
2018
463,578 $
-
(157,003 )
306,575 $
2017
2,154,563
(1,375,422 )
(315,563 )
463,578
The following table sets forth the components of intangible assets as of December 31, 2018 and 2017:
As of December 31, 2018
Estimated Adjusted
Useful
Life
Carrying Accumulated
Amount Amortization
Net
Trade name ..............................................
2 years $ 286,590 $
954,915
Patents and copyrights ............................. 2-17 years
Non-contractual customer relationships .. 2-10 years 2,431,655
$ 3,673,160 $
7,765
(278,825 ) $
208,686
(746,229 )
(2,341,531 )
90,124
(3,366,585 ) $ 306,575
F-14
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2017
Adjusted
Carrying Accumulated
Amount
Amortization
Net
339,590 $
Trade name .................................................................. $
Patents and copyrights .................................................
954,915
Non-contractual customer relationships ...................... 2,431,655
(324,060 ) $
(711,781 )
(2,226,741 )
$ 3,726,160 $ (3,262,582 )
15,530
243,134
204,914
463,578
The following summarizes amortization of acquisition related intangible assets included in the statement of
operations:
Years Ended December 31,
2018
2017
Cost of sales ............................................................................. $
General and administrative .......................................................
$
129,496 $
27,507
157,003 $
236,651
78,912
315,563
The Company expects that amortization expense for the next five succeeding years will be as follows:
2019 .................................................................................... $
2020 .................................................................................... $
2021 .................................................................................... $
2022 .................................................................................... $
2023 .................................................................................... $
132,336
24,980
24,980
24,980
24,980
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 as of December 31, 2018 and 2017. This goodwill resulted from
the acquisition of Mobilisa, Inc. and Positive Access Corporation.
For the years ended December 31, 2018 and 2017, 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 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, 2018 and 2017, the Company determined that the fair value was more than its
carrying amount and therefore the second step of the goodwill impairment test was not required.
Accumulated impairment charges on goodwill through December 31, 2018 are $30,085,862.
F-15
6. NOTE RECEIVABLE
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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 was 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, 2018, the total note receivable was
$71,137, of which $42,120 and $29,017 is included in Other Current Assets and Notes Receivable, net of current portion,
respectively on the Consolidated Balance Sheets. At December 31, 2017, the total note receivable was $111,609, of which
$40,471 and $71,138 is included in Other Current Assets and Notes Receivable, net of current portion, respectively on the
Consolidated Balance Sheets.
7. DEBT
Revolving Line of Credit
During 2018, the Company has a revolving credit facility with Northwest Bank (“Northwest”) that allows for
borrowings to the lesser of (i) $2,000,000 or (ii) 95% of the balance in the Company’s money market account less $250,000.
The borrowings are secured by the Company’s existing deposit and money market accounts with Northwest. The facility
bears interest at a rate consistent with Northwest’s money market account (1.51% at December 31, 2018) plus 3%. Interest
is payable monthly and the principal is due upon maturity on May 22, 2019. As of December 31, 2018, there were no
amounts outstanding under this facility and unused availability under this facility was $2,000,000.
On January 10, 2019 the Company terminated the above facility with Northwest and on February 6, 2019 it entered
into a similar facility with Citibank that allows borrowings up to $2,000,000 and are secured by collateralized accounts.
The facility bears interest at a rate of Citibank’s Base Rate minus 2%. Interest is payable monthly. As of March 21, 2019,
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, 2018 and 2017:
Professional fees ....................................................................... $
Payroll and related ....................................................................
Severance payments to former officer ......................................
Other .........................................................................................
$
69,406 $
406,925
158,406
92,181
726,918 $
78,552
365,384
316,812
54,602
815,350
2018
2017
At December 31, 2018 and 2017, the long-term portion of severance payments to a former officer was $0 and
$158,407, respectively and is included in Other Long-term Labilities on the Consolidated Balance Sheets.
9.
INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted into law which significantly
modified U.S. corporate income tax law. The TCJA contains significant changes to corporate income taxation, including
but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21% in
2018. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is
uncertain, including to what extent various states will conform to the newly enacted federal tax law. The deferred tax assets
and liabilities are measured using the enacted tax rates that the Company believes will apply in the years in which the
temporary differences are expected to be recovered or paid. As a result, the Company remeasured the deferred tax assets
and deferred tax liabilities to reflect the reduction in the enacted U.S. corporate income tax rate. This resulted in a decrease
in our gross deferred tax assets and liabilities and corresponding valuation allowance of approximately $1.5 million.
F-16
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2018 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, 2018 and 2017 are as follows:
Deferred tax assets:
Net operating loss carryforwards ......................................... $
Stock-based compensation ...................................................
Reserves ...............................................................................
Intangible assets ...................................................................
Severance costs and deferred rent ........................................
Research and development tax credits .................................
Total deferred tax assets .......................................................
Deferred tax liabilities:
Depreciation .........................................................................
Total deferred tax liabilities .................................................
Net deferred tax assets ..............................................................
Less: Valuation allowance .......................................................
Deferred tax assets, net of allowance ............................... $
2018
2017
3,914,000 $
82,000
7,000
55,000
44,000
258,000
4,360,000
(37,000 )
(37,000 )
4,323,000
(4,323,000 )
- $
2,818,000
81,000
5,000
26,000
130,000
206,000
3,266,000
(33,000 )
(33,000 )
3,233,000
(3,233,000 )
-
There were no tax interest or penalties recorded in the consolidated financial statements for the years ended
December 31, 2018 and 2017.
The Company’s available NOL at December 31, 2018 was approximately $15 million. The federal and state
NOL’s incurred in all years through 2017 are available to offset future taxable income and expire from 2019 through 2038
if not utilized. The 2018 gross NOL incurred for the year ended December 31, 2018 can be utilized at 80% with no
expiration.
