Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References
made in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “Intellicheck,”
or the “Company,” refer to Intellicheck Mobilisa, Inc.
The
following discussion and analysis of our financial condition and results of operations constitutes management’s review of
the factors that affected our financial and operating performance for the three month period ended March 31, 2016. This discussion
should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Annual
Report on Form 10-K, for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and Positive Access Corporation (“Positive Access”).
Overview
We
are a technology company that provides identity systems for various applications including mobile and handheld access control
and security systems for the government, military and commercial markets. Our products include the Defense ID
®
and Fugitive Finder systems, advanced ID card access control products currently protecting military and federal locations, and
the ID√Check
®
family of products including Retail ID™, Law ID™, Age ID™ and Guest ID™.
ID√Check
®
is a patented technology that instantly reads, analyzes, and verifies encoded data in magnetic
stripes and barcodes on government-issue IDs from U.S. and Canadian jurisdictions designed to improve the Customer Experience
for the financial, hospitality and retail sectors.
Critical
Accounting Policies and the Use of Estimates
The
preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s
financial statements and accompanying notes. Significant estimates and assumptions that affect amounts reported in the financial
statements include impairment of goodwill, valuation of intangible assets, deferred tax valuation allowances, allowance for doubtful
accounts and the fair value of stock options granted under the Company’s stock-based compensation plans. Due to the inherent
uncertainties involved in making estimates, actual results reported in future periods may be different from those estimates.
We
believe that there are several accounting policies that are critical to understanding our historical and future performance, as
these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and
estimates. These significant accounting policies relate to revenue recognition, stock-based compensation, deferred taxes and commitments
and contingencies. These policies and our procedures related to these policies are described in detail below.
Goodwill
The
excess of the purchase consideration over the fair value of the assets of acquired businesses is considered goodwill. Under authoritative
guidance, purchased goodwill is not amortized, but rather it is periodically reviewed for impairment. We had goodwill of $8,101,661
at March 31, 2016. This goodwill resulted from the acquisition of Mobilisa, Inc. and Positive Access Corporation.
For
the year ended December 31, 2015, we performed our annual impairment test of goodwill in the fourth quarter. Under authoritative
guidance, we can use industry and Company specific qualitative factors to determine whether it is more likely than not that impairment
exists, before using a two-step quantitative analysis. Events or changes in circumstances which could trigger an impairment review
include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific
events and sustained decrease in share price. As a result of the qualitative factors in 2015, specifically as a result of the
decline in the stock price and the decrease in market multiples, we performed the first step of the goodwill impairment test in
order to identify potential impairment by comparing our fair value of the Company to our carrying amount, including goodwill.
The fair value was determined using the weighting of certain valuation techniques, including both income and market approaches
which include a discounted cash flow analysis, an estimation of an implied control premium, in addition to our market capitalization
on the measurement date. The implied control premium selected was developed based on certain observable market data of comparable
companies. The market capitalization is sensitive to the volatility of our stock price. Although we believe that the factors considered
in the impairment analysis are reasonable, changes in any one of the assumptions used could have produced a different result which
may have led to an impairment charge. Any future impairment loss could have a material adverse effect on our long-term assets
and operating expenses in the period in which impairment is determined to exist.
As
of December 31, 2015, we determined that the fair value was in excess of its carrying amount and therefore the second step of
the goodwill impairment test was not required.
We
determined that no events occurred or circumstances changed during the three months ended March 31, 2016 that would more likely
than not reduce the fair value of the Company below its carrying amounts. We will, however, continue to monitor our stock price
and operations for any potential indicators of impairment. We will conduct the 2016 annual test for goodwill impairment in the
fourth quarter, or at such time where an indicator of impairment appears to exist.
Intangible
Assets
Our
intangible assets consist of trade names, patents, developed technology and non-contractual customer relationships and as a result
of a qualitative analysis, we do not believe there is any indication of impairment.
Revenue
Recognition and Deferred Revenue
Revenue
is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable,
collectability is probable, and there is no future Company involvement or commitment. We sell our commercial products directly
through its sales force and through distributors. Revenue from direct
sales of products is recognized when shipped to the
customer and title has passed.
Under
the provisions of ASC Topic 605-25, “Revenue Arrangements with Multiple Deliverables,” for multi-element arrangements
that include tangible products containing software essential to the tangible product’s functionality and undelivered software
elements relating to the tangible product’s essential software, we allocate revenue to all deliverables based on their relative
selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling
price and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable
separately and is the price actually charged by us for that deliverable. ESPs reflect the Company’s best estimates of what
the selling prices of elements would be if they were sold regularly on a stand-alone basis.
We
also recognize revenues from licensing of its patented software to customers. The licensed software requires continuing service
or post contractual customer support and performance; accordingly, a portion of the revenue is deferred based on its fair value
and recognized ratably over the period in which the future service, support and performance are provided, which is generally one
to three years. Royalties from the licensing of our technology are recognized as revenues in the period they are earned.
