Intellicheck, Inc. — Q2 2019 Form 10-Q
Business and period: The company develops identity-authentication and threat-identification products for commercial, retail, banking, law-enforcement, and government markets. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.558 million | $1.001 million | $2.837 million | $2.063 million |
| Gross profit | $1.339 million | $0.919 million | $2.426 million | $1.881 million |
| Gross margin | 85.9% | 91.8% | 85.5% | 91.1% |
| Operating expenses | $2.259 million | $2.063 million | $4.564 million | $4.106 million |
| Operating loss | $(0.920) million | $(1.144) million | $(2.139) million | $(2.225) million |
| Net loss | $(0.874) million | $(1.100) million | $(2.087) million | $(2.168) million |
| Basic/diluted loss per share | $(0.06) | $(0.07) | $(0.13) | $(0.14) |
Q2 revenue grew 56%; six-month revenue grew 37%. SaaS revenue increased 79% in Q2 to $1.121 million and 63% for the six months to $1.982 million. Management attributed growth primarily to commercial revenue, partly offset by lower Defense ID revenue. Gross margin fell as SaaS hosting costs increased; management said margins were expected to normalize around 85%.
Cash flow, balance sheet, and liquidity
- Six-month operating cash use was $1.597 million, versus $2.128 million in 2018. Investing activities provided $14,000 and financing activities provided $268,000. Cash decreased by $1.315 million to $3.061 million.
- At June 30, 2019, working capital was $2.884 million; total assets were $13.436 million and stockholders’ equity was $11.543 million. The company reported no borrowings under its Citibank revolving facility, with $2.0 million of unused availability. The facility permits borrowing up to the lesser of $2.0 million or the eligible collateralized balance; its rate was 5% at quarter-end.
- There was no material funded debt reported. Current and long-term operating lease liabilities totaled approximately $218,000. Adoption of the new lease standard in January 2019 resulted in initial recognition of a right-of-use asset of approximately $266,000 and a lease liability of approximately $274,000.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $785,000 for Q2 and a loss of $1.572 million for the six months, compared with losses of $1.018 million and $1.980 million, respectively, in 2018.
Changes, outlook, and risks
- Higher commercial revenue and SaaS sales improved reported revenue and reduced net losses year over year. Operating expenses rose 10% in Q2 and 11% for the six months, reflecting development headcount, legal fees, higher stock-based compensation, and a new executive bonus plan.
- Management expected available cash, operating cash flows, and revolving-credit availability to fund working capital and capital expenditures for at least 12 months. It cautioned that weaker performance or higher expenses could require additional financing or expense reductions, and financing may not be available on acceptable terms.
- Three customers accounted for approximately 39% of Q2 revenue and 33% of six-month revenue; they represented 35% of accounts receivable at quarter-end. This concentration creates customer and collection risk.
- The company reported a six-month net loss and operating cash use, an accumulated deficit of $116.473 million, and a full valuation allowance against deferred tax assets. Management cited economic conditions and spending as risks. Approximately $15 million of NOLs were available at year-end 2018, but realization is uncertain.
- No material legal proceedings or goodwill/intangible impairment charges were reported. Goodwill was $8.102 million; management planned its annual impairment test for Q4 2019. The company disclosed no off-balance-sheet financing arrangements and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether SaaS growth and commercial sales continue, and whether the decline in Defense ID revenue persists.
- Whether gross margins remain near management’s approximately 85% expectation as hosting costs evolve.
- Actual cash burn, cash runway, and the collateral terms and practical availability of the revolving facility.
- Revenue and receivables exposure to the three major customers, including customer retention and payment trends.
- Potential dilution from equity awards and warrants; the filing reported 1.437 million outstanding options and 290,644 warrants at June 30, 2019.
- Whether results support management’s 12-month liquidity expectation and whether future financing or expense reductions become necessary.