PART
I
Item
1. Business
OVERVIEW
We
were originally incorporated in the state of New York in 1994 as Intelli-Check, Inc. In August 1999, we reincorporated in Delaware.
On March 14, 2008, our corporation was renamed Intelli-Check - Mobilisa, Inc. after the consummation of the merger with Mobilisa,
Inc. (“Mobilisa”) (references to “Intelli-Check” in this annual report refer to the Company prior to the
merger with Mobilisa). At the closing of the merger, our headquarters were moved to Mobilisa’s offices in Port Townsend,
Washington. On October 27, 2009, we made a further change in our name to Intellicheck Mobilisa, Inc. 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; 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 in order to stay on the leading edge of technology.
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:
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Commercial
Fraud and Risk Management – which may lead to economic losses to financial institutions and 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;
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Instant
Credit Card Approval – retail stores and financial institutions use our technology to scan a driver license at a
kiosk or at the Point Of Sale (POS) and send the information underwriters and others 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;
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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
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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.
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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:
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committing
identity theft;
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gaining
entrance to high profile buildings and sensitive infrastructures,
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improperly
boarding airplanes;
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engaging
in medical fraud;
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committing
credit card, debit card and check cashing fraud;
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purchasing
age restricted products such as alcohol and tobacco while underage; and
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illegally
purchasing firearms;
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obtaining
welfare or other government benefits.
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unlawfully
committing pharmacy fraud, including false narcotic prescriptions;
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committing
refund fraud;
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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.
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® ® 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:
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the
format of the document is valid;
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the
document has been altered or is fake, by displaying the parsed, encoded data for comparison with the printed information;
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the
document has expired; and
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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.
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Then,
the ID Check® software applications can:
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respond
to the user by displaying the format verification result and the parsed information;
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save
information that is permissible by law to memory; and
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print
a record of the transaction including the verification results if a printer is part of the hardware configuration.
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ID
Check® SDK
Our
software product, ID Check® SDK, is designed for software developers that wish to incorporate our proprietary ID Check®
technology into their applications. We currently have multiple license agreements with third parties for integration and sub-licensing
of our software applications into their core applications. The SDK is available for multiple platforms such as Microsoft Windows,
Windows Mobile, AIX, certain versions of Linux and is also offered as a SaaS product that provides a platform independent &
centralized update solution for quicker and easier integration. It can easily be ported to other platforms as the need arises.
New integrations are being sold as hosted cloud-based SaaS products and the customer purchases 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.
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, mobile phones, and point-of-sale terminals. Many of these devices contain an electronic serial number (ESN) to prevent
unauthorized use of our software.
Instant
Credit Application Kiosk Software Applications
These
are custom software applications that Intellicheck Mobilisa has developed for a variety of major financial service companies and
retail stores. The software installed on multiple kiosk devices provides the customers of the major financial service companies
and retail stores with the ability to perform in-store instant credit approval on these devices. The hardware platforms, on which
the software applications run, range from stationary devices to handhelds to tablet PCs. The process involves the swiping or scanning
of the driver license to verify the encoded format and after verification, the information parsed from the encoded data is populated
into the proper fields on the application displayed on the kiosk. The applicant then completes the application by entering the
remaining required information that is not encoded on the driver license, such as social security and telephone numbers. The software
application then sends the data to the financial service company’s backend “decisioning” tool
for credit approval. If approved, the applicant is granted instant credit which can then be used to make purchases.
Upgrade
Capability
Our
ID Check® Products and related databases are constantly updated to stay current with identification formats and new forms
of ID.
Government
Identification
Defense
ID® System
Our
Defense ID® System offers law enforcement personnel and military security officers’ additional information
for protecting their facilities. The Defense ID System uses rugged, handheld, mobile devices and desktop visitor/vendor approval
workstations to read barcodes, magnetic stripes, RFID (radio frequency 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.
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.
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 workflow, 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. Some of these companies have included 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.