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 2015 to date. The Company believes there are
no unresolved tax issues or tax claims likely to be material to its financial position. ASC Topic 740-10 requires evaluation
of uncertain tax positions. As of December 31, 2018, the Company has no material uncertain tax positions.
The effective tax rate for the years ended December 31, 2018 and 2017 is different from the tax benefit that would
result from applying the statutory tax rates primarily due to the recognition of valuation allowances. In 2018, the valuation
allowance increased approximately $1.1 million primarily related to an increase of the Company’s NOLs.
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, 2018, and 2017, there were no outstanding shares of
Series A Convertible Preferred Stock.
F-17
Stock Options and Share Based Compensation
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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 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.
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:
Years Ended December 31,
2018
2017
Valuation assumptions:
$2.30 - $2.87
Grant price ................................................................................
$2.30 - $2.87
Exercise price ...........................................................................
Expected dividend yield ...........................................................
0 %
Expected volatility ................................................................... 94.02% - 97.22 %
Expected life (in years) ............................................................
5
2.69% - 2.73 %
Risk-free interest rate ...............................................................
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, 2016 .....................
1,665,420 $
1.40
3.62 years
-
Granted ...............................................................
Forfeited or expired ............................................
Exercised ............................................................
Outstanding at December 31, 2017 .....................
-
(24,062 )
(10,000 )
1,631,358 $
Granted ...............................................................
Forfeited or expired ............................................
Exercised ............................................................
Outstanding at December 31, 2018 .....................
102,500
(67,488 )
(593,838 )
1,072,332 $
-
4.06
1.01
1.36
2.86
4.18
1.16
1.44
1.70 years $
2,106,669
1.85 years $
881,493
Exercisable at December 31, 2018 ......................
937,332 $
1.28
1.58 years $
864,092
F-18
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
The following is a summary of stock options as of December 31, 2018:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$ 1.15 to $1.56
$ 1.75 to $2.87
3.93
$
Number of
Options
889,460
155,500
27,372
1,072,332
Weighted-
average
Remaining Life
1.59 years
3.51 years
0.75 years
1.85 years
$
$
$
$
Weighted-
average
Exercise
Price
Number of
Options
Weighted-
average
Exercise
Price
1.16
2.56
3.93
1.44
876,960 $
33,000 $
27,372 $
937,332 $
1.16
2.11
3.93
1.28
The weighted-average fair value of the options granted during the years ended December 31, 2018 and 2017 is
$2.12 and $0, respectively.
As of December 31, 2018, the Company had 746,103 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.
Restricted stock unit activity under the Plans during the periods indicated below is as follows:
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic
Value
Number of
Shares
Outstanding at December 31, 2016 .............................
32,714
1.89
26,010
Granted ....................................................................
Vested and Settled in shares ....................................
Outstanding at December 31, 2017 .............................
23,352
(50,207 )
5,859 $
Granted ....................................................................
Vested and Settled in shares ....................................
Outstanding at December 31, 2018 .............................
29,822
(35,681 )
- $
2.87
2.31
2.56 $
2.07
2.15
- $
-
-
As of December 31, 2018, there was $193,161 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 2.83 years.
Share based compensation expense for the years ended December 31, 2018 and 2017 is as follows:
Compensation cost recognized:
Years Ended December 31,
2018
2017
Stock options ........................................................................ $
Restricted stock units ...........................................................
$
124,886 $
61,821
186,707 $
368,465
67,214
435,679
F-19
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Share based compensation is included in operating expenses as follows:
Selling, general and administrative .......................................... $
Research and development .......................................................
$
169,654 $
17,053
186,707 $
408,772
26,907
435,679
Years Ended December 31,
2018
2017
The Company has a net operating loss carry-forward as of December 31, 2018, 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 2018 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, 2018, the Company had 471,801 remaining
warrants outstanding at exercise prices ranging from $2.20 to $8.00 through 2021. There were 63,500 warrants exercised
at a price of $2.20 during the year ended December 31, 2017. No warrants were exercised in the year ended December 31,
2018.
11. ISSUANCE OF COMMON STOCK
On August 4, 2017, the Company completed a public offering of 4,168,750 shares of its common stock, offered
to the public at $2.25 per share. Net proceeds to the Company from this offering were approximately $8,670,000 after
deducting underwriting discounts and commissions paid by the Company. Direct offering costs totaling approximately
$157,000 were recorded as a reduction to the net proceeds on the consolidated statement of stockholders’ equity.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases an office in Melville, New York which expires on March 31, 2021. Future minimum lease
payments under this lease agreement are as follows for the years ended December 31:
2019 .......................................................... $
2020 ..........................................................
2021 ..........................................................
Total ......................................................... $
127,117
130,930
32,892
290,939
Rent expense for the years ended December 31, 2018 and 2017 amounted to $161,095 and $287,535, respectively.
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 this former officer was identified as an inventor. Cumulatively through
December 31, 2018, total fees paid under this agreement amounted to approximately $2,000.
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.
F-20
Severance and Change-in-Control Agreements
INTELLICHECK, INC.
NOTES TO FINANCIAL STATEMENTS
On November 29, 2017, Bill White, the Chief Financial Officer and the then Interim Chief Executive Officer
entered into a severance agreement with the Company (the “Agreement”). The Agreement provides that in consideration
of his services and pursuant to the Agreement, in the event that Mr. White’s employment is terminated without “cause” (as
such term is defined in the Agreement), Mr. White will receive a 24-month continuation of salary payments, continuation
of certain eligible medical benefits under the COBRA program, and a lump sum payment equal to any quarterly bonus
target applicable during the quarter of termination plus any prior completed quarterly bonus which has not yet been
determined (if any). In addition, the Agreement provides that upon such termination without Cause, the Company will
accelerate the vesting of all of Mr. White’s outstanding but unvested stock options or other equity incentives. This
Agreement replaces a severance agreement, as amended, initially executed by Mr. White and the Company on September
30, 2014 and amended May 30, 2017 (the “Original Agreement”). The Original Agreement, as amended, provided
equivalent severance benefits as provided in the Agreement. The Original Agreement expired by its terms September 30,
2017.
