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Form 10-K Intellicheck, Inc. For: Dec 31

New IdentityTheft Scam


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UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549

 

 

FORM
10-K

 

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

 

For
the fiscal year ended December 31, 2020

 

OR

 

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

 

For
the transition period from ________________ to ________________

 

Commission
File No.: 001-15465

 

Intellicheck,
Inc.

(Exact
name of Registrant as specified in its charter)

 

Delaware   11-3234779

(State
or Other Jurisdiction of

Incorporation
or Organization)

 

(I.R.S.
Employer

Identification
No.)

 

200
Broad Hollow Road, Suite 207, Melville, NY 11747

(Address
of Principal Executive Offices) (Zip Code)

 

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

 

Securities
registered pursuant to Section 12(b) of the Act:

 

Common
Stock, $0.001 par value
  The
NASDAQ Stock Market LLC
(Title
of Class)
  (Name
of exchange on which registered)

 

Securities
registered pursuant to Section 12(g) of the Act: None

 

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]
No [X]

 

Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ]
No [X]

 

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes
[X] No [  ]

 

Indicate
by check mark whether the registrant has submitted electronically (§232.405 of this chapter) every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).

Yes
[X] No [  ]

 

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

 

Large
accelerated

filer
[  ]

  Accelerated
filer [  ]
 

Non-accelerated
filer [  ]

(Do
not check if a

smaller reporting company)

  Smaller
reporting company [X]
  Emerging
Growth Company [  ]

 

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
[  ] No [X]

 

State
the aggregate market value of the voting and non-voting stock held by non-affiliates of the Issuer: $111,615,707 (based upon the
closing price of Issuer’s Common Stock, $0.001 par value, as of the last business day of the Issuer’s most recently
completed second fiscal quarter (June 30, 2020)).

 

Indicate
the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

 

Common
Stock, $0.001 Par Value
  18,593,757
(Title
of Class)
  (No.
of Shares Outstanding at March 29, 2021)

 

DOCUMENTS
INCORPORATED BY REFERENCE: Proxy for Annual Meeting of Stockholders May 5, 2021

 

 

 

Table
of Contents

 

 

 

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. 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 identity verification solutions to address
challenges that include commercial retail and banking fraud prevention, access control and identity validation. Intellicheck’s
products include ID Check®, a solution for preventing identity fraud across any industry delivered via smart devices, the
internet, or integrated into a customer’s system.

 

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 and identity validation. For example, we
have extended our technologies into online applications to provide identity validation 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:

 

  Commercial
Fraud and Risk Management
– which may lead to economic losses to financial institutions and merchants from check
cashing, debit and credit card transactions, e-commerce as well as other types of fraud such as identity theft that principally
use fraudulent identification documents as proof of identity;
     
  Instant
Credit Card Approval –
retail stores 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 to 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;
     
  Unauthorized
Access
– our systems and software are designed to increase security and deter terrorism at airports, shipping ports,
rail and bus terminals, military installations, high profile buildings and infrastructure where security is a concern; and
     
  Inefficiencies
Associated With Manual Data Entry
– by reading encoded data contained in the bar code and magnetic stripe of an
identification card with a quick swipe or scan of the card, where permitted by law, customers are capable of accurately and
instantaneously inputting information into forms, applications and the like without the errors associated with manual data
entry.

 

 

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 digitally stored barcode 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 digitally 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, coupled with the staggering amount of personal information available from data breaches, has created a major
problem for those who rely on identification documents. In an age where high-tech scanners, computers and color printers are commonplace,
and personal information so cheap to purchase, fake IDs of the highest quality with the identity theft victim’s actual information
on the document 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 forms of ID. Therefore, anyone can gain access
to a false identity that gives them the ability, in a commercial transaction, to present fake and stolen credit cards or checks
that are supported by false identification. Additionally, starting with only a fraudulent driver license, an individual may be
able to create multiple identities, commit fraud, buy age restricted products such as alcohol and tobacco while underage, evade
law enforcement and engage in other criminal activities, such as:

 

  committing
identity theft
  gaining entrance to high profile buildings and
sensitive infrastructures
  improperly
boarding airplanes
  engaging in medical fraud
  committing
credit card, debit card and check cashing fraud
  purchasing age restricted products such as alcohol
and tobacco while underage, and
  illegally
purchasing firearms
  obtaining welfare or other government benefits.
  unlawfully
committing pharmacy fraud including false narcotic prescriptions
     
  committing
refund fraud
     

 

Given
the ease with which identification can be falsified, simply looking at a driver license may not be sufficient to verify age or
identity and determine if it is fraudulent. Since merchants and financial institutions are facing significant economic losses
due to these frauds, we believe that a document authentication system which can accurately read the digitally 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, Financial 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 for the retail, banking, government, age restricted products,
hospitality or any other use case where knowing a person’s identity is important.

 

ID
Check® software does not require a connection to a central database to operate, thus negating privacy concerns. Many of our
products can 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. For additional
authentication in an online transaction, the Company also has a biometric facial recognition solution, through partnerships, for
person not present transactions. The user simply scans the front of the license and takes a selfie then the software compares
the images to verify the person. The software quickly determines if:

 

  the
format of the document is valid;
  the
document has been altered or is fake, by displaying the parsed, encoded data for comparison with the printed information;
  the
document has expired;
  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; and
 

if
using biometric facial matching if there is a match and if liveliness was detected

 

Then,
the ID Check® software applications can:

 

  respond
to the user by displaying the format verification result and the parsed information;
  save
information that is permissible by law to memory; and
  print
a record of the transaction including the verification results if a printer is part of the hardware configuration.

 

 

ID
Check® SDK

 

Our
software product, ID Check® SDK, is designed for software developers that wish to incorporate our proprietary ID Check®
technology into their applications. We currently have multiple license agreements with third parties for integration and sub-licensing
of our software applications into their core applications. The SDK is available for multiple platforms such as Microsoft Windows,
iOS and Android. Users receive a text message with instructions to scan their driver license. AIX and certain versions of Linux
is also offered as a SaaS product that provides a platform independent and 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.

 

ID
Check® – Retail

 

Our
ID Check 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. ID Check reduces liability risks and ensures compliance by
checking all retrieved data against each state’s privacy laws and regulatory requirements.

 

ID
Check® – Online

 

Our
online offering instantly and accurately authenticates an on-line user’s identification documents such as a driver license
and helps eliminate fraud associated with online transactions. Users receive a text message with instructions to scan their driver
license. With online fraud growing daily, we believe that this new product is the right solution at the right time.

 

ID
Check® – Mobile
®

 

This
product provides the fraud reduction benefits of an integrated identity validation system, without the time and expense of integrating
the application into the customer’s point of sale system. The customer simply downloads the application to a mobile device
such as a tablet or smartphone and instantly begin receiving the benefits from our fraud reduction capabilities.

 

ID
Check® – IAM

 

This
software application speeds up check-in and ID verification within the property management systems in places like hotels, motels,
commercial buildings and prisons.

 

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

 

Our
patented State Aware Software solution 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 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.

 

STRATEGY

 

Our
objective is to be a leading identity verification 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.
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 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, facial biometrics companies Ipsidy and Applied
Recognition. 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, iOS, Android 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.

 

Our
Revenue Sources

 

We
derive our revenue from the following sources:

 

Sales
of our systems by both our own direct sales force and marketing partners;
Per
transaction or subscription fees (SaaS) from the licensed use of our technology;
Revenue
sharing and marketing arrangements through strategic alliances and partnerships; and
Select
hardware sales related to SaaS implementation, Windows CE and Windows Mobile

 

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 and financial
institutions 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 digitally stored information. We target the industry sectors that would most benefit from
our systems and software.

 

We
also market our products to opportunities where our ID Check® technology can be used to enhance productivity. We have made
significant progress in the sectors for the retail issuance of instant credit. We believe there are financial benefits and compelling
business models for customers in this sector to utilize our technology.

 

Productivity
Enhancement

 

  Mass
merchandisers and retailers
  Auto
dealerships and rental car agencies
  Banks
and other financial institutions
  Casinos
for enrollment of guests
  Credit
unions
  Hospital
patient admissions
  Credit
card issuers
  Lodging
Industry
  Check
cashing services
  Airlines

 

Commercial
fraud protection

 

  Mass
merchandisers and retailers
  Auto
dealerships and rental car agencies
  Banks
and other financial institutions
  Casino
cage operations
  Credit
unions
  Hospitals,
medical facilities and health plans
  Credit
card issuers
  Lodging
Industry
  Check
cashing services
  Pharmacies

 

Access
control

 

  Airports
and airlines
  Prisons
  Departments
of Motor Vehicles
  Law
enforcement agencies
  Notable
buildings
  Military
establishments
  Court
houses
  College
campuses
  Nuclear
facilities
  Department
of Homeland Security
  Oil
refineries and storage facilities
  Bus,
rail and port facilities

 

 

Age
verification

 

  Bars
and night clubs
  Stadiums
and arenas
  Convenience
stores
  Casinos
and gaming establishments
  Grocery
chains
  Law
Enforcement
 

Restaurants

 

Firearm
dealers

  Cannabis Industry      

 

Law
Enforcement/Government

 

  FBI   Drug
Enforcement Administration
  State
& Local Police
 
Local
Sheriffs
  Bureau
of Alcohol, Tobacco, Firearms, and Explosives
  Intelligence
Agencies
  Customs   Department
of Transportation
  Department
of Homeland Security
  Border
Patrol

 

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 to a lesser extent 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
ID Check® software is available to customers via the cloud (SaaS) and available for Microsoft Windows platforms, Android and
iOS in addition to devices such as credit card terminals and other operating systems such as Linux. We are marketing our ID Check®
technology to the financial institutions, mass merchandisers, government, airlines, airports, high profile buildings or infrastructure,
grocery, convenience and pharmacy chains, and casinos.

