Intellicheck Mobilisa, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company develops identity verification, access-control, security, and wireless technology for government, military, and commercial customers.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2.12 million | $3.60 million | $8.27 million | $9.62 million |
| Gross profit | $1.57 million | $2.32 million | $5.76 million | $6.20 million |
| Gross margin | 73.8% | 64.5% | 69.5% | 64.5% |
| Operating income (loss) | $(381,000) | $310,000 | $(305,000) | $(268,000) |
| Net income (loss) | $(381,000) | $306,000 | $(305,000) | $(277,000) |
| Adjusted EBITDA (non-GAAP) | $(102,000) | $610,000 | $567,000 | $591,000 |
Q3 revenue fell 41% year over year, principally due to lower Identity Systems sales; Wireless revenue increased but did not offset the decline. For the nine-month period, revenue decreased 14%. Higher gross margins reflected product mix, while operating expenses declined 3% in Q3 and 6% year to date. The company reported a quarterly loss after prior-year quarterly income; its nine-month loss widened modestly.
Cash, liquidity, and balance sheet
- At September 30, 2012, cash was $2.74 million, working capital was $2.64 million, and total assets were $22.47 million.
- Nine-month operating cash flow was $1.28 million, compared with $45,000 in 2011. The filing attributes much of the cash generation to a $1.18 million reduction in accounts receivable; deferred revenue also declined.
- Cash increased $1.34 million from year-end 2011. Investing activities used $71,000; financing activities provided $130,000, primarily from option exercises.
- Total liabilities were $2.84 million. No borrowings were outstanding on the $2 million revolving facility; reported unused availability was $700,000. The facility is secured by company assets and matures August 17, 2013.
- Management expected available cash, operating cash flow, and facility availability to fund working capital and capital expenditures for at least 12 months. The company retained the option to seek additional capital, with no assurance it could do so on acceptable terms.
Operating developments, outlook, and risks
- Identity Systems revenue declined 54% in Q3, mainly from reduced Fugitive Finder and Defense ID sales to military bases. Wireless revenue rose 217% against a weak prior-year comparison tied to the timing of FAN/buoy contract funding.
- Bookings were $1.4 million in Q3 versus $6.2 million a year earlier. Backlog was approximately $300,000 at September 30, compared with $3.3 million a year earlier and $2.7 million at December 31, 2011; management said the prior-year comparison included an unusually large FAN/buoy award.
- Four customers accounted for approximately 37% of Q3 revenue and 49% of nine-month revenue; those customers represented 59% of receivables at quarter-end, creating significant customer concentration.
- On November 13, 2012, CEO Steve Williams was separated from his position. Dr. Nelson Ludlow became President and CEO, and director Michael D. Malone became Chairman.
- The company disclosed approximately $38.1 million of federal and New York NOL carryforwards, subject to expiration and possible Section 382 ownership-change limitations. The filing gives differing expiration ranges: 2018–2029 in the tax note and 2018–2031 in MD&A. A full valuation allowance was recorded against net deferred tax assets.
- Other items to note: a 2012 contract modification increased billings by $65,390 for services dating to 2011; the company said it was not an accounting error. A related-party office lease carries annual rent of approximately $85,498, with the company guaranteeing the leased property. No material legal proceedings were reported.
- Management identified economic weakness and reduced business or consumer spending as risks. It provided no specific revenue or earnings guidance; interim results were cautioned not to necessarily indicate full-year results.
Investor verification priorities
- Assess whether the sharply lower bookings and backlog can recover, and the timing and conversion of prospective government and commercial orders.
- Review customer concentration, receivable collection, and the drivers of operating cash flow, particularly the accounts-receivable reduction.
- Confirm available borrowing capacity under the receivables-based facility and its maturity, and monitor liquidity against management’s 12-month assessment.
- Clarify the NOL expiration discrepancy and potential Section 382 limitations; consider the full valuation allowance.
- Track the leadership transition and any implications of the related-party lease and guarantee.