Our
Revenue Sources
We
derive our revenue from the following sources:
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Sales
of our systems by both our own direct sales force and marketing partners;
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Per
transaction or subscription fees (SaaS) from the licensed use of our technology;
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Revenue
sharing and marketing arrangements through strategic alliances and partnerships; and
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Sale
of software upgrades and extended maintenance programs
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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
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Mass
merchandisers and retailers
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Auto
dealerships and rental car agencies
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Banks
and other financial institutions
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Casinos
for enrollment of guests
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Credit
unions
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Hospital
patient admissions
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Credit
card issuers
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Lodging
Industry
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Check
cashing services
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Airlines
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Commercial
fraud protection
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Mass
merchandisers and retailers
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Auto
dealerships and rental car agencies
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Banks
and other financial institutions
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Casino
cage operations
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Credit
unions
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Hospitals,
medical facilities and health plans
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Credit
card issuers
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Lodging
Industry
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Check
cashing services
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Pharmacies
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Access
control
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Airports
and airlines
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Prisons
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Departments
of Motor Vehicles
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Law
enforcement agencies
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Notable
buildings
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Military
establishments
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Court
houses
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College
campuses
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Nuclear
facilities
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Department
of Homeland Security
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Oil
refineries and storage facilities
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Bus,
rail and port facilities
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Age
verification
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Bars
and night clubs
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Stadiums
and arenas
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Convenience
stores
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Casinos
and gaming establishments
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Grocery
chains
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Law
Enforcement
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Restaurants
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Firearm
dealers
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Cannabis
Industry
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Government
Identity Systems
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 seaports, 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.
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
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Army
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Navy
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Air
Force
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Marines
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Coast
Guard
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Military
Acade locations that validate identification cards mies
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Military
and Veterans Hospitals
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Oil
Refineries
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Airports
and Seaports
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Law
Enforcement/Government
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FBI
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Drug Enforcement Administration
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State & Local Police
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Local Sheriffs
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Bureau of Alcohol, Tobacco, Firearms, and Explosives
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Intelligence Agencies locations that validate identification cards
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Customs
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Department of Transportation
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Department of Homeland Security
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Border Patrol
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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:
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Endorsements
by nationally known public interest groups and trade associations;
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Web
seminars, as well as our own website; and
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Trade
publications;
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Various
conventions and industry specific seminars.
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Trade
shows;
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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.
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 2019, our top ten customers accounted for approximately 66% of total revenues. In 2018,
our top ten customers accounted for approximately 52% 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, 2019 and 2018 was $3,656,679 and $2,904,166, respectively.
INTELLECTUAL
PROPERTY
We
currently hold eighteen (18) U.S. patents, one (1) Canadian patent and one (1) United Kingdom patent. At present, we have five
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.
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.
In
2016, we were granted three patents that were a continuation of earlier filed applications. The first patent related to comparing
documents. The second patent related to identity in response to threat levels. Finally the third patent is related to checking
the validity of identification documents using a remote database.
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
were granted two patents in 2019. The first patent is related to checking the validity of identification documents using a remote
database. The second patent related to identification scanning in compliance with jurisdictional or other rules.
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, 2019 total fees paid under this agreement were
approximately $2,000.
Employees
As
of March 18, 2020, we had thirty-four full-time employees. Three are engaged in executive management, nineteen in information
technology, six in sales and marketing, three in integration and customer support 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 $2,548,711 and $3,963,576 for the fiscal years ended December 31, 2019 and 2018, respectively, and our
accumulated deficit was $116,935,112 as of December 31, 2019. 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.
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:
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build
and train our sales force;
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establish
and maintain relationships with distributors;
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develop
customer support systems;
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develop
expanded internal management and financial controls adequate to keep pace with growth in personnel and sales, if they occur;
and
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manage
the use of third-party manufacturers and suppliers.
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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:
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contractual
arrangements providing for nondisclosure of proprietary information;
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maintaining
and enforcing issued patents and filing patent applications on innovative solutions to commercially important problems;
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protecting
trade secrets;
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protecting
copyrights and trademarks by registration and other appropriate means;
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establishing
internal processes for identifying and appropriately protecting new and innovative technologies; and
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establishing
practices for identifying unauthorized use of intellectual property.