 

We
have developed a comprehensive marketing plan to build customer awareness and develop brand recognition in our target industry
sectors. We promote the advantages and ease of use of our products through:

 

  Endorsements
by nationally known public interest groups and trade associations;
  Web
seminars, as well as our own website; and
  Trade publications;   Various conventions
and industry specific seminars.
  Trade shows;      

 

We
intend to continue to develop and market other related software applications.

 

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 2020, our top ten customers accounted for approximately 75% of total revenues. In 2019,
our top ten customers accounted for approximately 66% 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. Additionally,
we believe that 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 digitally stored within the barcode 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.

 

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.

 

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, 2020 and 2019 was $3,674,987 and $3,656,679, respectively.

 

INTELLECTUAL
PROPERTY

 

We
currently hold eighteen (18) U.S. patents and one (1) Canadian patent. At present, we have four patent applications pending in
the U.S. Patent and Trademark Office. These patents cover commercially important aspects of our capabilities relating to the authentication
and verification of identification documents. We will continue to pursue patents for all 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 previously 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.

 

 

In
2015 we were granted two patents. 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 multiple documents.

 

We
were granted two patents in 2019 that were a continuation of earlier filed applications. 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.

 

In
2020, we were granted two patents that were a continuation of earlier filed applications. The first patent is related to checking
the validity of identification documents using a remote database. The second patent is related to document comparison that compares
information contained in multiple documents.

 

We
own multiple copyrights in the United States, which are effective in Canada and in other major industrial countries. The copyright
protection covers software source codes and supporting graphics relating to the operation of ID Check® and other software
products. We also have several trademarks relating to our company, its product names, and logos.

 

Employees
AND HUMAN CAPITAL RESOURCES

 

As
of March 26, 2021, we had thirty-seven full-time employees. Five are engaged in executive management such
as our Chief Executive Officer and Chief Financial Officer, nineteen in information technology including those participating in
our research and development efforts, seven 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.

 

Our
human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our
existing and new employees. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel,
whether existing employees or new hires, through the granting of stock-based and cash-based compensation awards. We believe that
this increases value to our stockholders and the success of our company by motivating such individuals to perform to the best
of their abilities and achieve our objectives.

 

As
the success of our business is fundamentally connected to the well-being of our employees, we are committed to their health, safety
and wellness. We provide our employees and their families with access to convenient health and wellness programs, including benefits
that provide protection and security giving them peace of mind concerning events that may require time away from work or that
impact their financial well-being; and that offer choice where possible so they can customize their benefits to meet their needs
and the needs of their families. In response to the COVID-19 pandemic, we implemented significant changes that we determined were
in the best interest of our employees, as well as the community in which we operate, and which comply with government regulations,
including working in a remote environment where appropriate or required.

 

 

Item
1A. Risk Factors

 

RISK
FACTORS

 

Risks
Related to Our Business and Industry

 

We
have had 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
had net income of $558,397 for the fiscal year ended December 31, 2020 and a net loss of ($2,548,711) for the fiscal year ended
December 31, 2019 and our accumulated deficit was $116,376,715 as of December 31, 2020. Since we expect to incur additional expenditures
in line with the sales growth of our business, we may not continue to achieve operating profits in the near future and we could
experience further losses. 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 to a lesser extent, 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.

 

We
could be negatively impacted by the recent outbreak of coronavirus (COVID-19).

 

In
December 2019, it was first reported that there had been an outbreak of a novel strain of COVID-19, in China. Since then, COVID-19
has continued to spread outside of China, including throughout the United States and other parts of the world, becoming a global
pandemic. For the period covered by this Form 10-K, the COVID-19 pandemic has impacted our business and will likely continue to
impact our business directly and/or indirectly for the foreseeable future. While we are hopeful that widespread vaccinations from
COVID-19 will usher a new sense of normalcy, we are unable to accurately predict the full impact that the COVID-19 pandemic will
have on our results of operations or financial condition due to numerous factors that are not within our control, including the
duration and severity of the outbreak together with any additional statewide closures resulting from increases in cases nationwide,
whether from COVID-19 or recently discovered variants.

 

Governments
in affected regions have implemented and may continue to implement safety precautions, including stay-at-home orders, travel restrictions,
business closures, cancellations of public gatherings, and other measures. Other organizations and individuals are taking additional
steps to avoid or reduce infection, including limiting travel and having employees work remotely. These measures are disrupting
normal business operations both in and outside of affected areas. We continue to monitor our operations and government recommendations
and have made appropriate modifications to our operations because of COVID-19, including transitioning to a remote work environment,
substantial reductions in employee travel, virtualization or cancellation of customer and employee events, and remote sales, implementation,
and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration.
The cancellation of industry events nationwide reduces our ability to meet with existing and potential new customers. Our customers’
businesses could be disrupted or they could seek to limit technology spending, either of which could foreclose future business
opportunities, could negatively impact the willingness of our customers to enter into or renew contracts with us, and ultimately
adversely affect our revenues. Although we are unable to predict the precise impact of COVID-19 on our business, our business
depends to a large extent on the willingness of customers to enter into or renew contracts with us.

 

 

In
addition, while the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict,
the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which
could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets
for our common stock. In addition, a recession, further market correction or depression resulting from the spread of COVID-19
and the overall economic effect to the U.S. and world economies could materially affect our business and the value our common
stock.

 

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:

 

  build
and train our sales force;
  establish
and maintain relationships with distributors;
  develop
customer support systems;
  develop
expanded internal management and financial controls adequate to keep pace with growth in personnel and sales, if they occur;
and
  manage
the use of third-party manufacturers and suppliers.

 

If
we can grow our business but do not manage our growth successfully, we may experience increased operating expenses, loss of customers,
distributors, or suppliers and declining or slowed growth of revenues.

 

Failure
to protect our proprietary technology may impair our competitive position.

 

We
continue to allocate significant resources to developing new and innovative technologies that are utilized in our products and
systems. Because our continued success depends on, to a significant degree, our ability to offer products providing superior functionality
and performance over those offered by our competitors, we consider the protection of our technology from unauthorized use to be
fundamental to our success. This is done by processes aimed at identifying and seeking appropriate protection for newly developed
intellectual property, including patents, trade secrets, copyrights, and trademarks, as well as policies aimed at identifying
unauthorized use of such property. These processes include:

 

  contractual
arrangements providing for nondisclosure of proprietary information;
  maintaining
and enforcing issued patents and filing patent applications on innovative solutions to commercially important problems;

 

 

  protecting
trade secrets;
  protecting
copyrights and trademarks by registration and other appropriate means;
  establishing
internal processes for identifying and appropriately protecting new and innovative technologies; and
  establishing
practices for identifying unauthorized use of intellectual property.

 

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, even if they are not upheld, such claims could:

 

  consume
substantial time and financial resources;
  divert
the attention of management from growing our business and managing operations; and
  disrupt
product sales and shipments.

 

If
any third party prevails in an action against us for infringement of its proprietary rights, we could be required to pay damages
and either enter 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.

 

 

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.

 

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 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.

 

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.

 

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.

 

Our
percentage of revenues and customer concentration is significant.

 

Revenues
from our ten largest customers accounted for 75% of total revenues in 2020 and 66% of total revenues in 2019. Two customers accounted
for 41% of revenues in 2020 and three customers accounted for 39% of revenues in 2019. Our loss of one or more significant customers
could have a significant adverse impact on our business, financial condition, and results of operations.

 

Risks
Related to Our Common Stock and the Market for Our Common Stock

 

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 26, 2021, 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:

 

  shortfalls
in revenues, cash flows or continued losses from operations;
  delays
in development or roll-out of any of our products;
 

economic
and social effects of the COVID-19 virus or other pandemics;

short
selling or other market manipulation activities;

announcements
by one or more competitors of new product acquisitions or technological innovations; and

  unfavorable
outcomes from outstanding litigation.

 

In
addition, the stock market experiences extreme fluctuations in price and volume, which was heightened as a result of the COVID-19
pandemic, 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.
Furthermore, the trading price of our common stock may be adversely affected by third-parties
trying to drive down the market price. Short sellers and others, some of whom post anonymously on social media, may be positioned
to profit if our stock declines and their activities can negatively affect our stock price. These broad market and industry factors
may seriously harm the market price of our common stock, regardless of our operating performance.
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.

 

 

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.

