Intellicheck Mobilisa, Inc. — Form 10-Q Summary
Business context and period: The company develops identity-verification, access-control and wireless technology for government, military and commercial markets. This unaudited report covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2.579 million | $2.123 million | $5.932 million | $8.275 million |
| Gross profit | $1.781 million | $1.567 million | $3.636 million | $5.755 million |
| Gross margin | 69.1% | 73.8% | 61.3% | 69.5% |
| Operating income (loss) | $16,000 | $(381,000) | $(1.824) million | $(305,000) |
| Net income (loss) | $16,000 | $(381,000) | $(1.824) million | $(305,000) |
| Adjusted EBITDA (non-GAAP) | $287,000 | $(102,000) | $(994,000) | $567,000 |
Cash flow and balance sheet: For the nine months, operating activities used $1.040 million, investing activities used $73,000, and financing activities provided $70,000. Cash declined to $643,000 from $1.686 million at December 31, 2012. At September 30, total assets were $19.114 million, total liabilities $3.161 million, and stockholders’ equity $15.953 million. Working capital was negative $395,000. No borrowings were outstanding under the revolving credit facility; reported unused availability was approximately $957,000. The facility has a $2 million maximum, is secured by company assets, and matures October 15, 2014.
Material changes and operating developments
- Q3 revenue rose 21.5% year over year, while nine-month revenue fell 28.3%. Q3 Identity Systems revenue increased 4% and Wireless/R&D revenue increased 70%; nine-month revenue declined 32% and 17%, respectively.
- Management attributed the nine-month revenue decline mainly to large Identity Systems hardware sales in Q2 2012 that did not recur, and lower 2013 wireless activity compared with 2012 buoy work.
- Q3 gross margin declined 4.7 percentage points and nine-month margin declined 8.2 points, principally because lower-margin wireless installation work made up a larger share of sales.
- Operating expenses declined 9.4% in Q3 and 9.9% for the nine-month period, primarily reflecting lower personnel-related costs. The nine-month net loss widened substantially year over year.
- Q3 booked orders were $1.5 million versus $1.4 million a year earlier. Backlog was approximately $400,000, compared with $300,000 a year earlier and $1.2 million at December 31, 2012; $200,000 was expected to be recognized after one year.
Outlook, risks and other notable items
- Liquidity outlook: Management expected existing resources, operating cash generation and available credit to meet working-capital and capital-expenditure needs for at least 12 months. The company had implemented cost reductions and said it would consider further cuts. It also retained the option to raise capital, but gave no assurance of availability or favorable terms.
- Concentration: One customer accounted for approximately 23% of Q3 and 21% of nine-month 2013 revenue and 24% of receivables at quarter-end; sales related to Washington State wireless network installations.
- Related-party items: The company leased office space from an entity wholly owned by two directors who are members of management, under a lease extending to 2017; the company guaranteed the lease. It reported $321,000 accrued for board fees for the first three quarters and the CEO’s second-quarter salary.
- Assets and taxes: No impairment charges were recognized for the nine months, and management reported no then-current impairment indicators. Goodwill’s fair value had exceeded carrying value by only 2% in the 2012 test; the 2013 annual test was planned for Q4. The company had approximately $43 million in tax-loss carryforwards, subject to possible ownership-change limitations, and a full valuation allowance against net deferred tax assets.
- Contingencies and controls: The filing reported no material legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- Adjusted EBITDA is a company-defined non-GAAP measure; the filing cautions it has limitations and should not be considered in isolation or as a substitute for GAAP results.
Most important facts for investors to verify
- Whether revenue, orders and backlog recover after the unusually strong 2012 comparison and the sharp decline in backlog since year-end.
- Whether cash burn improves and the company can sustain operations within its stated 12-month liquidity outlook, including access to the borrowing facility.
- Whether the Q4 goodwill impairment test identifies impairment, given the narrow valuation cushion described for the prior-year test.
- The status and collectability of the concentrated customer receivable, and the timing of accrued related-party compensation payments.
- Whether NOL carryforwards remain usable after the company completes its Section 382 ownership-change review.