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Litigation
can be very costly and divert management’s attention. An adverse outcome in any litigation may have a severe negative effect
on our financial results. To determine the priority of inventions, we may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office or oppositions in foreign patent and trademark offices, which could result in substantial
cost and limitations on the scope or validity of our patents or trademarks.
Additionally,
third parties, including our competitors or licensees, may seek to have our patents reviewed by the Patent Trial and Appeal Board
of the United States Patent and Trademark Office in a post grant proceeding, such as post grant review or an inter parties review.
Such proceedings, if instituted could cancel our patents or narrow the scope of our patent claims. We cannot predict the effect
that such proceedings, if instituted, may have on our business or revenue received from licensing our patents.
In
addition, foreign laws treat the protection of proprietary rights differently from laws in the United States. The failure of foreign
laws or judicial systems to adequately protect our proprietary rights or intellectual property, including intellectual property
developed on our behalf by foreign contractors or subcontractors, may have a material adverse effect on our business, operations
and financial results.
If
our future products incorporate technologies that infringe the proprietary rights of third parties, and we do not secure licenses
from them, we could be liable for substantial damages.
We
are not aware that our current products infringe the intellectual property rights of any third parties. We also are not aware
of any third-party intellectual property rights that may hamper our ability to provide future 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:
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consume
substantial time and financial resources;
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divert
the attention of management from growing our business and managing operations; and
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disrupt
product sales and shipments.
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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 18, 2020, 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 Nasdaq Stock Market. Many factors may cause the market price for our common stock to
decline, including:
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shortfalls
in revenues, cash flows or continued losses from operations;
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delays
in development or roll-out of any of our products;
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announcements
by one or more competitors of new product acquisitions or technological innovations; and
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unfavorable
outcomes from outstanding litigation.
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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.
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 negatively impacted by the recent outbreak of coronavirus (COVID-19).
In
light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), this public health
concern could pose a risk to our customers, our employees, our vendors and the communities in which we operate, which could negatively
impact our business. The extent to which the coronavirus (COVID-19) may impact our business will depend on future developments,
which are highly uncertain and cannot be predicted at this time. We could experience customer or widespread retail shutdowns to
prevent spread of the virus, employee impacts from illness, school closures and other community response measures, all of which
could negatively impact our business. We intend to continue to monitor the situation and may adjust our current policies and practices
as more information and guidance become available.
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.
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.
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 66% of total revenues in 2019 and 52% of total revenues in 2018. Three customers
accounted for 39% of revenues in 2019 and two customers accounted for 31% of revenues in 2018. 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
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 identity authentication and threat identification solutions to address challenges that include bank
and 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;
and Defense ID®, a mobile and fixed infrastructure solution for threat identification, identity authentication and access
control to military bases and other government facilities.
Intellicheck
continues to develop and release innovative products based upon its rich patent portfolio consisting of twenty issued patents
and five pending.
Liquidity
For
the year ended December 31, 2019, the Company incurred a net loss of $2,548,711 and used cash in operations of $1,840,850. As
of December 31, 2019, the Company had cash of $3,350,853 and an accumulated deficit of $116,935,112. 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 from the date of filing.
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.
Merging
of Subsidiaries
On
December 31, 2018, the Company merged its wholly owned subsidiaries, Mobilisa, Inc. and Positive Access Corporation into one company
under Intellicheck, Inc. As of and prior to December 31, 2018, the financial statements are consolidated and include the accounts
of Intellicheck and these subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
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, 2019, the Company’s inventory related to Commercial Identity products for intended
near-term sales.
Long-Lived
Assets and Impairment of Long-Lived Assets
The
Company’s long-lived assets include property and equipment, goodwill and intangible assets.
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of these assets may not be fully recoverable in accordance with ASC topic 350 and ASC Topic 360 to determine recoverability of
its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. Impairment is measured at fair value.
Property
and Equipment
Property
and equipment are recorded at cost and are depreciated over their estimated useful lives ranging from three to ten-years using
the straight-line method. Leasehold improvements are amortized utilizing the straight-line method over the lesser of the term
of the lease or estimated useful life of the asset.