 

Item
1B. Unresolved Staff Comments

 

Not
applicable.

 

Item
2. Properties

 

Our
corporate headquarters is currently located in Melville, New York, where we occupy approximately 700 square feet of office space
pursuant to a month-to-month lease. While all personnel currently operate out of their individual home offices throughout the
country, this facility will be primarily used for employee use and for necessary physical meetings. 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

 

 

PART
II

 

Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)
Our common stock is traded on The Nasdaq Stock Market under the symbol “IDN.” The following table indicates high and
low sales prices for the periods indicated.

 

    Low     High  
             
2019                
First quarter   $ 2.10     $ 3.55  
Second quarter   $ 3.28     $ 6.25  
Third quarter   $ 4.01     $ 5.95  
Fourth quarter   $ 4.75     $ 8.04  
                 
2020                
First quarter   $ 2.75     $ 10.15  
Second quarter   $ 2.11     $ 7.80  
Third quarter   $ 6.01     $ 8.35  
Fourth quarter   $ 6.86     $ 11.41  
                 
2021                
First quarter*   $ 8.02     $ 15.01  

 

*
Portion of first fiscal quarter through March 26, 2021.

 

(b)
As of March 26, 2021, there were 30 shareholders of record of our common stock.

 

(c)
No cash dividends or other cash distributions made by us during the fiscal year ended December 31, 2020. Future dividend policy
will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other then existing
conditions. It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future.

 

(d)
Securities Authorized for Issuance Under Equity Compensation Plans

 

The
following table provides information as of December 31, 2020, with respect to the shares of our common stock that may be issued
under our existing equity compensation plans.

 

Plan
Category
  Number
of securities
to be issued upon
exercise of
outstanding options,
warrants and
rights (a)
    Weighted-average

exercise price of
outstanding options,
warrants and
rights (b)
    Number
of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities

reflected in column (a))
 
Equity
compensation plans approved by security holders (1)
    905,578     $ 4.10       1,191,445  
Equity compensation
plans not approved by security holders
          $ N/A       N/A  
Total     905,578     $ 4.10       1,191,445  

 

(1)
Represents 637,882 options, 1,754 restricted stock units and 265,942 performance stock units under the 2015 Omnibus Incentive
Plan.

 

 

(e)
Recent Sales of Unregistered Securities

 

None.

 

(f)
Repurchases of Equity Securities

 

There
were no shares purchased during 2020.

 

Item
6. Selected Financial Data

 

The
following selected financial data presented under the captions “Statement of Operations Data” and “Balance Sheet
Data” as of the end of each of the five years ended December 31, 2020, are derived from our financial statements. The selected
financial data should be read in conjunction with the financial statements as of December 31, 2020 and 2019 and for each of the
two years in the period ended December 31, 2020, the accompanying notes and the report of independent registered public accounting
firms thereon, which are included elsewhere in this Form 10-K. Our financial statements include our accounts and our former wholly
owned subsidiaries, Mobilisa and Positive Access.

 

    Years
Ended December 31,
 
    2016     2017     2018     2019     2020  
    (In thousands, except
per share data)
 
Statement of Operations
Data:
                                       
Revenues   $ 3,839     $ 3,598     $ 4,433     $ 7,664     $ 10,735  
(Loss) from operations     (5,750 )     (6,080 )     (4,093 )     (2,648 )     (260 )
Net (loss) income     (5,735 )     (6,021 )     (3,964 )     (2,549 )     558  
Net (loss) income per common share                                        
Basic     (0.58 )     (0.48 )     (0.26 )     (0.16 )     0.03  
Diluted     (0.58 )     (0.48 )     (0.26 )     (0.16 )     0.03  
Common shares used in computing per
share amounts
                                       
Basic     9,915       12,429       15,542       15,792       17,324  
Diluted     9,915       12,429       15,542       15,792       18,021  

 

    As
of December 31,
 
    2016     2017     2018     2019     2020  
    (In thousands)  
Balance sheet data:                                        
Cash   $ 3,092     $ 8,010     $ 4,376     $ 3,351     $ 13,121  
Working capital     2,471       7,340       4,244       3,178       13,462  
Total assets     14,534       17,882       14,461       13,997       24,340  
Total liabilities     1,598       1,873       1,541       2,248       2,129  
Stockholders’ equity     12,935       16,009       12,920       11,750       22,211  

 

 

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

 

Overview

 

We
are a prominent technology company that is engaged in developing, integrating and marketing 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. Our products driven by
our ID Check Authentication Engine, include Retail ID®, a solution for preventing fraud in the retail and banking industry
for both on-line and in-store transactions; 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 and commercial facilities.

 

Critical
Accounting Policies and the Use of Estimates

 

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

 

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

 

Valuation
of goodwill and other long-lived assets

 

Our
long-lived assets include property and equipment, goodwill, and intangible assets. As of December 31, 2020, the balances of property
and equipment, goodwill and intangible assets, all net of accumulated depreciation and amortization and impairments, were $138,870,
$8,101,661 and $482,591, respectively. As of December 31, 2019, the balances of property and equipment, goodwill and intangible
assets, all net of accumulated depreciation and amortization and impairments, were $181,731, $8,101,661 and $174,237, respectively.

 

We
depreciate property and equipment and amortize intangible assets that have finite lives over their estimated useful lives. For
purposes of determining whether there are any impairment losses, as further discussed below, management evaluates the carrying
amounts of identifiable long-lived tangible and intangible assets, including their estimated useful lives, when indicators of
impairment are present as more fully described below. Based on our review of the carrying amounts of the long-lived tangible and
intangible assets with finite lives, we may also determine that shorter estimated useful lives are appropriate. In that event,
we record depreciation and amortization over shorter future periods, which would reduce our earnings.

 

Goodwill

 

The
excess of the purchase consideration over the fair value of the assets of the acquired businesses is considered goodwill. Under
authoritative guidance, purchased goodwill is not amortized, but rather it is periodically reviewed for impairment. We had goodwill
of $8,101,661 as of December 31, 2020 and 2019. This goodwill resulted from the acquisition of Mobilisa, Inc. and Positive Access
Corporation. These entities were merged into one company under Intellicheck on December 31, 2018.

 

 

For
the years ended December 31, 2020 and 2019, we performed our annual impairment test of goodwill in the fourth quarter. Under
authoritative guidance, we can use industry and Company specific qualitative factors to determine whether it is more likely
than not that impairment exists, before using a two-step quantitative analysis. Events or changes in circumstances which
could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall
financial performance, other entity specific events and sustained decrease in share price. We performed the first step of the
goodwill impairment test to identify potential impairment by comparing our fair value of the Company to our carrying amount,
including goodwill. The fair value was determined using the weighting of certain valuation techniques, including both income
and market approaches which include a discounted cash flow analysis, similar public company financial comparisons, along
with market capitalization. The market capitalization is sensitive to the volatility of our stock
price. Although we believe that the factors considered in the impairment analysis are reasonable, changes in any one of the
assumptions used could have produced a different result which may have led to an impairment charge. Any future impairment
loss could have a material adverse effect on our long-term assets and operating expenses in the period in which impairment is
determined to exist.

 

For
the years ended December 31, 2020 and 2019, we determined that the fair value was more than our carrying amount and therefore
the second step of the goodwill impairment test was not required.

 

Intangible
Assets

 

Our
intangible assets consist of patents and a software license as described more fully in Note 5. We use the straight-line method
to amortize these assets over their estimated useful lives. We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with Accounting
Standards Codification (“ASC”) Topic 360. To determine recoverability of its long-lived assets, we evaluate the probability
that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment
is measured at fair value. No impairments were recognized during the years ended December 31, 2020 and 2019.

 

Revenue
Recognition and Deferred Revenue

 

Most
license fees and service revenues are generated from a combination of fixed-price and per-scan contracts. Under the per-scan revenue
model, customers are charged a fee each time the customer scans an identity document, such as a driver’s license, with our
software. Under the fixed-price revenue model customers are charged a fixed monthly fee either per device or physical business
location to access our software. In certain instances, customization services are determined to be essential to the functionality
of the delivered software. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services
in an amount that reflects the consideration expected to be received in exchange for those goods or services. We measure revenue
based on the consideration specified in a customer arrangement, and revenue is recognized when the performance obligations in
an arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer.
The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as,
the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our services as they
are performed. Substantially all customer contracts provide that we are compensated for services performed to date.

 

Invoicing
is based on schedules established in customer contracts. Payment terms are generally established from 30 to 60 days from the invoice
date. Product returns are recorded as a reduction to revenue.

 

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

 

Stock-Based
Compensation

 

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

 

 

Deferred
Income Taxes

 

Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards.
Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of December
31, 2020 and 2019, due to the uncertainty of the realizability of those assets.

 

Commitments
and Contingencies

 

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

 

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

 

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

 

COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2020

TO
THE YEAR ENDED DECEMBER 31, 2019

 

REVENUES.
Revenues for the year ended December 31, 2020 increased 40% to $10,735,000 compared to $7,664,000 for the year ended December
31, 2019. The increase in revenues in 2020 is a primarily the result of higher commercial Software as a Service (“SaaS”)
revenues. SaaS revenues, which consists of software licensed on a subscription basis, increased $3,271,000 or 54% to $9,373,000
for the year ended December 31, 2020 compared to $6,102,000 for the year ended December 31, 2019.

