Intellicheck Mobilisa, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 10, 2016. Intellicheck develops identity-authentication and threat-identification products for retail, law enforcement, government, military and commercial markets.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.214 million | $2.199 million | $3.105 million | $5.478 million |
| Gross profit | $946,000 | $1.396 million | $2.482 million | $3.032 million |
| Gross margin | 77.9% | 63.5% | 79.9% | 55.3% |
| Operating expenses | $1.677 million | $2.775 million | $7.141 million | $6.957 million |
| Operating loss | $730,000 | $1.379 million | $4.658 million | $3.925 million |
| Net loss and loss per share | $727,000; $0.07 | $1.268 million; $0.13 | $4.646 million; $0.48 | $3.784 million; $0.39 |
| Adjusted EBITDA (non-GAAP) | $(490,000) | $(734,000) | $(3.527) million | $(2.441) million |
- Revenue declined 45% in Q3 and 43% for the first nine months. Management attributed lower identity-systems revenue primarily to weaker commercial and Defense ID sales; other revenue fell following the 2015 sale of the wireless assets.
- Higher SaaS revenue mix and fewer equipment sales, which typically carry lower margins, improved gross margin. Q3 operating expenses fell 40%, mainly reflecting lower stock-based compensation, prior-year intangible amortization, lower legal and professional costs, and reduced specialized R&D consulting. Nine-month expenses rose 3%, including former-officer severance, accelerated R&D and higher legal fees.
- Nine-month operating cash outflow was $3.471 million, compared with $3.745 million in 2015. Investing used $22,000; financing provided $1.074 million. Cash decreased $2.419 million from year-end to $3.534 million.
- At September 30, cash was $3.534 million, working capital $3.040 million, total assets $15.538 million, equity $13.557 million and total liabilities $1.981 million. No amounts were drawn on the $2 million revolving credit facility; it bore interest at prime (3.50%) and matured October 5, 2017.
- Three customers generated approximately 35% of Q3 and 26% of nine-month 2016 revenue and represented 32% of accounts receivable. Backlog was approximately $233,000, versus $898,000 a year earlier and $339,000 at December 31, 2015.
Material changes, outlook and risks
- A March 2016 Section 382 study concluded that a cumulative ownership change had reduced available federal and New York net operating loss carryforwards from approximately $47.4 million to $2.2 million. The company maintains a full valuation allowance and says it may not realize any benefit from the NOLs.
- In March, the company repurchased 979,114 shares for approximately $1.097 million. A June offering of 1.2 million shares and 600,000 five-year warrants exercisable at $2.20 generated approximately $1.902 million in net proceeds; underwriters also exercised an option for 23,320 warrants.
- Management expects cash, operating receipts and the credit facility to cover working-capital and capital needs for at least 12 months. If performance falls short or expenses exceed expectations, the company may need financing or expense reductions; additional financing may not be available on acceptable terms. No specific revenue or earnings guidance was provided.
- Key risks include declining revenue and backlog, customer concentration, continued losses and cash use, potential financing needs, economic weakness and possible goodwill impairment. The company reported no material legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal controls.
- Former Chief Revenue Officer Robert Williamsen departed in May 2016; his agreement provides 12 months of salary payments, and accrued severance was $150,350 at quarter-end. The company also paid a $100,000 fee to terminate a Washington lease.
Important facts for investors to verify
- Whether commercial and Defense ID demand, orders and backlog recover after the reported decline.
- Cash burn and assumptions behind the stated 12-month liquidity outlook, including continued access to the undrawn credit facility.
- Customer concentration, collections and receivables exposure to the three major customers.
- Whether SaaS growth can sustain improved margins and translate into cash generation.
- Potential dilution from outstanding options and warrants, and the impact of the NOL limitation.
- The outcome of the planned fourth-quarter 2016 goodwill impairment assessment.