Goodwill
Goodwill
represents the excess of acquisition cost over the fair value of net assets acquired in business combinations. Pursuant to ASC
Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain
circumstances. Under guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform
the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit
unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than
its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions,
industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease
in share price.
The
Company performed its annual impairment test of goodwill in the fourth quarter for the years ended December 31, 2019 and 2018.
For the years ended December 31, 2019 and 2018, 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.
There were no impairment charges recognized for the years ended December 31, 2019 and 2018.
Revenue
Recognition and Deferred Revenue
General
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. 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:
Software
as a Service (SaaS)
Software
as a service (SaaS) for hosted subscription services and licensed software 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, the revenue should be recognized over time based on the usage of the hosted subscription
services and licensed software, which can vary from month to month. The revenue is typically based either on a formula such as
number of locations using the service in a given month multiplied by a fee per location or the number of actual scans in a given
month multiplied by a set price per scan based on the contract with the customer.
Other
Subscription and Support Services
The
Company also recognizes revenues from other subscription and support services, which includes jurisdictional updates to certain
commercial customers and support services particularly to its Defense ID® customers. These subscriptions require 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 locations
in a given month multiplied by a fee per location.
Equipment
Revenue
Revenue
from the sale of equipment is recognized at a point in time. The point in time that the revenue is recognized is when the customer
has control of the equipment which is when the customer receives the benefit and the Company’s performance obligation has
been satisfied. Depending on the contract terms, that could either be at the time the equipment is shipped or at the time the
equipment is received.
Non-Recurring
Services Revenue
The
non-recurring services include items such as training, installation, customization, and configuration. The Company recognizes
revenue from non-recurring services contracts ratably over the service contract period as the customer consumes the benefit as
it is provided and the Company’s performance obligation has been satisfied.
Extended
Warranty
Extended
warranty revenues are 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,
|
|
|
|
2019
|
|
|
2018
|
|
Products and services
|
|
|
|
|
|
|
|
|
Software as a Service (SaaS)
|
|
$
|
6,102,280
|
|
|
$
|
2,696,208
|
|
Other subscription and support services
|
|
|
682,325
|
|
|
|
1,042,196
|
|
Equipment
|
|
|
480,304
|
|
|
|
362,625
|
|
Non-recurring services
|
|
|
330,895
|
|
|
|
206,910
|
|
Extended warranties on equipment
|
|
|
59,146
|
|
|
|
120,710
|
|
Other
|
|
|
8,708
|
|
|
|
4,805
|
|
|
|
$
|
7,663,658
|
|
|
$
|
4,433,454
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
489,012
|
|
|
$
|
367,430
|
|
Services transferred over time
|
|
|
7,174,646
|
|
|
|
4,066,024
|
|
|
|
$
|
7,663,658
|
|
|
$
|
4,433,454
|
|
Contract
balances
The
current portion of deferred revenue at December 31, 2019 and December 31, 2018 was $572,391 and $704,536, 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, 2018, $704,536 was recognized as revenue for the year ended December 31, 2019. The long-term portion of deferred revenue is
$13,322 and $29,486 as of December 31, 2019 and December 31, 2018, 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:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software as a Service (SaaS)
|
|
$
|
391,831
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
391,831
|
|
Other subscription and support services
|
|
|
159,892
|
|
|
|
4,480
|
|
|
|
1,020
|
|
|
|
165,392
|
|
Extended warranties on equipment
|
|
|
20,668
|
|
|
|
7,235
|
|
|
|
587
|
|
|
|
28,490
|
|
|
|
$
|
572,391
|
|
|
$
|
11,715
|
|
|
$
|
1,607
|
|
|
$
|
585,713
|
|
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,
2019 and 2018, 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,
2019 and 2018, 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. 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, 2019, the Company had three customers that accounted for 39% of revenue. The revenue was associated
with commercial identity sales customers. These customers represented 47% of total accounts receivable as of December 31, 2019.
During the year ended December 31, 2018, the Company had two customers that accounted for 31% of revenue.