 

GROSS
PROFIT
. Gross profit increased by $2,641,000 to $9,309,000 for the year ended December 31, 2020 from $6,668,000 in the year
ended December 31, 2019. Our gross profit, as a percentage of revenues, was 86.7% and 87.0% in 2020 and 2019, respectively. The
decrease in percentage is primarily due to an increase in hardware sales which contain lower margins offset by our continued growth
of our SaaS revenue.

 

OPERATING
EXPENSES
. Operating expenses, which consist of selling, general and administrative expenses and research and development expenses,
increased by $252,000 or 3% to $9,568,000 for the year ended December 31, 2020 from $9,316,000 for the year ended December 31,
2019. Selling, general and administrative expenses increased 4% to $5,893,000 for the year ended December 31, 2020 from $5,659,000
for the year ended December 31, 2019. This increase is primarily due to higher personnel costs and accrued incentive plans. Research
and development expenses increased less than 1% to $3,675,000 for the year ended December 31, 2020 from $3,657,000 for the year
ended December 31, 2019.

 

GAIN
ON FORGIVENESS ON UNSECURED PROMISSORY NOTE
. A gain on the forgiveness on an unsecured promissory note was $796,000 for the
year ended December 31, 2020. This was the result of the forgiveness on a note under the Paycheck Protection Program administered
by the U.S. Small Business Administration.

 

INTEREST
AND OTHER INCOME
. Interest and other income were $22,000 for the year ended December 31, 2020 as compared to $99,000 during
the year ended December 31, 2019.

 

INCOME
TAXES
. We had taxable net losses through the years ended December 31, 2020; therefore, we have paid nominal income taxes.

 

 

NET
INCOME (LOSS)
. As a result of the factors noted above, we had net income of $558,000 for the year ended December 31, 2020
as compared to a net loss of $2,549,000 for the year ended December 31, 2019.

 

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

 

As
of December 31, 2020, we had cash of $13,121,000, working capital (defined as current assets minus current liabilities) of $13,462,000,
total assets of $24,340,000 and stockholders’ equity of $22,211,000.

 

For
the year ended December 31, 2020, our cash increased by $9,771,000. Cash used in operating activities was $19,000 for the year
ended December 31, 2020 as compared to cash used in operating activities of $1,841,000 for the year ended December 31, 2019. We
used cash of $416,000 in investing activities for the year ended December 31, 2020 compared to cash provided by investing activities
of $22,000 for the year ended December 31, 2019. Cash generated by financing activities was $10,205,000 for the year ended December
31, 2020 as compared to $794,000 for the year ended December 31, 2019.

 

On
June 23, 2020, we completed a public offering of 1,769,230 shares of our common stock, offered to the public at $6.50 per share.
Our net proceeds from this offering were approximately $10,710,000 after deducting underwriting discounts and commissions paid
by us. Direct offering costs totaling approximately $141,000 were recorded as a reduction to the net proceeds and included in
additional paid-in-capital on the statement of stockholders’ equity.

 

On
February 6, 2019, we entered 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 our existing fixed income investment account with Citibank. The facility bears interest
at a rate consistent of Citibank’s Base Rate (4.75% at December 31, 2020) minus 2% subject to certain limitations. Interest
is payable monthly and as of December 31, 2020, there were no amounts outstanding under this facility and unused availability
under this facility was $2,000,000.

 

We
are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and including how it may impact our
customers, employees and vendors. We did incur disruptions during the year ended December 31, 2020 from COVID-19 and we are unable
to predict the impact that this pandemic will have on us going forward, including our financial position, results of operations
and cash flows, the impact on our customers and the related demand for our services due to numerous uncertainties.

 

On
April 9, 2020 we entered into an unsecured promissory note in the amount of $796,100 (the “Note”) with First Bank
(the “Loan Servicer”) under the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business
Administration and established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
We received these proceeds on April 14, 2020 plus an additional $10,000 advance under the Economic Injury Disaster Loan program
(“EIDL”) on April 15, 2020. Under the terms of the Note, we can apply for forgiveness on this Note with the Loan Servicer
if certain conditions including the use of the Note proceeds are met over a 24-week period commencing from the date of the Note.
The Note has an interest rate of 1%. We have not imputed interest on the Note as the rate is determined to be a below-market rate
due to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. In November 2020, we received notification
from the Loan Servicer that the Note was fully forgiven and recorded income from the extinguishment of our obligation as we were
legally released from being the primary obligor in accordance with ASC 405-20-40-1.

 

We
repaid our EIDL advance on December 7, 2020.
On December 27,
2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“the Economic Aid Act”)
which relieves companies of
their obligations to repay EIDL advances. As a result of this ruling, the SBA returned
this advance, plus interest to the Loan Servicer on February 18, 2021, which was immediately returned to us.

 

We
currently anticipate that our available cash, as well as cash from the previously mentioned stock offerings, and expected cash
from operations and availability under the revolving credit agreement, will be sufficient to meet our anticipated working capital
and capital expenditure requirements for at least the next 12 months from the date of filing.

 

 

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

 

We
have filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”),
which became effective July 19, 2010. Under the shelf registration statement, we may offer and sell, from time to time in the
future in one or more public offerings, our common stock, preferred stock, warrants, and units. The aggregate initial offering
price of all securities sold by us will not exceed $25,000,000, and, pursuant to SEC rules, we may only sell up to one-third of
the market cap held by non-affiliate stockholders in any 12-month period. We renewed this registration with the SEC on June 1,
2020 and it was declared effective June 4, 2020.

 

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

 

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

 

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

 

Adjusted
EBITDA

 

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

 

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

 

 

A
reconciliation of GAAP net income (loss) to Adjusted EBITDA follows:

 

    Year
Ended December 31,
 
    2020     2019  
             
Net income (loss)   $ 558,397     $ (2,548,711 )
Reconciling items:                
Gain on forgiveness of unsecured promissory
note
    (796,100 )      
Interest and other income     (21,948 )     (99,059 )
Depreciation and amortization     179,405       249,895  
Stock-based compensation
expense
    409,477       584,865  
                 
Adjusted EBITDA   $ 329,231     $ (1,813,010 )

 

Net
Operating Loss Carry Forwards

 

Our
available net operating loss (“NOL”) at December 31, 2020 was approximately $17 million. The federal and state NOLs
are available to offset future taxable income and expire from 2021 through 2039 if not utilized.

 

Contractual
Obligations

 

Below
is a table, which presents our contractual obligations and commitments as of December 31, 2020:

 

    Payments
Due by Period
 
          Less
than
                More
than
 
    Total     1
year
    1-3
years
    3-5
years
    5
years
 
                               
Operating
Leases
  $ 32,892     $ 32,892     $     $     $  
Total Contractual
Obligations
  $ 32,892     $ 32,892     $     $     $  

 

Recently
Issued Accounting Pronouncements

 

Except
as discussed below, we do not expect the impact of the future adoption of recently issued accounting pronouncements to have a
material impact on our financial statements.

 

In
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. We do
not expect this standard will have a material impact on our financial statements.

 

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

 

Off-Balance
Sheet Arrangements

 

We
have never entered any off-balance sheet financing arrangements and have never established any special purpose entities. We have
not guaranteed any debt or commitments of other entities or entered any options on non-financial assets.

 

Forward
Looking Statements

 

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

 

Item
7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item
8. Financial Statements and Supplementary Data

 

Our
financial statements and supplementary data are attached hereto beginning on Page F-1.

 

Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

 

There
have been no changes in or disagreements with our principal independent registered public accounting firm for the two-year period
ended December 31, 2020.

 

Item
9A. Controls and Procedures

 

Evaluation
of Disclosure Controls and Procedures

 

Our
Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. As of December
31, 2020, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as
defined in Securities Exchange Act Rule 13a-15I, were effective.

 

 

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

 

Changes
in Internal Control over Financial Reporting

 

There
was no change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Annual
Report of Management on Internal Control over Financial Reporting

 

Management
is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 15d-15(f)
under the Exchange Act) for the Company. Management, with the participation of our principal executive officer and our principal
financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020 (the end
of our fiscal year), based on the framework and criteria established in the 2013 Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of December 31, 2020.

 

Item
9B. Other Information

 

None.

 

 

PART
III

 

Item
10. Directors, Executive Officers and Corporate Governance

 

The
information required by this Item is incorporated herein by reference from our 2021 definitive Proxy Statement (which will be
filed with the SEC within 120 days after December 31, 2020 in connection with the solicitation of proxies for the Company’s
2021 annual meeting of stockholders) (“2021 Proxy Statement”) under the captions “Proposal 1 – Election
of Directors,” “Other Information – Executive Officers,” and “Beneficial Ownership Reporting Compliance
under Section 16(a) of the Exchange Act.”

 

Item
11. Executive Compensation

 

The
information required by this Item is incorporated herein by reference from our 2021 Proxy Statement under the captions “Executive
Compensation” and “Director Compensation.”

