Intellicheck, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, financial amounts are in thousands of dollars. Intellicheck develops identity-verification and fraud-prevention solutions for commercial, banking, government and other markets.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4,008 | $4,797 | $7,403 | $7,660 |
| Gross profit | $3,644 | $3,328 | $6,723 | $5,971 |
| Gross margin | 91% | 69% | 91% | 78% |
| Operating expenses | $4,742 | $4,165 | $9,289 | $11,447 |
| Operating loss | $(1,098) | $(837) | $(2,566) | $(5,476) |
| Net loss | $(1,098) | $(836) | $(2,566) | $(5,461) |
| Loss per share, basic/diluted | $(0.06) | $(0.04) | $(0.14) | $(0.29) |
| Adjusted EBITDA (non-GAAP) | $(583) | $(47) | $(1,389) | $(98) |
Revenue mix: SaaS revenue was $3,928 in Q2, up 21% year over year, and $7,281 for the first half, up 21%. Total revenue declined 16% in Q2 and 3% in the first half, primarily because equipment revenue fell to $80 in Q2 from $1,425 and to $117 for the first half from $1,462. Excluding equipment, revenue increased 16% in Q2 and 18% for the first half, according to management.
Cash flow and liquidity: First-half operating cash use was $1,538, versus $1,075 in 2021; investing cash use was $156, versus $182. Financing cash flow was zero, versus $76 provided in 2021. Cash declined by $1,694 to $11,957. At June 30, working capital was $9,121, total assets were $24,194 and stockholders’ equity was $18,360. The company reported no borrowings under its revolving facility and $2,000 of available capacity. No interest-bearing debt balance is reported.
Changes, unusual items and key developments
- Q2 revenue declined, but gross profit increased 9%; the reported margin improvement largely reflects the smaller share of lower-margin equipment sales. Excluding equipment, gross margin was 93% in Q2 2022 and 2021; for the first half it was 92% versus 93%.
- First-half operating expenses decreased 19%, primarily because of lower equity-compensation expense following large liability-award fair-value adjustments in 2021. Q2 operating expenses rose 14%, with management citing higher personnel, professional-fee and marketing expenses.
- Management and the Audit Committee concluded in May 2022 that previously issued statements for Q3 2020, 2021 quarters and fiscal years 2020 and 2021 should no longer be relied upon, due to errors in accounting for certain option awards. The filing says those periods were restated. Certain awards should have been liability-classified and remeasured; the company also had not returned or reimbursed shares withheld in 2021 to cover taxes and was arranging payment to affected individuals.
- Management reported a material weakness in internal controls over equity-compensation accounting, shares issued and outstanding, and weighted-average shares. Disclosure controls were deemed ineffective; the stated evaluation refers to March 31, 2022. The planned remediation included outsourcing equity-plan administration and recordkeeping and engaging a professional-services firm.
Outlook, risks and contingencies
Management expects cash, operating cash generation and available credit to meet working-capital and capital-expenditure needs for at least 12 months from the filing date. It also says it may seek additional financing for expansion, marketing, infrastructure or acquisitions, with no assurance of availability or acceptable terms. The filing provides no quantified revenue or earnings guidance.
Management cites continuing uncertainty from COVID-19, including possible renewed restrictions and effects on customer demand. It also identifies economic conditions, the Ukraine conflict and potential cyberattacks as risks. Three customers represented approximately 53% of Q2 and first-half revenue; those customers plus one other accounted for 70% of accounts receivable at June 30. The company reported no material legal proceedings. It had an accumulated deficit of $129,463 and a full valuation allowance against net deferred tax assets.
Important facts for investors to verify
- Review the restated filings and reconciliation of the option-award accounting errors, including the status of payments or reimbursements to affected individuals.
- Track remediation of the material weakness and whether management later concludes internal controls are effective.
- Assess SaaS growth and customer concentration against continued weakness in equipment sales and total revenue.
- Monitor operating cash use, cash runway and any change in revolving-credit availability or financing plans.
- Evaluate the assumptions behind breakage revenue estimates and the timing of deferred-revenue recognition.