On October 4, 2017, Dr. William Roof, the Company’s President and Chief Executive Officer retired from the
Company at the request of the board of directors (the “Board”). The parties have entered into a separation and consulting
agreement dated as of November 2, 2017 (the “Agreement”). Pursuant to the Agreement, the Company may contact Dr.
Roof to provide consulting services and he will provide consulting services at the Company’s request to ensure a smooth
and effective transition of management and business affairs. In consideration of these services and to fulfill the Company’s
obligations under Dr. Roof’s employment agreement with the Company, Dr. Roof will receive aggregate cash payments
of $500,000 over a 20-month period together with reimbursement of certain vision and dental benefit premiums. The
Company does not anticipate this to be a significant effort and therefore has accounted for these payments as severance on
the date of separation. In addition, the board of directors of the Company has extended the expiration date of Dr. Roof’s
options to purchase Company’s common stock to six months from the Separation Date. The Board immediately appointed
Bill White, the Company’s current Chief Financial Officer, as its Interim President and Chief Executive Officer. At
December 31, 2018, the total severance liability was $158,406 which 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 election. The Company
may also make discretionary contributions, subject to certain conditions, as defined in the plan. The Company’s matching
contributions were $53,784 and $45,441 for 2018 and 2017, respectively. The plan assets were approximately $2.2 million
at December 31, 2018.
13. 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, 2018
Year Ended December 31, 2017
First
Quarter
Income Statement Data:
Second
Quarter
Third
Quarter
Second
Quarter
(Dollars in thousands, except per share data)
First
Quarter
Fourth
Quarter
Third
Quarter
Fourth
Quarter
Revenues ................................. $ 1,062 $ 1,001 $ 1,040 $ 1,330 $
927 1,239
Gross profit .............................
(714 )
Loss from operations .............. (1,082 ) (1,143 ) (1,154 )
(664 )
Net loss ................................... (1,068 ) (1,101 ) (1,131 )
962
919
951 $
747
967
713 $
603
864
(940 ) (1,101 ) (1,083 ) (2,957 )
(937 ) (1,099 ) (1,075 ) (2,910 )
967 $
862
Net loss per common share:
Basic ....................................... $
Diluted .................................... $
(0.07 ) $
(0.07 ) $
(0.07 ) $
(0.07 ) $
(0.07 ) $
(0.07 ) $
(0.04 ) $
(0.04 ) $
(0.09 ) $
(0.09 ) $
(0.10 ) $
(0.10 ) $
(0.08 ) $
(0.08 ) $
(0.19 )
(0.19 )
Due to rounding, quarterly net loss per share may not add up to the total net loss for the year.
F-21
INTELLICHECK, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
Exhibit 10.11
Intellicheck, Inc. (“Company”) and Bryan Lewis (“Employee”) (together, the “parties”) enter into this Executive
Employment Agreement (“Agreement”) effective as of February 1, 2018.
Agreement
Based upon the consideration of the mutual covenants in this Agreement, and other good and valuable consideration, the
sufficiency and receipt of which are acknowledged, the parties agree as follows:
1. Employment.
1.1
1.2
Employee agrees to be employed as President and Chief Executive Officer (“CEO”) of Company. Employee’s
first day of employment as CEO will be February 21, 2018 (“Start Date”). The CEO reports directly to the
Board of Directors (“Board”). Employee will comply with all rules, policies, and procedures of Company, as
modified from time to time, including, without limitation, rules and procedures set forth in Company’s
employee handbook as adopted and modified from time to time at Company’s sole discretion. Employee will
perform all of Employee’s responsibilities in complete compliance with all applicable laws. Company may, in
its discretion, modify Employee’s duties, title, and assignment. Employee will serve on the Board for no
consideration other than that provided for in this Agreement.
Employee agrees to devote Employee’s full and undivided time, energy, knowledge, skill, and ability to the
purposes of Company and discharging Employee’s responsibilities for the benefit of Company’s business. In
no event will Employee allow other activities to conflict or interfere with Employee’s duties to Company.
Employee agrees to perform all duties faithfully and diligently and to the best of Employee’s ability. Employee
recognizes that the services to be rendered under this Agreement require certain training, skills, and experience,
and that this Agreement is entered into for the purpose of obtaining such service for Company. Employee agrees
to provide Company with any information that Employee possesses and that will be of benefit to Company,
unless providing such information would violate a third party’s rightful claim of ownership or unless such
information is subject to an ongoing obligation of confidentiality to any third party, particularly any prior
employers of Employee. Employee agrees to conduct himself in a way that will be a credit to the reputation
and interests of Company and its Affiliates, to perform Employee’s duties in a careful, safe, loyal, and prudent
manner, and to otherwise fulfill all fiduciary and other duties Employee has to Company. For purposes of this
Agreement, “Affiliate” means any person or entity, including the current subsidiaries of the Company,
currently existing or subsequently formed that directly or indirectly controls, is controlled by, or is under
common control with Company, whether by contract, through the ownership of voting securities or otherwise.
1.3
Employee’s initial base of operations will be Company’s offices in Jericho, New York. Employee will travel
the United States and internationally as necessary to fulfill the responsibilities of Employee’s position.
2. At-Will Employment. Employee understands and agrees that Employee’s employment with Company will be at will
and for no specific term, and either Employee or Company may terminate the employment relationship at any time,
with or without reason, with or without cause, notice, pre-termination warning or discipline, or other pre- or post-
termination procedures of any kind, subject only to the provisions of Section 4 regarding payments upon termination.
