Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
On May 16, 2022, the Board of Directors (the "Board") of Intellicheck, Inc. (the "Company") determined that for the reasons explained below, its financial statements for the quarterly periods ended September 30, 2020, March 31, 2021, June 30, 2021, and September 30, 2021, and the years ended December 31, 2020 and 2021, should no longer be relied upon. The Board made this determination in consultation with the Company's Independent Registered Public Accounting Firm.
The Company determined that a cashless withholding to satisfy personal income tax obligations from certain option awards exercised during the third quarter of 2020 and the first quarter of 2021, caused the underlying options to no longer qualify as equity awards and should have instead been classified as liability awards commencing on the date of exercise. The change in the classification of the awards to liability classified awards requires the Company to remeasure the fair value of the awards at the end of each reporting period they remain outstanding, with the increase or decrease in fair value correspondingly charged or credited to selling, general and administrative expenses in arriving at net income. Furthermore, the Company, due to an administrative error, failed to sell the shares surrendered in 2021 and did not remit the equivalent amount of funds to the tax authorities. To date, the Company has not returned the shares or otherwise reimbursed the effected employees for the shares surrendered. The Company is currently in the process of arranging payment, which is expected to be completed during the quarter ending June 30, 2022.
The effect of these administrative errors on the Company's previously issued balance sheets as of the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021, and the year ended December 31, 2021, is expected to result in an increase in accrued liabilities of approximately $1.8 million, $1.9 million, $2.0 million and $1.6 million, and a net (decrease) to stockholder's equity of approximately $(1.8) million, $(1.9) million, $(2.0) million and $(1.6) million, respectively.
In addition, the effect of the errors on the Company's previously issued statements of operations is currently expected to result in a non cash increase in selling, general and administrative expenses with a corresponding decrease in net income in the statement of operations of approximately, $2.7 million for the period ended September 30, 2020, $3.5 million for the period ended March 31, 2021, $0.1 million for the period ended June 30, 2021, $0.1 million for the period ended September 30, 2021, and $3.3 million for the year ended December 31, 2021.
No assurance can be provided that the amounts referred to above and the financial statements line items affected will not change and the amounts may be materially different as the Company finalizes the restatement process.
Financial Statements to be Restated
As a result, the Company will promptly be amending its Form 10-Q's for the periods ending March 31, 2021, June 30, 2021, and September 30, 2021. The Company will also amend its Form 10-K for the year ended December 31, 2021, to reflect the adjustments described above. In addition, with respect to the amendments to the financial statements for the quarter ended September 30, 2020 and year ended December 31, 2020, the adjustments will be reflected in the amended 10-Q for the period ended September 30, 2021 and the amended Form 10-K for the period ended December 31, 2021, respectively.
Remediation Steps to Be Undertaken
To ensure that this type of narrow, isolated incident does not happen in the future, the Company has engaged a nationally recognized fintech company specializing in managing employee stock option plans, in order to coordinate management of transactions by employees with respect to exercises of their stock options. In addition, as a further safeguard, future cashless exercises of stock options will be settled by sale of the surrendered shares administered by our third-party provider, and not from the Company's cash on hand, to cover the option exercise price and any potential income tax liability.
The Company's management and the Audit Committee have discussed the matters disclosed in this Form 8-K with the Company's Independent Registered Public Accounting Firm.
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