Intellicheck, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Intellicheck provides identity-authentication and age-verification solutions for retail, law enforcement, government, military and commercial customers. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.040 million | $0.967 million | $3.103 million | $2.631 million |
| Gross profit / margin | $0.927 million / 89.1% | $0.862 million / 89.1% | $2.808 million / 90.4% | $2.212 million / 84.1% |
| Operating expenses | $2.082 million | $1.944 million | $6.188 million | $5.335 million |
| Operating loss | $(1.154) million | $(1.083) million | $(3.380) million | $(3.123) million |
| Net loss / diluted loss per share | $(1.131) million / $(0.07) | $(1.075) million / $(0.08) | $(3.300) million / $(0.21) | $(3.110) million / $(0.27) |
| Adjusted EBITDA (non-GAAP) | $(1.048) million | $(0.888) million | $(3.029) million | $(2.529) million |
- Revenue mix and margins: Management attributed revenue growth primarily to commercial sales, partly offset by lower Defense ID revenue. SaaS revenue rose 25% to approximately $651,000 in Q3 and 72% to $1.871 million year to date. Nine-month gross margin improved mainly alongside higher SaaS revenue; quarterly gross margin was unchanged.
- Cash flow: Operating activities used $3.207 million in the first nine months, versus $2.896 million a year earlier. Investing activities used $102,000; financing provided $688,000, primarily from stock-option exercises. Cash declined $2.622 million from year-end 2017.
- Liquidity and debt: At September 30, cash was $5.389 million, working capital $4.838 million, total assets $15.289 million and stockholders’ equity $13.565 million. No borrowings were outstanding on the $2.0 million revolving credit facility; the filing reports $2.0 million of unused availability and a May 22, 2019 maturity. Total liabilities were $1.724 million.
- Other metrics: Goodwill was $8.102 million, with no impairment charge reported for the first nine months. Shares outstanding were 15,632,196 at September 30; 15,638,765 were reported outstanding at November 14, 2018.
Material changes versus prior periods
- Nine-month revenue increased 18%, but the net loss widened by approximately $189,000 and operating expenses rose 16%, primarily due to increased sales and development headcount and stepped-up marketing and R&D efforts.
- Quarterly revenue increased 8%; quarterly net loss widened by approximately $56,000. Higher commercial revenue was partly offset by lower Defense ID revenue.
- Cash from operations remained negative and worsened by approximately $312,000 year over year. The prior-year financing inflow included approximately $8.67 million of net proceeds from a public offering; 2018 financing inflow was substantially smaller.
- Intellicheck adopted ASC 606 on January 1, 2018 using the modified retrospective method. It reported no opening retained-earnings adjustment and no change to revenue-recognition methods; comparative periods were not restated.
Outlook, risks and notable items
- Outlook: No specific revenue or earnings guidance is provided. Management expected cash, anticipated operating cash and available credit to meet working-capital and capital-expenditure needs for at least 12 months. It cautioned that weaker performance or higher expenses could require additional financing or expense reductions; financing availability and terms are not assured.
- Customer concentration: Sales to two customers represented approximately 32% of Q3 revenue and 33% of nine-month revenue, as described in the filing. Those customers represented 24% of accounts receivable at quarter-end.
- Costs and contingencies: Accrued expenses included $237,609 of severance liability for the former CEO. The company also disclosed a $500,000 separation and consulting payment arrangement with the former CEO, accounted for as severance. Office rent was $10,334 monthly through March 2021.
- Risks: The company reported a $3.300 million nine-month net loss and $3.207 million of operating cash use. It cited economic and spending conditions as risks, maintained a full valuation allowance against deferred tax assets, and noted goodwill impairment assumptions are sensitive to operating performance and stock price. Cash was held at one financial institution. Management reported no legal proceeding expected to have a material adverse effect and no goodwill or intangible-asset impairment in the period.
- Controls: Management concluded disclosure controls were effective at September 30, 2018; no material change in internal control over financial reporting was reported during Q3.
Important facts for investors to verify
- Whether subscription and commercial revenue growth continues, and how much future revenue depends on the two concentrated customers.
- Whether operating cash burn and operating expenses decline enough to support management’s stated 12-month liquidity expectation.
- The terms, borrowing-base calculation and availability of the revolving facility as it approaches its May 2019 maturity.
- Whether the upcoming goodwill impairment test or lease-accounting adoption materially affects reported assets, liabilities or expenses.
- The potential effects of severance obligations, future equity issuance and stock-based compensation on cash needs and shareholder dilution.