Any representations to the contrary, whether written, verbal, or implied by any Company communication, conduct, or
practice, are unauthorized and void unless contained in a formal written employment contract signed by the Company’s
Chairman of the Board, at the direction of the Board of Directors, and Employee. Except as otherwise noted in this
Agreement, Employee will not be entitled to any further compensation or benefits, other than compensation earned
through the termination date of Employee’s employment, accrued, unused vacation, and vested benefits, if any exist,
regardless of the reason for termination.
3. Compensation and Benefits. Employee will be entitled to compensation and benefits pursuant to the following
subparagraphs.
3.1
Base Salary. Employee will be paid a salary at an annual gross rate of $250,000 per year (“Base Salary”),
with the actual amount paid to be prorated for the actual period of employment and payable in equal installments
in accordance with Company’s normal payroll practices, subject to appropriate deductions and withholding.
3.2 Annual Incentive Compensation. Company will provide Employee with the opportunity to earn an annual
incentive compensation award (“Annual Incentive Compensation”) under terms identified by Company and
based on achievement of goals identified by the Board or its designee. For 2018 and going forward, Employee
may earn Annual Incentive Compensation an at-goal amount of $125,000 gross based on achievement of goals
identified by the Board and also subject to accelerators for outperformance. Bonus targets to be mutually agreed
upon by the Employee and Board within 90 days of Employee start date. Any Annual Incentive Compensation
will be prorated for the actual period of employment and subject to Employee’s satisfaction of all eligibility
criteria, as determined by the Board, or its designee, in its sole discretion. Any Annual Incentive Compensation
will not be deemed earned until paid, and Employee must be employed with Company at the time of payment
and award to be eligible to receive such payment or award.
3.3
Benefits. Employee will be eligible to participate in employee benefit programs established by Company for
personnel on a basis commensurate with Employee’s position and in accordance with the terms and conditions
of the governing documents and the Company’s policies from time to time, provided that Employee satisfies
the eligibility requirements of any such program. Nothing herein will require the adoption or maintenance of
any such plans. Employee also will receive the following additional benefits:
3.3.1 Vacation. Employee will be provided with 20 vacation days per calendar year, which will accrue in
accordance with Company’s vacation policy. Employee may use his vacation consistent with the
applicable Company policy in place at the time of use.
3.3.2
Expenses. Company will reimburse Employee in accordance with Company’s policies and procedures
for reasonable expenses necessarily incurred in the performance of duties hereunder, provided that
Employee provides appropriate receipts and vouchers indicating the specific business purpose for each
such expenditure in accordance with Company policies.
3.4 Relocation Benefits. Company will pay certain relocation and housing benefits to Employee as set forth in
Section 3.4.1. These advances may be earned subject to the terms specified in Section 3.4.2.
3.4.1 Moving Expenses. Subject to the requirements of Section 3.4.2, Company will advance or reimburse
the amount of Employee’s reasonable Moving Expenses that are actually incurred by Employee to
relocate to a reasonable distance to Melville, New York. The parties presently anticipate that
Employee will relocate to temporary housing within a reasonable distance to Melville within 60 days
of the start date. Any Moving Expense must be previously quoted to Employee and approved by the
Board in advance. For the purposes of this Agreement, “Moving Expenses” means the reasonable
cost of “qualified moving expenses” as that term is defined in Section 217 of the Internal Revenue
Code of 1986 (the “Code”) and the regulations thereunder, including the expense of moving household
goods and personal effects from Employee’s former residence to Employee’s new residence, as well
as the expenses of packing, crating, and in-transit storage and insurance for such goods and effects.
The following items are expressly excluded from the definition of Moving Expenses: meals, rental
cars, and temporary housing and living expenses after arrival, residence sale, purchase or lease
expenses, house-hunting expenses, and other costs not specified in the definition of Moving Expenses.
To receive payment under this provision, Employee must present to Company documentation,
including receipts, for amounts actually expended within a reasonable time following completion of
the move. Subject to Section 12.10, the Moving Expense will be paid to Employee (or on behalf of
Employee) a reasonable period after Employee’s submission of appropriate documentation.
3.4.2 Relocation Advances and Repayment Provision. If Employee remains employed by Company in
good standing through the 12 month anniversary of the Start Date, then the Moving Expense and other
covered expenses (collectively, “Relocation Advances”) will be earned by Employee in full, subject
to the conditions below. If Employee’s employment terminates before the 12 month anniversary of
the Start Date, then the Relocation Advances shall be prorated (and clawed back if necessary) based
on the duration of employment out of 12 months employed, unless Section 4.2 applies. Employee
expressly authorizes Company to deduct all amounts owed by Employee to Company under this
Section 3.4.2 as an offset against Employee’s final paycheck and further agrees and acknowledges
that such deduction is for the sole benefit of Employee, who otherwise would not be offered these
relocation benefits. If the full amount owed is not deducted, Employee must repay the Company within
10 business days after the Separation Date (as defined below) for any amount still owed. Nothing in
this provision restricts the at-will employment relationship.
3.5
Stock Option. Upon the Start Date, Employee will receive an option to purchase 100,000 shares (subject to
adjustment in the event of any recapitalization, stock split or reverse stock split), subject to a four-year vesting
schedule (25% will vest after each one full year of employment) under the Company’s 2015 Omnibus Incentive
Plan, as amended (“Stock Option”).
4. Termination. In addition to the provisions in Sections 4.1 through 4.5, if and as applicable, upon termination of
Employee’s employment by Company or Employee for any reason, Company will pay Employee (a) salary earned on
or before the termination date of Employee’s employment, (b) unpaid expenses, (c) accrued, unused vacation, and (d)
vested benefits, if any exist, which vested benefits will be handled in accordance with their controlling plans and
documents (collectively, “Final Pay”). Employee’s last day of employment, regardless of the reason for termination
(or no reason) is the “Separation Date.”