As
of December 31, 2019, 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. All shares were considered anti-dilutive due to the net loss
for each of the respective years ended.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,548,711
|
)
|
|
$
|
(3,963,576
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares –
|
|
|
|
|
|
|
|
|
Basic/Diluted
|
|
|
15,792,470
|
|
|
|
15,542,480
|
|
|
|
|
|
|
|
|
|
|
Net Loss per share –
|
|
|
|
|
|
|
|
|
Basic/Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the common stock equivalents excluded from loss per diluted share because their effect would be anti-dilutive:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,436,623
|
|
|
|
1,072,332
|
|
Warrants
|
|
|
63,430
|
|
|
|
471,801
|
|
Restricted stock
|
|
|
2,670
|
|
|
|
-
|
|
Total
|
|
|
1,502,723
|
|
|
|
1,544,133
|
|
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, 2019 and 2018.
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.
Recent
Accounting Pronouncements
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting
standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company
is currently evaluating the impact that this standard will have on its financial statements.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (ASC 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”). The standard requires hosting arrangements that are service contracts to follow the guidance for
internal-use software to determine which implementation costs can be capitalized. This standard is effective for fiscal years
beginning after December 15, 2019 with early adoption permitted and can be applied retrospectively
or prospectively. The Company determined has this standard will not have a material impact on its 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 was effective for the quarter that begun after the effective date. The
Company applied these changes on the Statement of Stockholders’ Equity in its financial statements and did not have a material
impact on this presentation.
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 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 smaller
reporting companies for fiscal years beginning after December 15, 2022, 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 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 financial statements. The Company elected the practical expedient to include non-lease
components as rent and utilities in the definition of rent payments. The impact of adoption was the recognition of a right-to-use
asset and an operating lease liability on the Company’s financial statements in the amount of approximately $266,000 and
$274,000, respectively and did not have a significant impact on its 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:
|
|
2019
|
|
|
2018
|
|
Accounts receivable
|
|
$
|
1,716,949
|
|
|
$
|
1,044,109
|
|
Less: Allowance for doubtful accounts
|
|
|
(42,055
|
)
|
|
|
(24,675
|
)
|
Accounts receivable, net
|
|
$
|
1,674,894
|
|
|
$
|
1,019,434
|
|
4.
PROPERTY AND EQUIPMENT
Property
and equipment are comprised of the following as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Computer equipment
|
|
$
|
1,025,287
|
|
|
$
|
992,336
|
|
Furniture and fixtures
|
|
|
136,524
|
|
|
|
136,524
|
|
Leasehold improvements
|
|
|
41,257
|
|
|
|
41,257
|
|
Office equipment
|
|
|
591,111
|
|
|
|
589,357
|
|
|
|
|
1,794,179
|
|
|
|
1,759,474
|
|
Less – Accumulated depreciation and amortization
|
|
|
(1,612,448
|
)
|
|
|
(1,494,891
|
)
|
|
|
$
|
181,731
|
|
|
$
|
264,583
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018 amounted to $117,557 and $88,545, respectively.
5.
GOODWILL AND INTANGIBLE ASSETS
Identifiable
intangible assets
The
changes in the carrying amount of intangible assets for the year ended December 31, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Balance at beginning of year
|
|
$
|
306,575
|
|
|
$
|
463,578
|
|
Deduction: Amortization expense
|
|
|
(132,338
|
)
|
|
|
(157,003
|
)
|
Balance at end of year
|
|
$
|
174,237
|
|
|
$
|
306,575
|
|
The
following tables set forth the components of intangible assets as of December 31, 2019 and 2018:
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Estimated
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and copyrights
|
|
|
2-17 years
|
|
|
$
|
480,661
|
|
|
$
|
(306,424
|
)
|
|
$
|
174,237
|
|
|
|
|
|
|
|
$
|
480,661
|
|
|
$
|
(306,424
|
)
|
|
$
|
174,237
|
|
|
|
As of December 31, 2018
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
286,590
|
|
|
$
|
(278,825
|
)
|
|
$
|
7,765
|
|
Patents and copyrights
|
|
|
954,915
|
|
|
|
(746,229
|
)
|
|
|
208,686
|
|
Non-contractual customer relationships
|
|
|
2,431,655
|
|
|
|
(2,341,531
|
)
|
|
|
90,124
|
|
|
|
$
|
3,673,160
|
|
|
$
|
(3,366,585
|
)
|
|
|
306,575
|
|
The
following summarizes amortization of acquisition related intangible assets included in the statement of operations:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
104,830
|
|
|
$
|
129,496
|
|
General and administrative
|
|
|
27,508
|
|
|
|
27,507
|
|
|
|
$
|
132,338
|
|
|
$
|
157,003
|
|
The
Company expects that amortization expense for the next five succeeding years will be as follows:
2020
|
|
$
|
24,980
|
2021
|
|
$
|
24,980
|
2022
|
|
$
|
24,980
|
2023
|
|
$
|
24,980
|
2024
|
|
$
|
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, 2019 and 2018. This goodwill resulted from the acquisition of Mobilisa, Inc. and Positive Access
Corporation.
