Intellicheck, Inc. — Q1 2019 Form 10-Q
Business context and period. Intellicheck develops identity-authentication and threat-identification products for commercial, government and military markets. This unaudited report covers the three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018, unless otherwise stated.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $1.279 million | $1.062 million; up 20% |
| Gross profit / margin | $1.087 million / 85.0% | $962,000 / 90.5% |
| Operating expenses | $2.306 million | $2.043 million; up 13% |
| Operating loss | $1.219 million | $1.082 million |
| Net loss / diluted loss per share | $1.213 million / $0.08 | $1.068 million / $0.07 |
| Adjusted EBITDA (non-GAAP) | $(787,000) | $(962,000) |
| Cash used in operations | $542,000 | $865,000 |
| Cash and cash equivalents | $3.841 million at March 31, 2019 | $4.376 million at December 31, 2018 |
SaaS revenue rose 45% to $861,000. Management attributed overall revenue growth primarily to higher commercial revenue, partly offset by lower Defense ID revenue. Gross margin declined mainly because of increased SaaS hosting costs. Selling, general and administrative expense and research and development expense were $1.494 million and $812,000, respectively; management cited higher stock-based compensation and increased development headcount.
Operating cash use was lower year over year, primarily due to the timing of accounts-receivable collections. Investing activities provided $7,000, mainly reflecting note-receivable collections; financing activities provided no cash in Q1 2019, versus $688,000 in Q1 2018 from stock-option exercises. Cash decreased by $535,000 during the quarter. The company reported working capital of $3.357 million, total assets of $13.923 million and stockholders’ equity of $12.076 million at March 31, 2019.
Balance sheet, debt and liquidity
The company reported no outstanding borrowings at quarter-end. A revolving Citibank facility entered into February 6, 2019 allows borrowing up to the lesser of $2 million or the balance in its fixed-income investment account. Reported unused availability was $2 million; the interest rate was Citibank’s base rate minus 2% (5% based on the stated 7% base rate at March 31).
Intellicheck said cash, expected operating cash flows and credit-facility availability should meet working-capital and capital-expenditure needs for at least 12 months. It cautioned that weaker-than-expected performance or higher expenses could require additional financing or expense reductions, and that financing may not be available on acceptable terms. The company had an accumulated deficit of $115.6 million and used $542,000 in operating cash during the quarter.
Outlook, risks and notable items
- Management said gross margins are expected to normalize in the 85% range. No specific revenue, earnings or cash-flow guidance was provided.
- Two customers accounted for approximately 26% of Q1 2019 revenue and 22% of accounts receivable at quarter-end, creating customer-concentration exposure.
- Goodwill was $8.102 million. No impairment was recorded, and management reported no Q1 indicators requiring an impairment test; it plans its annual test in the fourth quarter.
- Stock-based compensation increased to $370,000 from $61,000 a year earlier. The company reported $638,000 of unrecognized compensation cost related to unvested awards.
- The company adopted lease-accounting guidance on January 1, 2019, recognizing a right-of-use asset and lease liability; management said adoption had no significant income-statement impact. The office lease runs through March 2021.
- Accrued expenses included $79,000 of severance liability for former CEO William Roof. The filing reported no material legal proceedings or impairment charges.
- The company cited economic conditions, including potential reductions in business and consumer spending, as risks to performance and collections. It also noted that approximately $15 million of NOLs may be available, subject to expiration and utilization limits, but deferred tax assets carry a full valuation allowance.
- Disclosure controls were reported effective at March 31, 2019. The filing’s internal-control discussion refers to the “third quarter of 2018” despite this being a Q1 2019 report; the period reference appears inconsistent.
Most important facts for investors to verify
- Whether SaaS and commercial revenue growth continues, and whether lower Defense ID revenue persists.
- Whether gross margins remain near management’s stated 85% range as hosting costs and revenue mix change.
- Operating cash burn, collections and liquidity runway, including the facility’s actual borrowing availability under its investment-balance limit.
- The revenue and receivables exposure to the two major customers and any changes in customer concentration.
- Potential goodwill impairment indicators and the assumptions underlying future impairment testing.
- The apparent “third quarter of 2018” reference in the internal-controls disclosure and whether it is a drafting error.