Intellicheck Mobilisa, Inc. — Q3 2015 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2015. Intellicheck Mobilisa develops identity verification and access-control systems for government, military, and commercial customers. It sold its wireless enterprise assets on August 31, 2015.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.20 million | $3.22 million | $5.48 million | $5.51 million |
| Gross profit | $1.40 million | $2.02 million | $3.03 million | $3.49 million |
| Gross margin | 63.5% | 62.6% | 55.3% | 63.5% |
| Operating income (loss) | $(1.38) million | $0.33 million | $(3.92) million | $(1.68) million |
| Net income (loss) | $(1.27) million | $0.33 million | $(3.78) million | $(1.68) million |
| Adjusted EBITDA, non-GAAP | $(0.73) million | $0.44 million | $(2.44) million | $(1.22) million |
At September 30, cash was $6.67 million, working capital $6.83 million, total assets $19.90 million, and stockholders’ equity $17.68 million. Current liabilities were $1.77 million. The company had no borrowings under its revolving credit facility at quarter-end. The nine-month cash-flow statement reports $3.74 million used in operations, $0.16 million used in investing, and $7.60 million provided by financing; cash increased by $3.70 million to $6.67 million. Financing included net proceeds from a January 2015 stock offering.
Material changes and notable items
- Q3 revenue declined 32% year over year. Identity Systems revenue fell 12%, as lower Defense ID sales outweighed increased commercial identity sales; wireless revenue fell 97%, reflecting fewer projects before the asset sale. For the first nine months, Identity Systems revenue rose 12%, while wireless revenue fell 62%.
- Nine-month revenue was nearly flat, but gross margin declined to 55.3% from 63.5%, which management attributed to greater sales of lower-margin equipment to a commercial customer. Q3 gross margin improved slightly year over year.
- Operating expenses increased 64% in Q3 and 29% for the nine-month period. Management cited stock-based compensation, non-compete agreement amortization, higher professional fees, and specialized research and development consulting. Nine-month stock-based compensation was $686,000.
- The August wireless-asset sale had total consideration of $350,000: $30,000 cash, a $200,000 promissory note, and up to $120,000 in contingent consideration. The company recognized an approximately $109,000 gain; contingent consideration is recognized if earned.
- A decline in the company’s share price triggered goodwill testing. The September 30 first-step test found fair value above carrying value, so no further test or impairment charge was recorded. Goodwill was $8.10 million. The company had recorded a $4.21 million goodwill impairment in Q4 2014.
- Common shares outstanding rose from 4.93 million at December 31, 2014 to 9.85 million at September 30, 2015, primarily following the January offering of 4.86 million shares. There were also 1.91 million stock options outstanding at quarter-end.
Outlook, risks, and other disclosures
Management said available cash, expected operating cash, and the credit facility should meet anticipated working-capital and capital-expenditure needs for at least 12 months from the filing date. The $2.0 million revolving facility was renewed and amended on October 5, 2015, with maturity extended to October 5, 2017; there were no borrowings under it as of November 10, 2015. Management may seek additional capital, but gave no specific revenue or earnings guidance.
- Customer concentration is significant: two customers accounted for approximately 51% of Q3 revenue and 40% of nine-month revenue, and together represented 51% of accounts receivable at September 30.
- Management noted that further share-price declines or changes in valuation assumptions could lead to a goodwill impairment test and potential impairment. The goodwill valuation used discounted cash flows, an estimated control premium, and market capitalization.
- Federal and New York net operating loss carryforwards were approximately $42.9 million at December 31, 2014, but their use may be limited under Internal Revenue Code Section 382. A full valuation allowance was recorded against deferred tax assets.
- The company disclosed economic and spending conditions as risks. It reported no legal or regulatory matter expected to have a material adverse effect. It also disclosed a related-party office lease guaranteed by the company and remaining payments under former executives’ non-compete agreements.
- Disclosure controls were assessed as effective at September 30, 2015; no material change in internal control over financial reporting was reported during the quarter.
Key facts for investors to verify
- Whether the reported backlog of approximately $898,000 at September 30 converts to shipped products and performed services; booked orders fell 34% year over year in Q3.
- Whether operating cash burn moderates and management’s stated 12-month liquidity expectation is supported by collections, customer demand, and the renewed credit facility.
- How revenue and receivables evolve for the two major customers, and whether commercial identity growth offsets lower Defense ID and wireless activity.
- Whether the lower-margin customer equipment mix and elevated operating expenses continue to pressure margins and losses.
- Whether the goodwill valuation assumptions remain supportable and how potential share issuance, options, and other equity awards affect dilution.