For
the years ended December 31, 2019 and 2018, 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, 2019 and 2018, 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, 2019 were $30,085,862.
6.
NOTE RECEIVABLE
On
August 31, 2015, the Company sold its wireless enterprise assets to the Jamestown S’Klallam Tribe (the “Buyer”)
for total consideration of $350,000 which consists of an upfront cash payment of $30,000, the issuance of a promissory note totaling
$200,000 and contingent consideration up to a maximum of $120,000 based on future earnings. 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, 2019, the total note receivable was $29,017, which is included in
Other Current Assets on the Balance Sheets. 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 Balance Sheets.
7.
DEBT
Revolving
Line of Credit
On
February 6, 2019, the Company entered into a revolving credit facility with Citibank that allows for borrowings up to the lesser
of (i) $2,000,000 or (ii) the collateralized balance in the Company’s existing fixed income investment account with Citibank
subject to certain limitations. The facility bears interest at a rate consistent of Citibank’s Base Rate (6.25% at December
31, 2019) minus 2%. Interest is payable monthly and as of December 31, 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, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Professional fees
|
|
$
|
171,331
|
|
|
$
|
69,406
|
|
Payroll and related
|
|
|
544,441
|
|
|
|
406,925
|
|
Incentive bonuses
|
|
|
632,105
|
|
|
|
-
|
|
Severance payments to former officer
|
|
|
-
|
|
|
|
158,406
|
|
Other
|
|
|
60,209
|
|
|
|
92,181
|
|
|
|
$
|
1,408,086
|
|
|
$
|
726,918
|
|
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 at December 31, 2017.
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, 2019 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, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
4,498,000
|
|
|
$
|
3,914,000
|
|
Stock-based compensation
|
|
|
171,000
|
|
|
|
82,000
|
|
Reserves
|
|
|
11,000
|
|
|
|
7,000
|
|
Intangible assets
|
|
|
78,000
|
|
|
|
55,000
|
|
Severance costs and deferred rent
|
|
|
-
|
|
|
|
44,000
|
|
Research and development
tax credits
|
|
|
333,000
|
|
|
|
258,000
|
|
Total deferred tax assets
|
|
|
5,091,000
|
|
|
|
4,360,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(30,000
|
)
|
|
|
(37,000
|
)
|
Total deferred tax liabilities
|
|
|
(30,000
|
)
|
|
|
(37,000
|
)
|
Net deferred tax assets
|
|
|
5,061,000
|
|
|
|
4,323,000
|
|
Less: Valuation allowance
|
|
|
(5,061,000
|
)
|
|
|
(4,323,000
|
)
|
Deferred tax assets,
net of allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
There
were no tax interest or penalties recorded in the financial statements for the years ended December 31, 2019 and 2018.
The
Company’s available NOL at December 31, 2019 was approximately $17 million. The federal and state NOL’s incurred in
all years through 2017 are available to offset future taxable income and expire from 2020 through 2039 if not utilized. The 2018
and 2019 gross NOLs incurred for the year ended December 31, 2019 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 2016 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,
2019, the Company has no material uncertain tax positions.