 

Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The
information required by this Item is incorporated herein by reference from our 2021 Proxy Statement under the captions “Other
Information—Security Ownership of Certain Beneficial Owners and Management” and “Other Information – Equity
Compensation Plan Information.”

 

Item
13. Certain Relationships and Related Transactions, and Director Independence

 

The
information required by this Item is incorporated herein by reference from our 2021 Proxy Statement under the captions “Other
Information – Related Party Transactions Overview,” “Other Information – Certain Transactions with Related
Persons” and “Director Attributes and Independence.”

 

Item
14. Principal Accounting Fees and Services

 

The
information required by this Item is incorporated herein by reference from our 2021 Proxy Statement under the caption “Proposal
2 – Ratification of the Selection of Independent Auditors.”

 

PART
IV

 

Item
15. Exhibits and Financial Statement Schedules

 

  (a)(1) Financial
Statements

 

Balance
Sheets as of December 31, 2020 and 2019

Statements
of Operations for the years ended December 31, 2020 and 2019

Statements
of Stockholders’ Equity for the years ended December 31, 2020 and 2019

Statements
of Cash Flows for the years ended December 31, 2020 and 2019

 

 

 

 

 

  * Denotes
a management contract or compensatory plan, contract or arrangement.
  ** Filed
herewith.
  (1) Incorporated
by reference to Registration Statement on Form SB-2 (File No. 333-87797) filed September 24, 1999.
  (2) Incorporated
by reference to Registrant’s Annual Report on Form 10-K filed March 30, 2004.
  (3) Incorporated
by reference to Registrant’s Annual Report on Form 10-K filed March 21, 2019.
  (4) Incorporated
by reference to Registrant’s Current Report on Form 8-K filed August 13, 2014.
  (5) Incorporated
by reference to Registrant’s Current Report on Form 8-K filed May 9, 2017.
  (6) Incorporated
by reference to Registrant’s Current Report on Form 8-K filed December 4, 2020.
  (7) Incorporated
by reference to Registrant’s Current Report on Form 8-K filed October 28, 2009.
  (8)
Incorporated
by reference to Registrant’s Current Report on Form 8-K filed August 14, 2007.
  (9) Incorporated
by reference to Registrant’s Proxy Statement on Schedule 14A filed April 3, 2020.

 

 

SIGNATURES

 

Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:  March
29, 2021
  INTELLICHECK,
INC.
       
    By:  /s/
Bryan Lewis
      Bryan
Lewis
      Chief Executive Officer and Director

 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

 

    INTELLICHECK,
INC.
       
Date: March
29, 2021
By:  /s/
Bryan Lewis
      Bryan
Lewis
      Chief Executive Officer and Director
      (Principal
Executive Officer)
       
Date: March
29, 2021
By: /s/
Bill White
      Bill
White
      Chief
Financial Officer, Chief Operating Officer, Secretary and Treasurer
      (Principal
Financial and Accounting Officer)
       
Date: March
29, 2021
By: /s/
Guy L. Smith
      Guy
L. Smith, Chairman and Director
       
Date: March
29, 2021
By: /s/
Emil R. Bedard
      Lt.
Gen. Emil R. Bedard, Director
       
Date: March
29, 2021
By: /s/
Jack A. Davis
      Jack
A. Davis, Director
       
Date: March
29, 2021
By: /s/
William P. Georges
      William
P. Georges, Director
       
Date: March
29, 2021
By: /s/
Dylan Glenn
      Dylan
Glenn, Director
       
Date: March
29, 2021
By: /s/
Amelia L. Ruzzo
      Amelia
L. Ruzzo, Director
       
Date: March
29, 2021
By: /s/
David E. Ullman
      David
E. Ullman, Director

 

 

EXHIBIT
INDEX

 

 

 

 

FINANCIAL
STATEMENTS

 

INDEX

 

 

 

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To
the Board of Directors and Stockholders of

Intellicheck,
Inc.

 

Opinion
on the Financial Statements

 

We
have audited the accompanying balance sheets of Intellicheck (the “Company”) as of December 31, 2020 and 2019, and
the related statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations
and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United
States of America.

 

Basis
for Opinion

 

These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.

 

We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.

 

Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.

 

Critical
Audit Matter

 

The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.

 

Goodwill
Impairment Analysis

 

As
of December 31, 2020, the Company had goodwill of approximately $8.1 million. As described in Notes 1 and 4 to the financial
statements, the Company performs its impairment test of goodwill annually, or whenever events or changes in circumstances
indicate that the carrying value of the Company exceeds its fair value. The Company performed its annual impairment test of
goodwill in the fourth quarter of 2020. The Company operates as one reporting segment, operating segment and reporting unit.
The Company’s goodwill impairment test involves comparing the Company’s carrying value to its estimated fair
value. 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, similar public company financial comparisons, along
with market
capitalization. The Company’s fair value estimates require management to make significant estimates and assumptions
including discount rates, projected revenue growth rates, operating margins and guideline public company
multiples.

 

We
identified the impairment test of goodwill as a critical audit matter due to the significant judgement by management in the estimates
and assumptions used in developing the fair value estimate of the Company. This in turn led to a high degree of auditor judgement,
subjectivity, and effort in performing procedures to evaluate the reasonableness of management’s significant estimates and
assumptions related to discount rates, projected revenue growth rates, operating margins and guideline public company multiples.
Additionally, the audit effort involved the use of professionals with specialized skill and knowledge.

 

Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
financial statements. We obtained an understanding and evaluated the design of controls over the Company’s impairment test
of goodwill, including developing the estimate of fair value. Our procedures included, among others: evaluated the forecasted
revenue growth rates and operating margins to the Company’s underlying business strategies and growth plans and considered
if they were consistent with evidence obtained in other areas of the audit; evaluated management’s ability to accurately
forecast revenue growth rates and operating margins by comparing actual results to management’s historical forecasts; and
performed sensitivity analyses over significant estimates and assumptions including discount rates and projected revenue growth
rates when assessing the overall impact on the estimate of fair value compared to the carrying value. In addition, we utilized
our valuation specialists with specialized skills and knowledge, in evaluating the reasonableness of the Company’s methodology
for estimating fair value including both the income and market approaches; evaluating the discount rates used by management by
comparing it to a range of discount rates developed using existing market information for comparable entities; evaluating market
approaches including selected guideline company multiples for reasonableness and evaluating the mathematical accuracy of the calculations
included in both the income and market approaches.

 

We
have served as the Company’s auditor since 2010.

 

/s/
EisnerAmper LLP

 

EISNERAMPER
LLP

Iselin,
New Jersey

March
29, 2021

 

 

INTELLICHECK,
INC.

 

BALANCE
SHEETS

DECEMBER
31, 2020 and 2019

 

    2020     2019  
             
ASSETS                
CURRENT ASSETS:                
Cash   $ 13,121,392     $ 3,350,853  
Accounts receivable, net of allowance
of $42,974 and $42,055 as of December 31, 2020, and 2019, respectively
    2,119,861       1,674,894  
Other
current assets
    340,718       354,349  
Total current assets     15,581,971       5,380,096  
                 
PROPERTY AND EQUIPMENT, net     138,870       181,731  
GOODWILL     8,101,661       8,101,661  
INTANGIBLE ASSETS, net     482,591       174,237  
OPERATING LEASE RIGHT-OF-USE ASSET     31,131       151,668  
OTHER ASSETS     4,250       7,778  
                 
Total
assets
  $ 24,340,474     $ 13,997,171  
                 
LIABILITIES
AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:                
Accounts payable   $ 46,171     $ 95,388  
Accrued expenses     1,638,798       1,408,086  
Operating lease
liability, current portion
    32,620       125,851  
Deferred
revenue, current portion
    402,782       572,391  
Total current liabilities     2,120,371       2,201,716  
                 
OTHER LIABILITIES                
Deferred revenue,
long-term portion
    8,662       13,322  
Operating
lease liability, long-term portion
          32,620  
                 
Total liabilities     2,129,033       2,247,658  
                 
COMMITMENTS AND CONTINGENCIES (Note
11)
               
                 
STOCKHOLDERS’ EQUITY:                
Common stock –
$.001 par value; 40,000,000 shares authorized; 18,410,458 and 16,041,650 shares issued and outstanding as of December 31,
2020 and 2019, respectively
    18,410       16,042  
Additional paid-in
capital
    138,569,746       128,668,583  
Accumulated
deficit
    (116,376,715 )     (116,935,112 )
Total
stockholders’ equity
    22,211,441       11,749,513  
                 
Total
liabilities and stockholders’ equity
  $ 24,340,474     $ 13,997,171  

 

The
accompanying notes are an integral part of these financial statements.

 

 

INTELLICHECK,
INC.