4.1
4.2
Termination by Company For Cause or Resignation by Employee. Company will have the right to
terminate immediately Employee’s services and this Agreement for Cause upon notice of termination. Upon
termination of Employee’s employment hereunder for Cause, or if Employee terminates Employee’s
employment for any reason, all compensation described herein will cease as of the Separation Date, and
Employee will have no rights to any other compensation or payments, other than the Final Pay. Any assignment
of this Agreement by Company will not constitute a termination for Cause for purposes of this Section 4.1.
Termination by Company Without Cause. Company will have the right to terminate immediately
Employee’s services and this Agreement without Cause and without Employee’s consent upon notice of
termination, subject to the provisions of this Section 4.2. If Company terminates Employee’s employment
without Employee’s consent and without Cause, Company will provide Employee the following (collectively,
“Severance”), subject to the conditions below:
● Severance Payments: If Employee is terminated without Cause:
○ Prior to the one year anniversary of this Agreement, Company will continue to pay
Employee’s base monthly salary (at the annual rate then in effect), subject to applicable
deductions and withholdings, for six months in accordance with Company’s regular payroll
schedule.
○ After the one anniversary of this Agreement but before the fifth anniversary of this
Agreement, Company will continue to pay Employee’s base monthly salary (at the annual
rate then in effect), for one year subject to applicable deductions and withholdings, for one
year in accordance with Company’s regular payroll schedule.
○ After the fifth anniversary of this Agreement, Company will continue to pay Employee’s
base monthly salary (at the annual rate then in effect), subject to applicable deductions and
withholdings, for eighteen months in accordance with Company’s regular payroll schedule.
● Benefits Continuation: If Employee is terminated without cause, the company will reimburse
Employee for the full amount of premiums paid for participation in the company’s medical, dental
and vision plans pursuant to Section 498B(f) of the Internal Revenue Code of 1986, as amended
(COBRA) until such time as Employee becomes eligible for coverage under another employer’s
insurance plan or the following periods, whichever is shorter:
○ Prior to the one year anniversary of this agreement, for a period of six months.
○ After the one anniversary of this Agreement but before the fifth anniversary of this
Agreement, for a period of one year.
○ After the fifth anniversary of this Agreement, for a period of 18 months
The above three bulleted provisions, (the “Severance Payments”) and the three separate durations being
the (“Severance Period”).
● The Severance Payments will commence with the next payment cycle after the Separation Date
provided that Employee has satisfied the conditions below and further provided that if the next
payment period begins in one taxable year and ends in a subsequent taxable year, Severance
Payments will commence in the subsequent taxable year.
The Severance is expressly conditioned upon (a) Employee’s timely execution and delivery to Company
of a separation agreement in a form acceptable to Company, which will include a full waiver and release
of all claims by Employee against Company, its Affiliates, and their officers, directors, employees, and
agents; (b) Employee not rescinding or revoking the separation agreement; and (c) Employee being and
remaining in full compliance with this Agreement (including Sections 5, 6, and 7), and all other
obligations to Company. Except as provided in this Section 4.2, upon termination by Company without
Employee’s consent and without Cause, Employee will not be entitled to any further compensation,
payments, or severance other than the Final Pay.
4.3 Death or Disability. Employee and Company acknowledge that Employee’s ability to perform the duties
specified in Section 1 or as otherwise communicated by Company are of the essence of this Agreement. This
Agreement and Employee’s employment hereunder will terminate automatically upon the death or Total
Disability of Employee. If Employee’s employment is terminated as a result of the Employee’s death or Total
Disability, this Agreement will terminate without further obligations to Employee, other than the Final Pay.
4.4
Limitations. Employee agrees that this Section 4 details the sole consideration to which Employee may be
entitled in the event of the termination of Employee’s employment. Employee expressly waives and
relinquishes any claim to other or further consideration. If any consideration is owed to Employee in connection
with Employee’s termination of employment under any arrangement or law (including the federal Workers
Adjustment and Retraining Notification Act or other state or local laws), then amounts owed to Employee under
this Section 4 will be less the amount of all such sums to the extent permitted by law.
4.5 Definitions. For purposes of this Agreement, the following definitions apply:
(a) “Cause” means a good faith determination by Company that: (i) Employee has engaged in conduct that
constitutes gross negligence, flagrant disloyalty to Company, material dishonesty, fraud, theft,
embezzlement, or unprofessional conduct; (ii) Employee has failed to perform assigned job duties or
willfully or repeatedly failed to carry out the directions of the Board or its designee; (iii) Employee engaged
in insubordination or willful dereliction of his duties hereunder; (iv) Employee has falsified any Company
record or violated any law or regulation related to performance of Employee’s duties; (v) Employee has
engaged in conduct in violation of material policies of Company or its Affiliates, including policies
pertaining to compliance with the laws prohibiting unlawful discrimination, harassment, or insider trading;
(vi) Employee has been convicted of or entered a plea of nolo contendere to any crime involving fraud,
embezzlement, or any other act of moral turpitude or any felony; (vii) Employee has breached the terms
of any agreement signed in connection with Employee’s employment with Company or any of its Affiliates
(including this Agreement; (viii) Employee’s employment with Company or performance of duties within
that employment violates any obligation of employee to any third party not to engage in such employment
or duties; or (ix) Employee has done any other thing that would constitute cause under the laws of the State
of Washington.
(b) “Total Disability” means Employee’s inability (with or without such accommodation as may be required
by law protecting persons with disabilities and that places no undue burden on Company) as determined
in good faith by the Board or its designee, to perform Employee’s duties hereunder for a period or periods
aggregating 90 calendar days in any 12-month period as a result of physical or mental illness.