The
effective tax rate for the years ended December 31, 2019 and 2018 is different from the tax benefit that would result from applying
the statutory tax rates primarily due to the recognition of valuation allowances. In 2019, the valuation allowance increased approximately
$650,000 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, 2019, and 2018, there were no outstanding shares of Series A Convertible Preferred Stock.
Stock
Options and Share Based Compensation
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 3,500,000 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,
|
|
|
|
2019
|
|
|
2018
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
Grant price
|
|
$
|
2.68
|
|
|
|
$2.30 - $2.87
|
|
Exercise price
|
|
$
|
2.68
|
|
|
|
$2.30 - $2.87
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
84.92
|
%
|
|
|
94.02% - 97.22
|
%
|
Expected life (in years)
|
|
|
5
|
|
|
|
5
|
|
Risk-free interest rate
|
|
|
2.49
|
%
|
|
|
2.69% - 2.73
|
%
|
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, 2017
|
|
|
1,631,358
|
|
|
$
|
1.36
|
|
|
|
1.70 years
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
102,500
|
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(67,688
|
)
|
|
|
4.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(593,838
|
)
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,072,332
|
|
|
$
|
1.44
|
|
|
|
1.85 years
|
|
|
$
|
881,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
444,163
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(94,872
|
)
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,421,623
|
|
|
$
|
1.78
|
|
|
|
1.96 years
|
|
|
$
|
8,113,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
1,069,542
|
|
|
$
|
1.49
|
|
|
|
1.34 years
|
|
|
$
|
6,416,368
|
|
The
following is a summary of stock options as of December 31, 2019:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Options
|
|
|
Weighted-
average
Remaining Life
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted-
average
Exercise
Price
|
|
$
|
1.15 to $1.56
|
|
|
839,460
|
|
|
|
0.66 years
|
|
|
$
|
1.16
|
|
|
|
833,210
|
|
|
$
|
1.16
|
|
$
|
1.75 to $2.87
|
|
|
582,163
|
|
|
|
3.83 years
|
|
|
$
|
2.67
|
|
|
|
236,332
|
|
|
$
|
2.64
|
|
|
|
|
|
1,421,623
|
|
|
|
1.96 years
|
|
|
$
|
1.78
|
|
|
|
1,069,542
|
|
|
$
|
1.49
|
|
The
weighted-average fair value of the options granted during the years ended December 31, 2019 and 2018 is $1.82 and $2.12, respectively.
As
of December 31, 2019, the Company had 789,463 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:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
5,859
|
|
|
$
|
2.56
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
29,822
|
|
|
|
2.07
|
|
|
|
|
|
Vested and Settled in shares
|
|
|
(35,681
|
)
|
|
|
2.15
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,477
|
|
|
|
5.53
|
|
|
|
|
|
Vested and Settled in shares
|
|
|
(9,807
|
)
|
|
|
5.00
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
2,670
|
|
|
$
|
7.49
|
|
|
$
|
-
|
|
As
of December 31, 2019, there was $485,110 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
2.87 years.
Share
based compensation expense for the years ended December 31, 2019 and 2018 is as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Compensation cost recognized:
|
|
|
|
|
|
|
Stock options
|
|
$
|
515,805
|
|
|
$
|
124,886
|
|
Restricted stock units
|
|
|
69,060
|
|
|
|
61,821
|
|
|
|
$
|
584,865
|
|
|
$
|
186,707
|
|
Share
based compensation is included in operating expenses as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Selling, general and administrative
|
|
$
|
561,391
|
|
|
$
|
169,654
|
|
Research and development
|
|
|
23,474
|
|
|
|
17,053
|
|
|
|
$
|
584,865
|
|
|
$
|
186,707
|
|
The
Company has a net operating loss carry-forward as of December 31, 2019, 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 2019 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, 2019, the Company had 63,430 remaining warrants outstanding at an exercise
price of $2.20 through 2021. There were 320,070 warrants exercised at a price of $2.20 during the year ended December 31, 2019.
No warrants were exercised in the year ended December 31, 2018.
