Intellicheck Mobilisa, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The filing was signed August 11, 2016. The company develops identity authentication and threat-identification products for retail, law enforcement, government, military, and commercial customers.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $940,354 | $2,291,570 | $1,891,022 | $3,278,697 |
| Gross profit | $748,700 | $1,040,824 | $1,536,326 | $1,635,789 |
| Gross margin | 79.6% | 45.4% | 81.2% | 49.9% |
| Operating expenses | $2,527,894 | $2,259,070 | $5,464,126 | $4,181,298 |
| Operating loss | $(1,779,194) | $(1,218,246) | $(3,927,800) | $(2,545,509) |
| Net loss | $(1,775,116) | $(1,213,973) | $(3,918,607) | $(2,516,086) |
| Loss per share, basic and diluted | $(0.19) | $(0.12) | $(0.42) | $(0.27) |
| Adjusted EBITDA (non-GAAP) | $(1,293,153) | $(808,661) | $(3,036,936) | $(1,707,078) |
Cash, liquidity, and capital
- At June 30, 2016, cash and cash equivalents were $3.99 million, working capital was $3.21 million, total assets were $16.10 million, and stockholders’ equity was $13.76 million.
- Operating activities used $2.62 million in cash in the first half, versus $2.50 million in the prior-year period. Investing activities used $20,067; financing activities provided $684,192. Cash declined $1.96 million from year-end 2015.
- No borrowings were outstanding on the $2.0 million revolving credit facility; the full amount was available. The facility bears interest at prime and matures October 5, 2017. The company reported no other debt outstanding in the presented balance sheet.
- During the first half, the company repurchased and retired 979,114 shares for $1.10 million and issued 1.2 million shares with warrants in a public offering. The offering generated approximately $1.90 million net proceeds, before separately reported direct offering costs.
Material changes and management commentary
- Revenue fell 59% in Q2 and 42% for the first half year over year. Management attributed the decline mainly to lower commercial and Defense ID sales; other revenue also fell following the 2015 sale of the wireless asset business.
- Q2 invoiced orders fell 71% to $849,000. Backlog was approximately $124,000 at June 30, compared with $1.046 million a year earlier and $339,000 at December 31, 2015.
- Gross margin increased, which management attributed to a greater contribution from the SaaS model and fewer lower-margin equipment sales. Despite improved margins, higher operating expenses and lower revenue contributed to larger net losses.
- Operating expenses rose 12% in Q2 and 31% for the first half. Management cited severance for a former officer, accelerated R&D for two new products, and legal fees; reductions in headcount and prior-year intangible amortization partly offset the increases. Retail ID Mobile launched in May; management said another product was expected to be announced shortly.
- Management expected existing and future resources, operating revenue, and credit-facility availability to cover working-capital and capital needs for at least 12 months. It cautioned that weaker performance or higher expenses could require additional financing or expense reductions, and that financing might not be available on acceptable terms.
- The company reported an ownership change in March 2016 following the share repurchase. Its estimated federal and New York net operating loss carryforwards were reduced from approximately $47.4 million to $2.2 million; the company said realization of any tax benefit was uncertain and maintained a full valuation allowance.
Risks, contingencies, and other notable items
- Three customers represented approximately 38% of Q2 revenue and 35% of first-half revenue; together they accounted for 27% of accounts receivable at June 30. Customer concentration and low backlog may make revenue timing and collection important to monitor.
- The company had an accumulated deficit of $102.55 million and used $2.62 million in operating cash during the first half. Management’s liquidity outlook is dependent on its business plan and expected resources; it acknowledged the possibility of needing financing or cost cuts.
- A former officer who departed in May was entitled to 12 months of salary payments and partial benefits reimbursement. Accrued expenses included $211,240 for severance at June 30.
- The company reported no material legal proceedings, no material off-balance-sheet arrangements, and no impairment charges during the first half. Management said it found no interim goodwill impairment indicator; the annual goodwill test was planned for the fourth quarter.
- Disclosure controls were concluded effective as of June 30, 2016, and the company reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial and Defense ID sales recover, and whether orders and backlog improve after the sharp year-over-year declines.
- Cash burn relative to the company’s stated 12-month liquidity outlook, and whether further financing or expense reductions become necessary.
- The potential dilution from outstanding options, warrants, and future equity issuance; 688,301 warrants were outstanding, and the June offering included five-year warrants exercisable at $2.20.
- The effects of the Section 382 ownership change on usable tax attributes and the company’s future tax position.
- Whether new products and SaaS revenue can sustain higher gross margins while supporting operating costs.