Intellicheck Mobilisa, Inc. — Q3 2014 Form 10-Q
Business and period: The company develops identity-verification, access-control and security systems, and provides wireless network installation and related services. This unaudited report covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3.218 million | $2.579 million | $5.507 million | $5.932 million |
| Gross profit | $2.016 million | $1.781 million | $3.494 million | $3.636 million |
| Gross margin | 62.6% | 69.1% | 63.5% | 61.3% |
| Operating income (loss) | $328,000 | $16,000 | $(1.684) million | $(1.824) million |
| Net income (loss) | $328,000 | $16,000 | $(1.683) million | $(1.824) million |
| Adjusted EBITDA, non-GAAP | $445,000 | $287,000 | $(1.218) million | $(994,000) |
Cash flow: For the first nine months, operating activities used $2.309 million, investing activities used $96,000, and financing activities provided $5.247 million. Cash rose to $3.067 million from $224,000 at December 31, 2013.
Liquidity and debt: Current assets were $5.895 million and current liabilities $2.954 million, resulting in working capital of $2.942 million. The company reported no borrowings on its Silicon Valley Bank revolving facility at September 30; the $2 million facility had approximately $658,000 of unused availability, subject to accounts-receivable borrowing limits. It was renewed October 15, 2014, through October 15, 2015, is secured by company assets, and includes a tangible-net-worth covenant. Total liabilities were $3.667 million; the filing does not identify outstanding funded debt at quarter-end.
Changes and notable developments
- Q3 revenue grew 25%, led by Identity Systems revenue, up 51% to $2.477 million. Wireless/R&D revenue fell 21% to $741,000 as fewer installation projects were underway. For the nine months, revenue declined 7%, as a 6% increase in Identity Systems was outweighed by a 42% reduction in Wireless/R&D.
- Management attributed the Q3 gross-margin decline to product mix; the nine-month margin improved as lower-margin wireless revenue made up a smaller share of sales. Operating expenses declined 4.4% in Q3 and 5.2% for the nine months.
- Q3 booked orders were $3.08 million, versus $1.54 million a year earlier. Backlog was approximately $710,000 at September 30, compared with $411,000 a year earlier and $381,000 at December 31, 2013. Backlog is defined as non-cancelable orders for products not shipped and services not yet performed.
- Two 2014 public offerings issued a combined 1,445,500 shares and generated approximately $5.738 million in net proceeds before expenses. The company also effected a one-for-eight reverse stock split in August; share and per-share data in the filing are retroactively adjusted.
- The CEO and a senior vice president retired and resigned from the board on September 30. Separation and consulting agreements provide for total payments of $587,500 over 15 months in exchange for non-compete and related undertakings; the company recorded an equal liability and intangible asset. A mutually agreed nine-month extension could add aggregate monthly payments of $27,500.
Outlook, risks and contingencies
- Management expects available cash, expected operating cash and facility availability to cover anticipated working-capital and capital-expenditure needs for at least the next 12 months. The company also reserved the option to seek additional capital; it cautioned that financing may not be available on acceptable terms.
- The company reported approximately $41 million of federal and New York tax-loss carryforwards, subject to expiration from 2018 through 2030. It had a full valuation allowance and had not completed its review of potential Section 382 limitations.
- Goodwill was $12.309 million. Management reported no interim impairment indicator and planned its annual impairment test for Q4 2014. No impairment charges were reported for the nine-month periods presented.
- The filing identifies economic weakness, reduced consumer or business spending, credit availability, and collection or asset-recovery risks. One customer represented about 10% of Q3 2014 revenue; there were no significant customers for the nine-month 2014 period. The company reported no material legal proceedings.
- Management stated disclosure controls were effective as of September 30, 2014, and reported no material change in internal control over financial reporting during the quarter. No specific revenue or earnings guidance was provided.
Investor verification priorities
- Assess whether the Q3 order and backlog increases convert into recognized revenue, and whether the Q3 improvement is sustainable given the nine-month loss.
- Review the operating cash use and the increase in accounts receivable, which rose to $2.622 million from $1.042 million at year-end; confirm collections and cash runway.
- Verify borrowing-base availability and covenant headroom under the renewed secured credit facility, including the impact of the separation-payment obligations.
- Review the new share count, offering proceeds and warrants, and the effect of the reverse split on historical share comparisons and potential dilution.
- Monitor the Q4 goodwill impairment test and the Section 382 analysis affecting the value of tax-loss carryforwards.