11.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases offices in Melville, New York which require monthly payments of $10,334 and expires March 31, 2021 under an operating
lease. The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to
the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
This operating lease is included in Operating Lease Right-of-Use (ROU) Asset, Operating Lease Liability, current portion and Operating
Lease Liability, long-term portion on the Balance Sheets. The Company recognizes rent and utilities expense for this lease on
a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating
lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities
are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s
lease does not provide an implicit rate, it uses its incremental borrowing rate of 5% based on the commencement date in determining
the present value of these lease payments. The Company gives consideration to instruments with similar characteristics when calculating
this incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain
that the Company will exercise that option. Rent expense which includes utilities was $125,616 and $182,427 for the years ended
December 31, 2019 and 2018, respectively, and cash payments for rent and utilities was $126,496 and $168,172 for the years ended
December 31, 2019 and 2018, respectively.
Software
License Agreement
On
February 26, 2020, the Company entered into a license agreement with a third party (the “Licensor”) to purchase certain
intellectual property rights and licensed software subject to certain restrictions. The purchase price of this license totaled
$400,000 which the Company paid an initial fee of $100,000 and has an obligation to pay the Licensor $300,000 on or before December
31, 2020. The Company has an option to pay the Licensor an annual fee of $35,000 for maintenance and updates to be distributed
from the Licensor.
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, 2019, 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.
Severance
and Change-in-Control Agreements
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 expires on November 29, 2020 and replaces an amended severance
agreement previously executed by Mr. White and the Company on May 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 could 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 would receive aggregate cash payments of $500,000 over a 20-month
period together with reimbursement of certain vision and dental benefit premiums. The Company 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, 2019, the total severance liability was fully paid.
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.
Incentive
Plans
In
May 2019, the Board entered into a 2019 separate executive incentive bonus plan (“the 2019 Bonus Plan”) with four
members of the Company’s executive management team. Each agreement, under the 2019 Bonus Plan, is based on certain goals
achieved by the Company plus individual achievements by each executive. The bonus was paid in the form of cash and RSUs which
was approved by the Board on March 11, 2020. At December 31, 2019, this bonus liability was $402,369 which is included in Accrued
Expenses on the Balance Sheets. The RSUs were granted on March 11, 2020 and the cash portion of this bonus was paid on March 16,
2020.
In
September 2019, the Company’s executive management team created a 2019 Employee Incentive Plan for all the Company’s
non-executives and non-sales personnel. The incentive payment is based on the Company attaining certain revenue goals for the
calendar year 2019 and is based as a percentage of the employee’s salary. At December 31, 2019 this bonus liability was
$229,736 and is included in Accrued Expenses on the Balance Sheets and was paid on March 16, 2020.
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 $62,786 and $53,784 for
2019 and 2018, respectively. The plan assets were approximately $2.4 million and $2.2 million at December 31, 2019 and 2018, respectively.
12.
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, 2019
|
|
|
Year Ended December 31, 2018
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,279
|
|
|
$
|
1,558
|
|
|
$
|
1,930
|
|
|
$
|
2,897
|
|
|
$
|
1,062
|
|
|
$
|
1,001
|
|
|
$
|
1,040
|
|
|
$
|
1,330
|
|
Gross profit
|
|
|
1,087
|
|
|
|
1,339
|
|
|
|
1,671
|
|
|
|
2,571
|
|
|
|
962
|
|
|
|
919
|
|
|
|
927
|
|
|
|
1,239
|
|
Income (loss) from operations
|
|
|
(1,219
|
)
|
|
|
(920
|
)
|
|
|
(581
|
)
|
|
|
72
|
|
|
|
(1,082
|
)
|
|
|
(1,143
|
)
|
|
|
(1,154
|
)
|
|
|
(714
|
)
|
Net income (loss)
|
|
|
(1,213
|
)
|
|
|
(874
|
)
|
|
|
(568
|
)
|
|
|
106
|
|
|
|
(1,068
|
)
|
|
|
(1,101
|
)
|
|
|
(1,131
|
)
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Due
to rounding, quarterly net income (loss) per share may not add up to the total net loss for the year.