 

STATEMENTS
OF OPERATIONS

FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

    2020     2019  
             
REVENUES   $ 10,734,509     $ 7,663,658  
COST OF REVENUES     (1,425,802 )     (995,791 )
Gross profit     9,308,707       6,667,867  
                 
OPERATING EXPENSES                
Selling, general
and administrative
    5,893,371       5,658,958  
Research
and development
    3,674,987       3,656,679  
                 
Total
operating expenses
    9,568,358       9,315,637  
                 
Loss
from operations
    (259,651 )     (2,647,770 )
                 
OTHER INCOME                
Gain on forgiveness
of unsecured promissory note
    796,100        
Interest
and other income
    21,948       99,059  
Total
other income
    818,048       99,059  
                 
Net income (loss)   $ 558,397     $ (2,548,711 )
                 
PER SHARE INFORMATION:                
Income (Loss) per common share –                
Basic   $ 0.03     $ (0.16 )
Diluted   $ 0.03     $ (0.16 )
                 
Weighted average common shares used
in computing per share amounts –
               
Basic     17,324,150       15,792,470  
Diluted     18,020,866       15,792,470  

 

The
accompanying notes are an integral part of these financial statements.

 

 

INTELLICHECK,
INC.

 

STATEMENTS
OF STOCKHOLDERS’ EQUITY

FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

                Additional           Total  
    Common
Stock
    Paid-in     Accumulated     Stockholders’  
    Shares     Amount     Capital     Deficit     Equity  
                               
BALANCE, December 31, 2018     15,638,765     $ 15,639     $ 127,290,467     $ (114,386,401 )   $ 12,919,705  
                                         
Stock-based compensation expense                 584,865             584,865  
Exercise of stock options, net of cashless exercise of 21,864
shares
    73,008       73       89,427             89,500  
Issuance of shares for vested restricted
stock grants
    9,807       9       (9 )            
Exercise of warrants     320,070       321       703,833             704,154  
Net loss                       (2,548,711 )     (2,548,711 )
                                         
BALANCE, December 31, 2019     16,041,650     $ 16,042     $ 128,668,583     $ (116,935,112 )   $ 11,749,513  
                                         
Stock-based compensation expense                 409,477             409,477  
Issuance of common stock, net of costs     1,769,230       1,769       10,567,698             10,569,467  
Exercise of stock options, net of cashless exercise of 93,840
shares
    689,901       690       203,468             204,158  
Issuance of shares for vested restricted
stock grants
    24,778       24       (24 )            
Exercise of warrants     50,750       51       111,599             111,650  
Settlement of executive bonuses with
issuance of restricted stock units
    14,993       15       84,695             84,710  
Shares forfeited in exchange for withholding
taxes
    (180,844 )     (181 )     (1,475,750 )           (1,475,931 )
Net income                       558,397       558,397  
                                         
BALANCE, December 31, 2020     18,410,458     $ 18,410     $ 138,569,746     $ (116,376,715 )   $ 22,211,441  

 

The
accompanying notes are an integral part of these financial statements.

 

 

INTELLICHECK,
INC.

 

STATEMENTS
OF CASH FLOWS

FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net
income (loss)
  $ 558,397     $ (2,548,711 )
Adjustments to reconcile
net income (loss) to net cash used in operating activities:
               
Depreciation and
amortization
    179,405       249,895  
Stock-based compensation
expense
    409,477       584,865  
Change in provision
for doubtful accounts
    919       17,380  
Forgiveness of unsecured
promissory note
    (796,100 )      
Changes in assets
and liabilities:
               
(Increase) in accounts
receivable
    (445,886 )     (672,840 )
(Increase) in other
current assets
    (15,385 )     (28,317 )
Decrease in other
assets
    3,528       1,964  
Increase in accounts
payable and accrued expenses
    260,892       703,223  
(Decrease)
in deferred revenue
    (174,269 )     (148,309 )
Net
cash used in operating activities
    (19,022 )     (1,840,850 )
                 
CASH FLOWS
FROM INVESTING activities:
               
Purchases of software
license
    (400,000 )      
Purchases of property,
plant and equipment
    (44,900 )     (20,088 )
Collection
on note receivable
    29,017       42,120  
Net
cash (used in) provided by investing activities
    (415,883 )     22,032  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Net proceeds from
issuance of common stock
    10,569,467        
Loan proceeds on
unsecured promissory note under Paycheck Protection Program
    796,100        
Loan proceeds on
unsecured promissory note under Economic Injury Disaster Loan program
    10,000        
Net proceeds from
issuance of common stock from exercise of stock options
    204,158       89,500  
Proceeds from issuance
of common stock from exercise of warrants
    111,650       704,154  
Withholding taxes
paid on exercise of stock options and vesting of restricted stock units
    (1,475,931 )      
Loan
payments on unsecured promissory note
    (10,000 )      
Net
cash provided by financing activities
    10,205,444       793,654  
                 
Net increase (decrease)
in cash
    9,770,539       (1,025,164 )
                 
CASH, beginning
of year
    3,350,853       4,376,017  
                 
CASH, end of
year
  $ 13,121,392     $ 3,350,853  
                 
Supplemental disclosure of noncash investing
and financing activities:
               
Settlement
of executive bonuses with restricted stock units
  $ 84,710     $  

 

The
accompanying notes are an integral part of these financial statements.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

1.
NATURE OF BUSINESS

 

Business

 

Intellicheck,
Inc. (the “Company” or “Intellicheck”) is a prominent technology company that is engaged in developing,
integrating and marketing identity verification solutions to address challenges that include commercial retail and banking fraud
prevention. Intellicheck’s products include ID Check®, a solution for preventing identity fraud across any industry
delivered via smartphone, tablet, POS integration or other electronic devices.

 

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

 

Liquidity

 

For
the year ended December 31, 2020, the Company generated net income of $558,397 and used cash in operations of $19,022. As of December
31, 2020, the Company had cash of $13,121,392 and an accumulated deficit of $116,376,715. On June 23, 2020, the Company completed
a public offering of 1,769,230 shares of its common stock, offered to the public at $6.50 per share resulting in net proceeds
to the Company of approximately $10,570,000 after deducting underwriters discounts and commissions paid by the Company and after
deducting direct offering costs. Intellicheck intends to use these net proceeds for general corporate purposes and working capital.
This public offering is referenced in Note 10. 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.

 

As
of the filing of this Form 10-K, the COVID-19 pandemic has impacted the Company’s business and will likely continue to impact
its business directly and/or indirectly for the foreseeable future. The Company is unable to accurately predict the full impact
that the COVID-19 pandemic will have on its results of operations or financial condition due to numerous factors that are not
within its control, including the duration and severity of the outbreak together with any potential statewide closures resulting
from the recent increases in cases nationwide.

 

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.

 

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.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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, 2020 and 2019.
For the years ended December 31, 2020 and 2019, 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 4. 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, 2020 and 2019.

 

Revenue
Recognition and Deferred Revenue

 

General

 

Most
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 to 60 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:

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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
length 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.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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,
 
    2020     2019  
Products and services                
Software as a Service (SaaS)   $ 9,372,856     $ 6,102,280  
Other subscription and support services     199,302       682,325  
Equipment     1,045,021       480,304  
Non-recurring services     77,950       330,895  
Extended warranties on equipment     20,668       59,146  
Other     18,712       8,708  
    $ 10,734,509     $ 7,663,658  
Timing of revenue
recognition
               
Products transferred at a point in time   $ 1,063,733     $ 489,012  
Services transferred
over time
    9,670,776       7,174,646  
    $ 10,734,509     $ 7,663,658  

 

Contract
balances

 

The
current portion of deferred revenue at December 31, 2020 and December 31, 2019 was $402,782 and $572,391, 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 these balances, as of
December 31, 2019, $574,444 was recognized as revenue for the year ended December 31, 2020. The long-term portion of deferred
revenue is $8,662 and $13,322 as of December 31, 2020 and December 31, 2019, 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:

 

    2021     2022     2023     Total  
                         
Software as a Service (SaaS)   $ 382,238     $     $     $ 382,238  
Other subscription and support services     12,438       4,370       1,463       18,271  
Extended warranties
on equipment
    8,106       2,145       684       10,935  
    $ 402,782     $ 6,515     $ 2,147     $ 411,444  

 

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

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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,
2020 and 2019, 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,
2020 and 2019, 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, 2020, the Company had two customers that accounted for 41% of revenue. The revenue was associated
with commercial identity sales customers. These customers represented 52% of total accounts receivable as of December 31, 2020.
During the year ended December 31, 2019, the Company had three customers that accounted for 39% of revenue.

 

As
of December 31, 2020, 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
Income (Loss) Per Share

 

Basic
net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net loss for the period
by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during
the period. The dilutive effect of these common stock equivalents comprising of outstanding options, warrants and restricted
stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net income
(loss) per share excludes all anti-dilutive shares. All shares were considered anti-dilutive due to the net income (loss) for
each of the respective years ended.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

    Years
Ended
 
    December
31,
 
    2020     2019  
Numerator:                
Net
Income (Loss)
  $ 558,397     $ (2,548,711 )
                 
Denominator:                
Weighted average common shares – Basic     17,324,150       15,792,470  
Dilutive effect
of equity incentive plans
    696,716        
Weighted average common shares
– Diluted
    18,020,866       15,792,470  
                 
Net Income (Loss) per share –                
Basic   $ 0.03     $ (0.16 )
Diluted   $ 0.03     $ (0.16 )

 

 

The
following table summarizes the common stock equivalents excluded from income (loss) per diluted share because their effect would
be anti-dilutive:

 

    2020     2019  
             
Stock options           1,436,623  
Warrants           63,430  
Restricted stock           2,670  
Performance stock
units
           
Total             1,502,723  

 

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
Income (Loss)

 

The
Company’s comprehensive income (loss) is equal to its net income (loss) for the years ended December 31, 2020 and 2019.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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
does not expect this standard will have a material impact its financial statements.