5. Confidential Information.
5.1 Confidentiality Obligations and Confidential Information. Employee may obtain, receive, or gain access to
Confidential Information in connection with Employee’s work for Company. Employee acknowledges that
disclosure of Confidential Information outside of Company would severely affect Company or its Affiliates
and provide the recipient of the Confidential Information with an unfair competitive advantage. During
Employee’s relationship with Company and at all times thereafter, Employee will hold all Confidential
Information in strictest confidence and will not copy, acquire, use, publish, disclose, or communicate any
Confidential Information except as necessary for Employee to perform Employee’s employment duties for (and
while employed by) Company. “Confidential Information” means all information, data, and materials in
whatever form, tangible or intangible, and whether or not marked or otherwise designated as confidential, that
is not generally known to the public and that relates to the business, technology, practices, projects, products,
services, inventions, ideas, trade secrets, developments, marketing, sales, customers, finances, or legal affairs
of Company or its Affiliates, including without limitation information regarding business plans, marketing and
sales data and plans, budgets, pricing information, suppliers, customer lists and information, data (equipment,
operational, and other data), concepts, techniques, processes, methods, know-how, designs, technology,
computer programs, licenses, formulas, and development or experimental work. Without limiting the generality
of the foregoing, trade secrets are further defined in the Uniform Trade Secrets Act, RCW 19.108 et seq. (the
“UTSA”).
5.2 Confidential Information of Third Parties. Employee will preserve as confidential any information that
Employee learns or obtains from a third party or relating to a third party (such as a client, customer, affiliate,
partner, or vendor) that is not readily available to the public or that Company is obligated to treat as confidential,
and Employee will treat such information as Confidential Information.
5.3 Return of Confidential Information. Upon the Separation Date, or sooner if so requested, Employee will
immediately return all Confidential Information and other things belonging to Company, including tools,
equipment, devices, keys, identification, or other property, and all documents, records, notebooks, and tangible
articles containing or embodying any Confidential Information, including any copies (whether stored in paper,
electronic, magnetic, or other form) then in Employee’s possession, custody, or control, whether prepared by
Employee or others. Employee understands that all such documents and materials are Company’s sole property
and that Employee cannot make any copies thereof.
6.
Intellectual Property. Employee acknowledges that all developments, including, without limitation, the creation of
products, services, source-code, applications, projects, strategies, tactics, promotions or publications, inventions,
patentable or otherwise, discoveries, improvements, patents, trademarks, trade names, copyrights, trade secrets,
designs, works, reports, computer software, flow charts and diagrams, procedures and business methods, data,
documentation and writings and applications thereof relating to the actual or planned business of Company or any of
its Affiliates from and after the date of his association with Company, that, alone or jointly with others, the Employee
may have discovered, conceived, created, made, developed, reduced to practice or acquired (“Developments”), are
works made for hire and will remain the sole and exclusive property of Company, and Employee hereby assigns to
Company all of Employee’s right, title and interest in and to all such Developments. Employee agrees promptly and
fully to disclose all future Developments to Company and, at any time upon request and at the sole expense of
Company, execute, acknowledge and deliver to Company all instruments that Company will prepare, give evidence,
and take all other actions that are necessary or desirable in the reasonable opinion of Company to enable Company to
file and prosecute applications for and to acquire, maintain and enforce all letters patent, trademark registrations or
copyrights covering the Developments in all countries in which the same are deemed necessary by Company. All data,
memoranda, notes, lists, drawings, records, files, customer lists, exhibitor lists and other documentation (and all copies
thereof) made or compiled by Employee or made available to Employee concerning the Developments or otherwise
concerning the actual or planned business of Company or any of its Affiliates will be the property of Company or such
Affiliate, as the case may be, and will be delivered to Company promptly upon the termination of Employee’s
employment with Company.
7. Noncompetition, Nonsolicitation, and Nondisparagement.
7.1 Noncompetition. During Employee’s employment with Company and for a period of 6 months after the
Separation Date (which term shall be increased to 12 months after the second anniversary of this Agreement),
Employee will not, directly or indirectly, except for on behalf of Company or except with the prior written
approval of Company, engage in, carry on, provide advisory services in connection with, or otherwise assist
with or be interested economically in the Business of Company within the Restricted Territory (as defined
below), including without limitation by seeking, soliciting, or accepting employment by or agreeing to provide
advisory services to any person or entity, or being interested economically in any entity, that is at that time
engaged in, or that has plans for future engagement in the Business of Company within the Restricted Territory.
7.2 Nonsolicitation. During Employee’s employment with Company and for a period of 6 months after the
Separation Date (which term shall be increased to 12 months after the second anniversary of this Agreement),
Employee will not, directly or indirectly, except for on behalf of Company or except with the prior written
approval of Company: (a) accept or solicit (or assist in the solicitation of) any person or business who was a
customer or active prospect of Company or any of its Affiliates during Employee’s employment with Company
with respect to the Business of Company within the Restricted Territory; (b) contact any person or business
who was a supplier, customer, or active prospect of Company or any of its Affiliates during Employee’s
employment with Company for the purpose of soliciting an order or establishing a relationship for any business
enterprise that engages or that has plans for future engagement in the Business of Company within the
Restricted Territory; (c) encourage any customer, client, or business party of Company to cease doing business
with Company or to terminate or limit an existing relationship or arrangement with Company; (d) solicit or
otherwise encourage any employee, contractor, or consultant of Company or its Affiliates (“Covered
Workers”) to terminate any employment or contractual relationship with Company or its Affiliates; or (e)
otherwise interfere with the performance of current or former Covered Workers of their obligations or
responsibilities to Company or its Affiliates.
