Intellicheck, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is unaudited. Intellicheck develops identity authentication and threat-identification products for retail, law enforcement, government, military, and commercial customers. The company changed its legal name from Intellicheck Mobilisa, Inc. effective May 16, 2017.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $966,690 | $1,214,308 | $2,630,684 | $3,105,330 |
| Gross profit | $861,677 | $946,171 | $2,211,601 | $2,482,497 |
| Gross margin | 89.1% | 77.9% | 84.1% | 79.9% |
| Operating loss | $(1,082,527) | $(730,359) | $(3,123,492) | $(4,658,159) |
| Net loss | $(1,074,845) | $(726,922) | $(3,110,155) | $(4,645,529) |
| Adjusted EBITDA (non-GAAP) | $(888,444) | $(490,495) | $(2,529,291) | $(3,527,431) |
- For the nine months, operating cash use was $2.90 million, compared with $3.47 million in 2016. Investing activities provided $17,000; financing activities provided $8.73 million. Cash increased by $5.85 million to $8.94 million.
- At September 30, cash was $8.94 million, working capital $8.56 million, total assets $20.43 million, and stockholders’ equity $18.84 million. Total liabilities were $1.60 million.
- No borrowings were outstanding under the Northwest Bank revolving facility; reported unused availability was $2.0 million. The facility is secured by company deposits and matures May 22, 2018. The filing reports no other debt balance.
- In August, Intellicheck sold 4,168,750 shares at $2.25 per share. Financing cash flow and equity statements report net proceeds of approximately $8.58 million; the note also describes approximately $8.67 million after underwriting discounts and commissions before approximately $92,000 of direct offering costs. Shares outstanding increased from 10.72 million at year-end 2016 to 14.98 million at September 30, 2017.
Changes versus comparable periods
- Revenue declined 20% in Q3 and 15% for the first nine months, primarily due to lower commercial and Defense ID sales. Q3 total invoiced orders also fell 20% to $931,000.
- Gross margin improved in both comparisons. Management attributed the increase to more SaaS revenue and fewer lower-margin equipment sales.
- Q3 operating expenses rose 16% to $1.94 million, reflecting increased sales and development staffing, travel, professional fees, and accelerated R&D. Q3 net loss widened to $1.07 million from $727,000.
- Nine-month operating expenses fell 25% to $5.34 million, primarily because 2016 included a former officer’s severance and higher legal, professional, and specialized consulting costs. Nine-month net loss narrowed to $3.11 million.
- Backlog was approximately $23,000 at September 30, 2017, down from $233,000 a year earlier and $133,000 at December 31, 2016.
Outlook, risks, and notable items
- Management expected available cash, operating cash flows, and the credit facility to cover working capital and capital expenditure needs for at least 12 months. It cautioned that lower-than-expected performance or higher expenses could require additional financing or expense reductions; additional financing may not be available on acceptable terms.
- Management cited plans to use offering proceeds for general corporate purposes, including product development, product features, and expansion of sales and engineering personnel. The filing gives no numerical revenue or earnings guidance.
- Two customers accounted for approximately 32% of Q3 revenue and 22% of nine-month revenue; together they represented 22% of receivables at September 30. This customer concentration is a potential source of revenue and collection risk.
- On October 4, 2017, CEO William Roof retired at the board’s request. Under a November 2 separation and consulting agreement, he is to receive $500,000 over 20 months plus certain benefit-premium reimbursements; his options’ expiration was extended. CFO Bill White became interim CEO and continued as CFO.
- The company reported no material legal proceedings and no goodwill or intangible-asset impairment charges for the nine months. It planned its 2017 annual goodwill impairment test for Q4. Deferred tax assets remained subject to a full valuation allowance; an ownership change in 2016 had reduced available NOLs materially.
- Revenue standard ASC 606 was scheduled to become effective for the company after December 15, 2017; Intellicheck was still assessing its effects, including performance obligations and commission-cost accounting.
- Management identified economic weakness and reduced business or consumer spending as risks. Cash was held at one financial institution. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported for Q3.
Investor verification points
- Verify the trend in commercial and Defense ID demand, order intake, backlog, and customer concentration after September 30.
- Assess whether SaaS growth and improved gross margins can offset lower sales and operating losses, and track operating cash burn against the stated 12-month liquidity outlook.
- Confirm the offering-proceeds reconciliation and the effects of share issuance, options, warrants, and other potential dilution.
- Review the CEO transition and separation costs, the Q4 goodwill impairment assessment, and the company’s eventual ASC 606 impact assessment.
- Monitor the May 2018 credit-facility maturity and whether additional financing or expense reductions become necessary.