We
also perform consulting work for other companies. These services are billed based on time and materials. Revenue from these arrangements
is also recognized as time is spent on the contract and materials are purchased.
Subscriptions
to database information can be purchased for month-to-month, one, two, and three year periods. Revenue from subscriptions are
deferred and recognized over the contractual period, which is typically three years.
We
offer enhanced extended warranties for its sales of hardware and software at a set price. The revenue from these sales are deferred
and recognized on a straight-line basis over the contractual period, which is typically one to four years.
Stock-Based
Compensation
We
account for the issuance of equity awards to employees in accordance with ASC Topic 718 and 505, which requires that the cost
resulting from all share based payment transactions be recognized in the financial statements. This pronouncement establishes
fair value as the measurement objective in accounting for share based payment arrangements and requires all companies to apply
a fair value based measurement method in accounting for all share based payment transactions with employees.
Deferred
Income Taxes
Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards.
Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. We have recorded a full valuation allowance for our net deferred tax assets as of March
31, 2016, due to the uncertainty of the our ability to realize those assets.
Commitments
and Contingencies
We
are not currently involved in any legal proceedings that we believe would have a material adverse effect on our financial position,
results of operations or cash flows.
The
above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s
judgment in their application. There are also areas in which management’s judgment in selecting any available alternative
would not produce a materially different result.
Results
of Operations
(All figures have been rounded to the nearest $1,000)
Comparison
of the three months ended March 31, 2016 to the three months ended March 31, 2015
Revenues
decreased by 4% to $951,000 for the three months ended March 31, 2016 from $987,000 for the three months ended March 31, 2015.
|
|
|
Three
months ended March 31,
|
|
|
%
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Identity Systems
|
|
$
|
948,000
|
|
|
$
|
928,000
|
|
|
|
2
|
%
|
|
Other
|
|
|
3,000
|
|
|
|
59,000
|
|
|
|
(95
|
)%
|
|
|
|
$
|
951,000
|
|
|
$
|
987,000
|
|
|
|
(4
|
)%
|
The
increase in Identity Systems revenues in the first quarter of 2016 is primarily the result of a slight increase in Defense ID®
sales. The decrease in Other revenues is a result of our sale of the wireless asset business in the third quarter of 2015. Total
invoiced orders increased 43% to $1,134,000 in the first quarter of 2016 compared to $791,000 in the first quarter of 2015. As
of March 31, 2016, our backlog, which represents non-cancelable sales orders for products not yet shipped and services to be performed,
was approximately $161,000 compared to $292,000 at March 31, 2015. As of December 31, 2015, our backlog was approximately $339,000.
Our
gross profit as a percentage of revenues was 82.8% for the three months ended March 31, 2016 compared to 60.3% for the three months
ended March 31, 2015. The increase in percentage is due to higher revenues on our new SaaS model, lower equipment sales and a
reduction in amortization expense related to a fully amortized intangible asset in 2015.
Operating
expenses, which consist of selling, general and administrative and research and development expenses, increased $1,014,000 or
53% to $2,936,000 for the three months ended March 31, 2016 compared to $1,922,000 for the three months ended March 31, 2015.
Of this increase, $555,000 resulted from accelerated R&D efforts on two new products; our Retail ID Mobile product we launched
in May along with another product we will be announcing shortly partially offset by a reduction in headcount. The remaining increase
reflected higher non-cash stock-based compensation costs, legal fees, and an early termination payment on the office lease in
Port Townsend.
Interest
and other income and interest expense was insignificant in the three month periods ended March 31, 2016 and 2015.
As
further explained in Note 7, we have a net operating loss carryforward for losses generated in prior years of $2.2 million and,
therefore, no provision for income tax has been made for the three months ended March 31, 2016.
As
a result of the factors noted above, we incurred a net loss of $2,143,000 for the three months ended March 31, 2016 compared to
a net loss of $1,302,000 for the three months ended March 31, 2015.
Liquidity
and Capital Resources
(All figures have been rounded to the nearest $1,000)
As
of March 31, 2016, we had cash and cash equivalents of $4,074,000, working capital (defined as current assets minus current liabilities)
of $2,760,000, total assets of $16,014,000 and stockholders’ equity of $13,384,000.
During
the three months ended March 31, 2016, we used net cash of $769,000 in operating activities as compared to net cash used of $707,000
in the three months ended March 31, 2015. Cash used in investing activities was $13,000 for the three months ended March 31, 2016
compared to $154,000 for the three months ended March 31, 2015. We used cash of $1,097,000 in financing activities for the three
months ended March 31, 2016, resulting from the purchase and retirement of common stock. This is compared to cash provided by
operating activities of $7,629,000 for the three months ended March 31, 2015, as a result of the issuance of common stock.