7.3 Nondisparagement. After the Separation Date, to the maximum extent permitted by law, Employee and
Company will not, directly or indirectly, disparage Employee, Company, its Affiliates, or any of its or their
officers, directors, or employees (“Covered Group”). This includes, but is not necessarily limited to, not saying
or doing anything that portrays Covered Group in a negative light. Despite the foregoing, nothing in this
Agreement is intended to prevent Employee from testifying truthfully in response to any lawfully issued
subpoena, court order, or arbitral order, or providing truthful information in response to any governmental or
administrative agency investigation, as long as Employee has received a subpoena, court order, or arbitral order
(a “Disclosure Demand”) to do so with respect to Employee’s employment with Company. Also, Employee
must provide the Disclosure Demand to Company within three business days of receiving it and cooperate with
Company and its Affiliates to the extent any of them wish to object to or challenge the Disclosure Demand.
Even if Employee has not received a Disclosure Demand, Employee may participate in or cooperate with the
Equal Employment Opportunity Commission or similar agency.
7.4
For purposes of this Agreement, the following definitions apply:
(a) “Business of Company” means the business that Company conducts or is planning to conduct, or any aspect
thereof, during the term of this Agreement, including, without limitation, the design, development, sale,
promotion, production, marketing, licensing or distribution of products, services or technologies relating
to identification verification software, applications, devices and services.
(b) “Restricted Territory” means any geographical region in which Company engages in business or
reasonably anticipates engaging in business, including but not limited to (i) North America, and (ii) every
other place in which Company, during Employee’s employment with Company or in the 12 months before
Employee commenced employment, has had customers or employees.
7.5 Nothing in this Section 7 will prohibit Employee from (a) working in the industry, engaging in academic
research or teaching, or using Employee’s skills and experience, in each case in compliance with the restrictions
contained in this Agreement, or (b) holding up to one percent of the issued and outstanding securities of any
class of securities of any entity that is publicly traded and quoted on a recognized securities exchange, so long
as Employee does not, directly or indirectly, exercise any management or control with respect to, or have any
active participation in the business of, such entity.
8. Disclosure. Employee agrees fully and completely to reveal the terms of Sections 5, 6, and 7 of this Agreement to any
new or prospective employee, business partner, or investor of Employee and authorizes Company, at its election, to
make such disclosure and provide a copy of this Agreement to any new or prospective employee, business partner, or
investor.
9. Representations Regarding Existing Obligations. Employee represents and certifies as follows: (a) Employee is not
in possession or control of any document or other tangible thing that in any way constitutes confidential, proprietary,
or trade secret information of any third party (including any former employer); (b) Employee is not subject to a
noncompetition agreement that precludes Employee’s work for Company; (c) Employee has identified all
confidentiality, nonsolicitation, or similar agreements or obligations Employee has with any third party, and Employee
will not violate any such agreements or obligations in the course of Employee’s work for Company; and (d) Employee
will not use or disclose any tangible or intangible information that constitutes a trade secret of any third party (including
any former employer) in the course of Employee’s employment, except pursuant to written authorization to do so.
10. Remedies for Breach and Right to Injunction. Any breach of Sections 5, 6, 7, 8, or 9 of this Agreement may cause
Company irreparable harm for which there is no adequate remedy at law and, as a result, Company will be entitled to
the issuance by a court of competent jurisdiction of an injunction, restraining order, or other equitable relief in favor
of itself, without the necessity of posting a bond, restraining Employee from committing or continuing to commit any
such violation. Any right to obtain an injunction, restraining order, or other equitable relief under this Agreement will
not be considered a waiver of any right to assert any other remedy Company may have at law or in equity. Nothing in
this Agreement will limit the remedies available to Company. Rather, the terms of this Agreement supplement, and do
not replace, any other obligations Employee has have under applicable law, including the UTSA and other laws
regarding confidentiality, non-disclosure, assignment of inventions, or the protection of intellectual property or
business interests. The UTSA is fully applicable and includes all definitions and remedies in the event of a violation
of the Act. The restrictions in this Agreement are independent of any other provision of this Agreement and will be
enforceable whether or not Employee may have or purport to have any claim against Company.
11. Conditions of Employment. Company’s obligations to Employee under this Agreement are conditioned upon
Employee’s timely compliance with requirements of the U.S. immigration laws.
12. Miscellaneous.
12.1 Fees. In any suit or action brought to enforce this Agreement, or to obtain an adjudication, declaratory or
otherwise, of rights hereunder, the losing party will pay to the prevailing party reasonable attorneys’ fees and
all other costs and expenses that may be incurred by the prevailing party in such suit or action.
12.2 Assignability. This Agreement will be binding upon Employee, Employee’s heirs, personal representatives,
and permitted assigns and on Company, its successors, and assigns. During Employee’s employment hereunder,
this Agreement may not be assigned by either party without the written consent of the other; provided, however,
that Company may in its sole discretion assign its rights and obligations under this Agreement, without
Employee’s consent, to an Affiliate or a successor by sale, merger, or liquidation.
12.3 Notices. Any notice required or permitted to be given hereunder will be sufficient if in writing, by registered
or certified mail, addressed to Employee at: 100 Jericho Quadrangle, Suite 202, Jericho, NY 11753, or such
other address as Employee may provide to Company in writing; or addressed to Company to the attention of
Chief Financial Officer, or such other address as may be provided in writing by Company. Notices to the
Employee may, at the discretion of Company, alternatively be hand delivered to Employee.
12.4 Severability. If any provision of this Agreement or compliance by any of the parties with any provision of this
Agreement will constitute a violation of any law, or be deemed unenforceable or void, then such provision, to
the extent only that it is in violation of law, or is deemed void or unenforceable, will be deemed modified to
the extent necessary so that it is no longer unenforceable, void or in violation of law and will be enforced to the
fullest extent permitted by law. If such modification is not possible, said provision, to the extent that it is in
violation of law, void or unenforceable, will be deemed severable from the remaining provisions of this
Agreement, which provisions will remain binding on the parties.