 

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

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

3.
PROPERTY AND EQUIPMENT

 

Property
and equipment are comprised of the following as of December 31, 2020 and 2019:

 

    2020     2019  
Computer equipment   $ 1,064,676     $ 1,025,287  
Furniture and fixtures     136,524       136,524  
Leasehold improvements     41,257       41,257  
Office equipment     596,621       591,111  
      1,839,078       1,794,179  
Less –
Accumulated depreciation and amortization
    (1,700,208 )     (1,612,448 )
    $ 138,870     $ 181,731  

 

Depreciation
and amortization expense for the years ended December 31, 2020 and 2019 amounted to $87,759 and $117,557, respectively.

 

4.
GOODWILL AND INTANGIBLE ASSETS

 

Identifiable
intangible assets

 

The
changes in the carrying amount of intangible assets for the year ended December 31, 2020 and 2019 were as follows:

 

    2020     2019  
Balance at beginning of
year
  $ 174,237     $ 306,575  
Addition: Acquisition of software license
(See Note 11)
    400,000        
Deduction: Amortization
expense
    (91,646 )     (132,338 )
Balance at end
of year
  $ 482,591     $ 174,237  

 

The
following tables set forth the components of intangible assets as of December 31, 2020 and 2019:

 

          As
of December 31, 2020
 
    Estimated     Adjusted              
    Useful     Carrying     Accumulated        
    Life     Amount     Amortization     Net  
                         
Patents and copyrights     2-17
years
    $ 480,661     $ (331,403 )   $ 149,258  
Developed technology     5
years
      400,000       (66,667 )     333,333  
            $ 880,661     $ (398,070 )   $ 482,591  

 

    As
of December 31, 2019
 
    Adjusted              
    Carrying     Accumulated        
    Amount     Amortization     Net  
                   
Patents
and copyrights
  $ 480,661     $ (306,424 )   $ 174,237  
    $ 480,661     $ (306,424 )   $ 174,237  

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

The
following summarizes amortization of acquisition related intangible assets included in the statement of operations:

 

    Years
Ended December 31,
 
    2020     2019  
             
Cost of sales   $ 81,372     $ 104,830  
General and administrative     10,274       27,508  
    $ 91,646     $ 132,338  

 

The
Company expects that amortization expense for the next five succeeding years, and thereafter, will be as follows:

 

2021   $ 104,979  
2022     104,979  
2023     104,979  
2024     104,979  
2025     38,313  
Thereafter     24,362  
    $ 482,591  

 

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, 2020 and 2019. This goodwill resulted from the acquisition of Mobilisa, Inc. and Positive Access
Corporation.

 

For
the years ended December 31, 2020 and 2019, 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, similar public
company financial comparisons, along with market capitalization. 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, 2020 and 2019, 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, 2020 were $30,085,862.

 

5.
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 until the time the note has been paid
in full. Any gain on contingent consideration would be recognized as it is earned.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

Under
the terms of the promissory note, monthly payments in the amount of $3,683 including principal and interest at 4%, were made over
a 60-month term expiring in August 2020. At December 31, 2020, the promissory note was paid in full. At December 31, 2019, the
total note receivable was $29,017, which is included in Other Current Assets on the Balance Sheets.

 

6.
DEBT

 

Promissory
Note

 

On
April 9, 2020 the Company entered into an unsecured promissory note in the amount of $796,100 (the “Note”) with First
Bank (the “Loan Servicer”) under the Paycheck Protection Program (“PPP”) administered by the U.S. Small
Business Administration (“SBA”) and established as part of the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”). The Company received these proceeds on April 14, 2020 plus an additional $10,000 advance under
the Economic Injury Disaster Loan program (“EIDL”) on April 15, 2020. Under the terms of the Note, the Company can
apply for forgiveness on this Note with the Loan Servicer if certain conditions including the use of the Note proceeds are met
over a 24-week period commencing from the date of the Note. The Note has an interest rate of 1%. The Company has not imputed interest
on the Note as the rate is determined to be a below-market rate due to the scope exception in ASC 835-30-15-3(e) for government-mandated
interest rates. In November 2020, the Company received notification from the Loan Servicer that the Note was fully forgiven and
recorded income from the extinguishment of its obligation as the Company was legally released from being the primary obligor in
accordance with ASC 405-20-40-1.

 

The
Company repaid its EIDL advance on December 7, 2020.
On December
27, 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“the Economic Aid Act”)
which relieves companies of their obligations to repay EIDL advances. As a result of this ruling, the SBA returned this
advance, plus interest to the Loan Servicer on February 18, 2021, which was immediately returned to the Company.

 

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 (4.75% at December
31, 2020) minus 2%. Interest is payable monthly and as of December 31, 2020, there were no amounts outstanding under this facility
and unused availability under this facility was $2,000,000.

 

7.
ACCRUED EXPENSES

 

Accrued
expenses are comprised of the following as of December 31, 2020 and 2019:

 

    2020     2019  
Professional fees   $ 123,787     $ 171,331  
Payroll and related     604,302       544,441  
Incentive bonuses     834,910       632,105  
Other     75,799       60,209  
    $ 1,638,798     $ 1,408,086  

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

8.
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.

 

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, 2020 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, 2020 and 2019 are as follows:

 

    2020     2019  
Deferred tax assets:                
Net
operating loss carryforwards
  $ 4,624,000     $ 4,498,000  
Payroll related
accruals
    235,000        
Stock-based compensation     89,000       171,000  
Intangible assets     89,000       78,000  
Reserves     11,000       11,000  
Research
and development tax credits
    411,000       333,000  
Total deferred tax
assets
    5,459,000       5,091,000  
Deferred tax liabilities:                
Depreciation     (24,000 )     (30,000 )
Total
deferred tax liabilities
    (24,000 )     (30,000 )
Net deferred
tax assets
    5,435,000       5,061,000  
Less: Valuation
allowance
    (5,435,000 )     (5,061,000 )
Deferred
tax assets, net of allowance
  $     $  

 

There
were no tax interest or penalties recorded in the financial statements for the years ended December 31, 2020 and 2019.

 

The
Company’s available NOL at December 31, 2020 was approximately $17 million. The federal and state NOL’s incurred in
all years through 2020 are available to offset future taxable income and expire from 2021 through 2040 if not utilized.

 

The
Company files numerous tax returns in various jurisdictions. The Company is not currently under examination by any taxing
authority, nor has the Company signed any waiver of the statute of limitations with any taxing authority. The Company remains
open to examination by major taxing jurisdictions from 2017 to date. ASC Topic 740-10 requires evaluation of uncertain tax
positions. As of December 31, 2020, the Company has no material uncertain tax positions.

 

The
effective tax rate for the years ended December 31, 2020 and 2019 is different from the tax benefit that would result from applying
the statutory tax rates primarily due to the recognition of valuation allowances. In 2020, the valuation allowance increased approximately
$374,000 primarily related to the timing of payroll related costs and an increase of the Company’s NOLs. The Company had
book income in 2020 and a tax NOL was generated primarily due to permanent differences that occurred during the year.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

9.
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, 2020, and 2019, 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 4,000,000 of the Company’s common shares, pursuant to which officers, directors,
key employees and consultants to the Company are eligible to receive incentive stock options, nonqualified stock options and restricted
stock units. All the Plans prior to Company’s 2015 Omnibus Incentive Plan have been closed. The Compensation Committee of
the Board of Directors administers this Plan and determines the terms and conditions of options granted, including the exercise
price. This Plan generally provides that all stock options will expire within ten years of the date of grant. Incentive stock
options granted under this Plan must be granted at an exercise price that is not less than the fair market value per share at
the date of the grant and the exercise price must not be less than 110% of the fair market value per share at the date of the
grant for grants to persons owning more than 10% of the voting stock of the Company. This Plan also entitles non-employee directors
to receive grants of non-qualified stock options as approved by the Board of Directors.

 

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

 

The
fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions
and weighted average fair values as follows:

 

    Year
Ended December 31, 2019
 
Valuation assumptions:        
Grant price   $ 2.68  
Exercise price   $ 2.68  
Expected dividend yield     0 %
Expected volatility     84.92 %
Expected life (in years)     5  
Risk-free interest rate     2.49 %

 

There
were no stock options granted during the year ended December
31, 2020.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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, 2018     1,072,332     $ 1.44     1.85 years      
                             
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  
                             
Granted                        
Exercised     (783,741 )     1.20              
Outstanding at December 31, 2020     637,882     $ 2.50     2.55 years   $ 5,686,421  
                             
Exercisable at December 31, 2020     359,967     $ 2.33     2.20 years   $ 3,269,723  

 

The
following is a summary of stock options as of December 31, 2020:

 

    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
 
$1.01 to $1.56     71,719      0.17 years   $ 1.02       71,719     $ 1.16  
$1.75 to $2.87     566,163      2.85
years
  $ 2.68       288,248     $ 2.65  
      637,882      2.55
years
  $ 2.50       359,967     $ 2.33  

 

The
weighted-average fair value of the options granted during the year ended December 31, 2019 is $1.82.

