Intellicheck, Inc. quarterly report, Q1 FY2015

Intellicheck Mobilisa, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. The company develops identity-verification and access-control products and wireless systems for government, military, and commercial markets. Financial statements are unaudited.

Financial results and liquidity

MetricQ1 2015Q1 2014 / comparison
Revenue$987,127$1,092,049; down 9.6%
Gross profit / margin$594,965 / 60.3%$729,402 / 66.8%
Operating expenses$1,922,228$1,639,230
Operating loss$(1,327,263)$(909,828)
Net loss / diluted loss per share$(1,302,113) / $(0.14)$(909,684) / $(0.21)
Adjusted EBITDA (non-GAAP)$(898,417)$(709,916)
Cash used in operating activities$(707,070)$(1,031,280)

Cash and cash equivalents were $9.735 million at March 31, 2015, compared with $2.966 million at December 31, 2014. Working capital was $8.389 million. Current assets were $10.573 million and current liabilities $2.184 million. Cash rose primarily from the January stock offering, which generated approximately $7.845 million in net proceeds; financing cash flow was $7.629 million. Investing activities used $154,000, including $125,000 for a patent purchase.

Total liabilities were $2.674 million. The company had no revolver borrowings and reported approximately $652,000 of unused availability under its asset-secured, $2 million credit facility, which matures October 15, 2015. A vehicle-related note had $24,404 outstanding, net of current portion. No cash equivalents were held at quarter-end.

Material changes and operating trends

  • Identity Systems revenue fell 14% to approximately $928,000, primarily due to fewer defense identity contracts. Wireless revenue rose to approximately $59,000 from $18,000, attributed to two additional installation projects.
  • Booked orders declined 28% to $791,000. Backlog was approximately $292,000 at March 31, versus $358,000 a year earlier and $530,000 at December 31, 2014.
  • Gross margin declined to 60.3%, which management attributed to fewer defense identity-system contracts.
  • Operating expenses rose 17.3%. Selling expense decreased, while general and administrative expense increased, principally due to non-compete amortization and higher stock-compensation costs; R&D expense also increased.
  • Shares outstanding rose from 4,934,601 at year-end to 9,826,333 at quarter-end following issuance of 4,857,143 shares in the January offering. Weighted-average shares increased to 9,057,326 from 4,431,589.

Outlook, risks, and notable items

  • Management said available cash, expected operating cash flow, and credit-facility availability should meet anticipated working-capital and capital-expenditure needs for at least 12 months from the filing date. This is a forward-looking expectation, not a guarantee.
  • The company may seek additional capital for expansion, marketing, market development, infrastructure, competitive needs, or acquisitions; it gave no assurance that funding would be available on acceptable terms.
  • Management reported no Q1 goodwill or definite-lived intangible impairment indicator. However, a $4.207 million goodwill impairment was recorded in Q4 2014, and the company planned its next annual goodwill test for Q4 2015.
  • Approximately $44 million of federal and New York tax-loss carryforwards were reported, but realization is uncertain; potential Section 382 limitations had not been determined. A full valuation allowance was recorded against net deferred tax assets.
  • The filing identifies economic weakness and reduced government or commercial spending as risks. The revolver is secured by company assets and has a tangible-net-worth covenant. Cash is maintained at one financial institution.
  • Other notable commitments include payments under former executives’ separation/non-compete agreements, a related-party office lease guaranteed by the company, and a PR-services agreement at $8,000 per month for an initial 12-month term. The company reported no legal proceedings expected to have a material adverse effect.

Important facts for investors to verify

  • Whether defense-contract activity, orders, and backlog recover after the Q1 declines.
  • Cash burn and liquidity after the offering, including the credit facility’s borrowing-base availability, covenant compliance, and October 2015 maturity.
  • Potential dilution from the large share issuance and outstanding options, restricted stock, and warrants.
  • Assumptions underlying management’s 12-month liquidity outlook and the timing or need for further financing.
  • Section 382 treatment and eventual realizability of tax-loss carryforwards, along with future goodwill impairment assessments.