12.5 Entire Agreement. This Agreement contains the entire agreement of the parties, and supersedes any prior or
contemporaneous statements or understandings by or between the parties, including the Prior Agreement.
Notwithstanding the foregoing, nothing in this Agreement supersedes or restricts any of Employee’s existing
obligations to Company or under other agreements between Employee and Company (including all Employee’s
obligations under Sections 5, 6, 7, 8, 9, 10, 12, and 13 of the Prior Agreement and other obligations to protect
the confidentiality of information of Company and to assign intellectual property rights to it or otherwise protect
its intellectual property and/or business interests), which remain in full force and effect. This Agreement may
be changed only by an agreement in writing signed by the party against whom enforcement of any waiver,
change, modification, extension, or discharge is sought.
12.6 Governing Law/Jurisdiction. This Agreement will be governed by and construed in accordance with the laws
of the State of Delaware, excluding choice of law provisions. The parties hereby irrevocably and
unconditionally agree to submit any legal action or proceeding relating to this Agreement to the non-exclusive
general jurisdiction of the courts of the State of Delaware located in Wilmington, Delaware and the courts of
the United States located in the District of Delaware and, in any such action or proceeding, consent to
jurisdiction in such courts and waive any objection to the venue in any such court.
12.7 Third-Party Beneficiaries. Affiliates of Company are and will be third-party beneficiaries of this Agreement.
12.8 Survival. Sections 4 through 13 will survive the termination of this Agreement or Employee’s employment
relationship with Company.
12.9 Nonwaiver. Failure of Company to insist upon strict adherence to any provision of this Agreement or to enforce
any provision, on one or more occasions, will not be deemed to be a waiver of its right to enforce any provision
in the future.
12.10 Code Section 409A. Company and Employee agree that this Agreement will be interpreted to comply with or
be exempt from Section 409A of the Code and the regulations and guidance promulgated thereunder to the
extent applicable (collectively “Section 409A”) and all provisions of this Agreement will be construed in a
manner consistent with the requirements for avoiding taxes or penalties under Section 409A. Notwithstanding
any other provision of this Agreement, payments provided under this Agreement may only be made upon an
event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this
Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation
from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible.
For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a
separate payment. Any payments to be made under this Agreement upon a termination of employment shall
only be made if such termination of employment constitutes a “separation from service” under Section 409A.
Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided
under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any
portion of any taxes, penalties, interest or other expenses that may be incurred by the Employee on account of
non-compliance with Section 409A.
(a) Notwithstanding any other provision of this Agreement, if at the time of Employee’s termination of
employment, he is a “specified employee”, determined in accordance with Section 409A, any payments
and benefits provided under this Agreement that constitute “nonqualified deferred compensation” subject
to Section 409A that are provided to Employee on account of his separation from service shall not be paid
until the first payroll date to occur following the six-month anniversary of Employee’s termination date
(“Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise
have been made during such six-month period shall be paid in a lump sum on the Specified Employee
Payment Date without interest and thereafter, any remaining payments shall be paid without delay in
accordance with their original schedule. If Employee dies during the six-month period, any delayed
payments shall be paid to Employee’s estate in a lump sum upon Employee’s death.
(b) To the extent required by Section 409A, each reimbursement or in-kind benefit provided under this
Agreement shall be provided in accordance with the following: (i) the amount of expenses eligible for
reimbursement, or in-kind benefits provided, during each calendar year cannot affect the expenses eligible
for reimbursement, or in-kind benefits to be provided, in any other calendar year; (ii) any reimbursement
of an eligible expense shall be paid to Employee on or before the last day of the calendar year following
the calendar year in which the expense was incurred; and (iii) any right to reimbursements or in-kind
benefits under this Agreement shall not be subject to liquidation or exchange for another benefit.
12.11 Counterparts; Headings. This Agreement may be executed in one or more counterparts, each of which will
be treated as an original, but all of which taken together will be treated as one and the same instrument. The
headings in this Agreement are for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
13. Employee’s Recognition of Agreement. Employee acknowledges with execution of this Agreement that: (a)
Employee has read and understood this Agreement and agrees that its terms are necessary for the reasonable and proper
protection of Company’s business, (b) Company has been induced to employ Employee by his representation that he
will abide by and be bound by each of the covenants and restraints in this Agreement, and (c) each and every covenant
and restraint is reasonable. Employee acknowledges that Employee has been advised by Company that Employee is
entitled to have this Agreement reviewed by an attorney of Employee’s selection, at Employee’s expense, before
signing, and that Employee has either done so or elected to forgo that right.
EMPLOYEE
/s/ Bryan Lewis
BRYAN LEWIS
INTELLICHECK, INC.
/s/ Michael D. Malone
By Michael D. Malone, Chairman
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Intellicheck, 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 21, 2019, on our audits of the consolidated financial statements as of December 31, 2018 and 2017 and for each of
the years then ended, which report is included in this Annual Report on Form 10-K to be filed March 21, 2019.
Exhibit 23.1
/s/ EisnerAmper LLP
EISNERAMPER LLP
Iselin, New Jersey
March 21, 2019
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Bryan Lewis, certify that:
1.
I have reviewed this annual report on Form 10-K of Intellicheck, 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 21, 2019
/s/ Bryan Lewis
Name: Bryan Lewis
Title: President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Bill White, certify that:
1.
I have reviewed this annual report on Form 10-K of Intellicheck, 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 21, 2019
/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, 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, 2018 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 21, 2019
/s/ Bryan Lewis
Dated: March 21, 2019
Name: Bryan Lewis
Title: President and 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.