 

As
of December 31, 2020, the Company had 1,191,445 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.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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, 2018         $        
                         
Granted     12,477       5.53          
Vested
and Settled in shares
    (9,807 )     5.00          
Outstanding at December 31, 2019     2,670     $ 7.49     $  
                         
Granted     38,855       5.78          
Vested
and Settled in shares
    (39,771 )     5.65          
Outstanding December 31, 2020     1,754     $ 11.40     $  

 

Performance
Stock Units

 

On
August 7, 2020, the Company issued 265,942 Performance Stock Units (PSUs) to its officers and certain employees as compensation.
For these PSU agreements, 50% vest based on the Company’s market price and 50% vest based on its Adjusted EBITDA performance
metric. Both the conditions are to occur over a passage of a specified time and is contingent on continued employment services.

 

For
the market condition, compensation expense is based on a Geometric Brownian Motion valuation model 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
period. For the performance condition, the Company reviews the probability of achieving this goal on a periodic basis. If the
Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived
for this performance metric is amortized over the anticipated service period. If these criteria are not met, no compensation cost
is recognized and any previously recognized compensation cost would be reversed. For both conditions, compensation expense is
charged to selling, general and administrative and research and development expense with a corresponding increase to additional
paid-in capital.

 

    Number
of
Shares
    Weighted
Average
Grant Date
Fair Value
    Aggregate

Intrinsic
Value
 
                   
Outstanding at December 31, 2019         $     $  
Granted     265,942       7.91          
                         
Outstanding at December 31, 2020     265,942     $ 7.91     $  

 

As
of December 31, 2020, there was $627,842 of total unrecognized compensation cost, net of estimated forfeitures, related to all
unvested stock options and restricted stock units, which is expected to be recognized over a weighted average period of approximately
1.98 years.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

Share
based compensation expense for the years ended December 31, 2020 and 2019 is as follows:

 

    Years
Ended December 31,
 
Compensation cost recognized:   2020     2019  
Stock
options
  $ 198,407     $ 515,805  
Restricted stock
units
    140,000       69,060  
Performance
stock units
    71,070        
    $ 409,477     $ 584,865  

 

Share
based compensation is included in operating expenses as follows:

 

    Years
Ended December 31,
 
    2020     2019  
Selling,
general and administrative
  $ 366,780     $ 561,391  
Research
and development
    42,697       23,474  
    $ 409,477     $ 584,865  

 

The
Company has a net operating loss carry-forward as of December 31, 2020, 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 2020 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, 2020, the Company had 12,680 remaining warrants outstanding at an exercise
price of $2.20 through 2021. There were 50,750 warrants exercised at a price of $2.20 during the year ended December 31, 2020.
There were 320,070 warrants exercised at a price of $2.20 during the year ended December 31, 2019.

 

10.
ISSUANCE OF COMMON STOCK

 

On
June 23, 2020, the Company completed a public offering of 1,769,230 shares of its common stock, offered to the public at $6.50
per share. Net proceeds to the Company from this offering were approximately $10,710,000 after deducting underwriting discounts
and commissions paid by the Company. Direct offering costs totaling approximately $141,000 were recorded as a reduction to the
net proceeds and included in additional paid-in-capital on the statement of stockholders’ equity.

 

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 considers 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 for the years ended December 31, 2020
and 2019, and cash payments for rent and utilities was $130,611and $126,496 for the years ended December 31, 2020 and 2019, respectively.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

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. 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.

 

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 25, 2020, Bill White, the Chief Financial Officer Chief Operating 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, 2023 and replaces an amended severance agreement
previously executed by Mr. White and the Company on November 29, 2017.

 

The Company’s employment agreement
dated February 1, 2018 (the “Agreement”) with Bryan Lewis, the Chief Executive Officer provides for certain severance
payments in the event Mr. Lewis is terminated without cause including pay for six (6) months if Mr. Lewis is terminated without
cause less than 12 months after February 1, 2018, pay for twelve (12) months if Mr. Lewis is terminated without cause between
one (1) and five (5) years after February 1, 2018, and pay for eighteen (18) months if Mr. Lewis is terminated without cause after
the fifth anniversary of this Agreement, in addition to reimbursement for certain living expenses and relocation advances and
expenses in certain situations.

 

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 would
contact Dr. Roof to provide consulting services and he would 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 received
aggregate cash payments of $500,000 over a 20-month period together with reimbursement of certain vision and dental benefit
premiums. 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.

 

 

INTELLICHECK,
INC.

NOTES
TO FINANCIAL STATEMENTS

 

Incentive
Plans

 

In
May 2020, the Board entered into a 2020 separate executive incentive bonus plan (“the 2020 Bonus Plan”) with four
members of the Company’s executive management team. Each agreement, under the 2020 Bonus Plan, is based on certain goals
achieved by the Company plus individual achievements by each executive. The bonus is to be paid in the form of cash. At December
31, 2020, this bonus liability was approximately $655,560 which is included in Accrued Expenses on the Balance Sheets.

 

In
June 2020, the Company’s executive management team created a 2020 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 2020
and is based as a percentage of the employee’s salary. At December 31, 2020 this bonus liability was $179,350 and is included
in Accrued Expenses on the Balance Sheets.

 

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 $69,681 and $62,786 for
2020 and 2019, respectively. The plan assets were approximately $3.0 million and $2.4 million at December 31, 2020 and 2019, respectively.

 

Subsequent Appointment of New President

 

The Board has appointed Garrett Gafke as
the Company’s President.  Mr. Gafke’s first day of employment as President was March 23, 2021. With the appointment
of Mr. Gafke as President, Bryan Lewis will continue as the Company’s Chief Executive Officer. In connection with becoming
the Company’s President, Mr. Gafke and the Company have entered into an employment agreement, dated March 23, 2021 (the
“Agreement”). Mr. Gafke, on his first day of employment
as President, was granted a restricted stock unit award of 90,000 shares and an option to purchase 60,000 shares of the Company’s
common stock, both of which are subject to a three-year vesting schedule under the Company’s 2015 Omnibus Incentive Plan,
as amended.

 

The Company’s agreement with Mr.
Gafke also provides for certain severance payments in the event Mr. Gafke is terminated without cause including pay for six (6)
months if Mr. Gafke is terminated without cause less than 12 months after March 23, 2021 and pay for twelve (12) months if Mr.
Gafke is terminated without cause after March 23, 2022.

 

 

 

Exhibit
23.1

 

CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We
consent to the incorporation by reference in the Registration Statements of Intellicheck, Inc. on Form S-1 (333-201168), S-3 (No.
333-238680) and Form S-8 (Nos. 333-238627, 333-231781, 333-211298 and 333-204308) of our report dated March 29,
2021, on our audits of the financial statements as of December 31, 2020 and 2019 and for each of the years then ended, which report
is included in this Annual Report on Form 10-K to be filed on or about March 29, 2021.

 

/s/
EisnerAmper LLP
 
   
EISNERAMPER LLP  
Iselin, New Jersey  
March 29, 2021  

 

 

Exhibit
31.1

 

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I,
Bryan Lewis, certify that:

 

  1. I
have reviewed this annual report on Form 10-K of Intellicheck, Inc.
     
  2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
     
  3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
     
  4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
     
  b) designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
     
  c)
evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
     
  d)
disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

 

  5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):

 

  a) all
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
     
  b) any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting.

 

Date:  March
29, 2021
  /s/
Bryan Lewis
    Name:  Bryan
Lewis
    Title: Chief Executive Officer and Director

 

 

 

Exhibit
31.2

 

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I,
Bill White, certify that:

 

  1. I
have reviewed this annual report on Form 10-K of Intellicheck, Inc.
     
  2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
     
  3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
     
  4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15I and 15d-15I) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
     
  b) designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
     
  d) disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

 

  5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):

 

  a) all
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
     
  b) any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting.

 

Date:  March
29, 2021
  /s/
Bill White
    Name:  Bill
White
    Title: Chief
Financial Officer and Chief Operating Officer

 

 

 

Exhibit
32

 

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), each of the undersigned officers of Intellicheck, Inc. (the “Company”), does hereby certify, to such officer’s
knowledge, that:

 

The
Annual Report on Form 10-K for the year ended December 31, 2020 of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the Company.

 

Dated:  March
29, 2021
   /s/
Bryan Lewis
    Name: Bryan
Lewis
    Title: Chief Executive Officer and Director
       
Dated: March
29, 2021
   /s/
Bill White
    Name:  Bill
White
    Title: Chief
Financial Officer and Chief Operating Officer

 

The
foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a
separate disclosure document.

 



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