On
January 14, 2015, we announced the closing of an underwritten public offering of 4,857,143 shares of its common stock, offered
to the public at $1.75 per share. Net proceeds from this offering were approximately $7,845,000 after deducting underwriting discounts
and commissions we paid.
On
February 24, 2016, we entered into a stock repurchase agreement with two former directors, who were also members of management
(the “Former Executives”) for the repurchase of all 979,114 shares owned by the Former Executives of our common stock
for $1,096,608. The transaction was finalized on March 4, 2016.
We
have a revolving credit facility with Silicon Valley Bank that allows for maximum borrowings of $2,000,000. The borrowings are
secured by collateralized accounts totaling $2,000,000. The facility bears interest at a rate of U.S. prime (3.50% at March 31,
2016). Interest is payable monthly and the principal is due upon maturity on October 5, 2017. At March 31, 2016, there were no
amounts outstanding under this facility and unused availability under this facility was $2,000,000.
We
currently anticipate that our available cash, as well as cash from the previously mentioned stock offering and expected cash from
operations and availability under the revolving credit agreement, will be sufficient to meet our anticipated working capital and
capital expenditure requirements for at least the next 12 months.
We
keep the option open to raise additional funds to respond to business contingencies which may include the need to fund more rapid
expansion, fund additional marketing expenditures, develop new markets for our technology, enhance our operating infrastructure,
respond to competitive pressures, or acquire complementary businesses or necessary technologies. There can be no assurance that
we will be able to secure the additional funds when needed or obtain such on terms satisfactory to us, if at all.
We
have filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”),
which became effective July 19, 2010. Under the shelf registration statement, we may offer and sell, from time to time in the
future in one or more public offerings, our common stock, preferred stock, warrants, and units. The aggregate initial offering
price of all securities sold by us will not exceed $25,000,000, and, pursuant to SEC rules, we may only sell up to one-third of
the market cap held by non-affiliate stockholders in any 12-month period. We renewed this registration with the SEC on July 31,
2013 and it was declared effective August 6, 2013.
The
specific terms of any future offering, including the prices and use of proceeds, will be determined at the time of any such offering
and will be described in detail in a prospectus supplement which will be filed with the SEC at the time of the offering.
The
shelf registration statement is designed to give the Company the flexibility to access additional capital at some point in the
future when market conditions are appropriate.
We
are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material
adverse effect on our business.
Net
Operating Loss Carry Forwards
As
of December 31, 2015, we had net operating loss carryforwards (“NOL’s”) for federal and New York State income
tax purposes of approximately $47.4 million. In March 2016, we completed a study which determined that a cumulative three-year
ownership change in excess of 50% had occurred in March 2016 due to a share repurchase. As a result, our available NOLs were reduced
from $47.4 million to $2.2 million during the first quarter of 2016. There can be no assurance that we will realize any benefit
of the NOL’s. The federal and New York state NOL’s are available to offset future taxable income and expire from 2016
to 2036, if not utilized.
Adjusted
EBITDA
We
use Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net loss,
interest, income taxes, impairments of long-lived assets and goodwill, depreciation, amortization and stock-based compensation
expense. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management
believes that Adjusted EBITDA provides an additional tool for investors to use in comparing our financial results with other companies
that also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived
assets and goodwill, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and
income taxes, investors can evaluate our operations and can compare the results on a more consistent basis to the results of other
companies. In addition, Adjusted EBITDA is one of the primary measures management uses to monitor and evaluate financial and operating
results.
We
consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful
measure of our historical operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it
excludes interest and other income and expense, impairments of long lived assets and goodwill, stock-based compensation expense,
all of which impact our profitability, as well as depreciation and amortization related to the use of long-term assets which benefit
multiple periods. We believe that these limitations are compensated by providing Adjusted EBITDA only with GAAP net loss and clearly
identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as
a substitute for net loss presented in accordance with GAAP. Adjusted EBITDA as defined by us may not be comparable with similarly
named measures provided by other entities.
A
reconciliation of GAAP net loss to Adjusted EBITDA follows:
|
|
|
(Unaudited)
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net loss
|
|
$
|
(2,143,491
|
)
|
|
$
|
(1,302,113
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Interest and other – net
|
|
|
(5,115
|
)
|
|
|
(25,150
|
)
|
|
Depreciation and amortization
|
|
|
106,793
|
|
|
|
340,321
|
|
|
Stock-based compensation
costs
|
|
|
298,030
|
|
|
|
88,525
|
|
|
Adjusted EBITDA
|
|
$
|
(1,743,783
|
)
|
|
$
|
(898,417
|
)
|
Off-Balance
Sheet Arrangements
We
have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities.
We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Forward
Looking Statements
This
document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, particularly statements anticipating future growth in revenues, loss from operations and cash flow. Words such as “anticipates,”
“estimates,” “expects,” “projects,” “intends,” “plans,” “believes”
and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify
forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs
about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances,
and the Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements
whether as a result of such changes, new information, subsequent events or otherwise.