Intellicheck Mobilisa, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. The company develops identity authentication, document verification, and access-control products for commercial and government customers, including ID-Check and Defense ID. Its strategy included shifting toward cloud-based software-as-a-service (SaaS) offerings.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $3.839 million | $7.015 million |
| Gross profit / margin | $3.070 million / 80% | $4.008 million / 57% |
| Operating loss | $5.750 million | $5.480 million |
| Net loss | $5.735 million | $5.334 million |
| Net loss per share, basic and diluted | $0.58 | $0.55 |
| Cash used in operating activities | $4.240 million | $4.436 million |
| Cash and cash equivalents at year-end | $3.092 million | $5.953 million |
| Working capital at year-end | $2.471 million | $5.659 million |
- FY2016 operating expenses were $8.820 million, including $6.414 million of selling, general and administrative expense and $2.406 million of research and development expense.
- Year-end total liabilities were $1.598 million; the company had no borrowings under its $2 million revolving credit facility, which matured October 5, 2017.
- FY2016 cash declined by $2.861 million. Financing activities provided $1.408 million, including proceeds from an equity offering and warrant and option exercises, partly offset by a $1.097 million repurchase of shares from former executives.
- Fourth-quarter revenue was $734,000 versus $1.537 million in Q4 2015; net loss was $1.090 million versus $1.550 million. Q4 2016 gross profit was $587,000.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $4.379 million in 2016 versus a loss of $3.581 million in 2015.
Material changes versus 2015
- Revenue fell 45%, primarily reflecting lower commercial and Defense ID sales as the company shifted its sales mix toward SaaS. Identity Systems revenue declined 42%; “other” revenue fell 96%, in part because the wireless enterprise assets were sold in 2015.
- Gross margin improved to 80% from 57%, which management attributed to a higher SaaS contribution and fewer lower-margin equipment sales. Gross profit dollars nevertheless declined 23%.
- Operating expenses decreased 7%, but the operating loss and net loss widened. Lower amortization and reduced use of a specialized R&D consultant contributed to the expense reduction.
- Backlog declined to approximately $133,000 from $339,000. The top ten customers represented about 50% of revenue, down from 59%; no customer accounted for 10% or more of 2016 revenue, compared with one customer at 31% in 2015.
Outlook, risks and unusual items
- Management expected available cash, operating resources and the credit facility to cover working-capital and capital-expenditure needs for at least 12 months. The financial-statement notes caution that weaker performance or higher expenses could require additional financing or expense reductions; financing availability and terms are not assured.
- The company has recorded losses since inception, with a $104.368 million accumulated deficit at year-end. It reported $4.240 million of operating cash use in 2016 and may continue to incur losses.
- Key risks include long sales and implementation cycles; dependence on major customers, government budgets, agency data access and military installation approvals; competition; supplier concentration; privacy and cybersecurity exposure; and potential restrictions on electronically capturing ID data. Management reported two plaintiff lawsuits to enforce patent rights; it stated no legal or regulatory proceeding was expected to have a material adverse effect.
- A Section 382 ownership-change study following the 2016 share repurchase reduced the company’s available net operating loss carryforwards from $47.4 million to $2.2 million in the first quarter; the company reported approximately $7 million available at year-end. Deferred tax assets remained fully offset by a valuation allowance.
- Goodwill was $8.102 million. The company reported no goodwill or intangible-asset impairment in 2016, but the goodwill valuation depends on estimates and market-sensitive assumptions. The auditor issued an unqualified opinion on the financial statements; management concluded internal controls were effective.
- No specific revenue, earnings or cash-flow guidance was provided. Management described continued SaaS development and expansion into commercial and government identity markets as strategic priorities.
Important facts for investors to verify
- Whether the SaaS transition can restore revenue growth while sustaining the higher gross margin.
- Cash burn, available liquidity and financing needs relative to management’s stated 12-month outlook.
- Whether the small backlog converts to revenue, and how customer concentration and long sales cycles affect results.
- The terms, availability and maturity of the revolving credit facility, and potential dilution from outstanding options and warrants.
- The effect of the Section 382 limitation on usable tax losses, and the assumptions supporting the goodwill valuation.