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IDN > SEC Filings for IDN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for INTELLICHECK MOBILISA, INC.

Form 10-Q for INTELLICHECK MOBILISA, INC.


14-Nov-2012

Quarterly Report


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 and nine month periods ended September 30, 2012 and 2011. 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, 2011. 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

Intellicheck Mobilisa, Inc. (the "Company" or "Intellicheck") is a leading technology company that is engaged in developing and marketing wireless technology and identity systems for various applications including mobile and handheld access control and security systems for the government, military and commercial markets. Products include the Defense ID and Fugitive Finder systems, advanced ID card access control products currently protecting approximately 100 military and federal locations, and ID-Check, 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. Wireless products include Wireless Over Water (WOW), Floating Area Network (FAN), AIRchitect and Wireless Buoys (Aegeus), which is a wireless security buoy system for the government, military and oil industry.

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.

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. The Company sells its 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, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses 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 the Company sells the deliverable separately and is the price actually charged by the Company 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.

The Company also recognizes 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 the Company's technology are recognized as revenues in the period they are earned.

Revenue from research and development contracts are generally with government agencies under long-term cost-plus fixed-fee contracts, where revenue is based on time and material costs incurred. Revenue from these arrangements is recognized as time is spent on the contract and materials are purchased. Research and development costs are expensed as incurred.

In March 2012, there were modifications made to an existing research and development contract which were applied retroactively. The change in terms effectively increased the amounts to be billed under the terms of the contract dating back to September 2011. Prior invoices were revised to reflect the change in contract billing terms which increased revenue a total of $65,390 related to the prior year. The Company determined that the change in contract terms and resulting additional billings related to 2011 did not constitute an accounting error.

The Company also performs 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.

The Company offers 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

The Company accounts 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 September 30, 2012, due to the uncertainty of the realizability of 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 September 30, 2012 to the three months ended September 30, 2011

Revenues for quarter ended September 30, 2012 decreased 41% to $2,123,000 compared to $3,595,000 for the previous year.

                               Three months ended September 30,
                                 2012                    2011            % Change
        Identity Systems   $       1,572,000       $       3,421,000           (54 )
        Wireless                     551,000                 174,000           217
                           $       2,123,000       $       3,595,000           (41 )

The decrease in Identity Systems revenues in the third quarter of 2012 is primarily the result of decreased Fugitive Finder and Defense ID sales to military bases. The increase in Wireless revenue in the third quarter of 2012 is attributable to the timing on the funding of the FAN/buoy contract which expired as of June 30, 2011 and the new funding was not awarded until mid-September, 2011. Total booked orders were $1.4 million in the third quarter of 2012 compared to $6.2 million in the third quarter of 2011. As of September 30, 2012, our backlog, which represents non-cancelable sales orders for products not yet shipped and services to be performed, was approximately $0.3 million at September 30, 2012, compared to $3.3 million at September 30, 2011. Backlog at December 31, 2011 was $2.7 million. The decrease is due to the FAN/buoy funding awarded in mid-September, 2011, which added an unusually large amount on the backlog.

Our gross profit as a percentage of revenues was 73.8% for the three months ended September 30, 2012 compared to 64.5% for the three months ended September 30, 2011. The increase in the percentage is primarily a result of a change in product mix: The decrease in Identity Systems revenue in 2012 was primarily related to 2011 equipment sales.

Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $62,000 or 3% to $1,948,000 for the three months ended September 30, 2012 compared to $2,010,000 for the three months ended September 30, 2011. Selling expenses for the quarter decreased by $108,000 resulting from lower overall salaries and commissions, and from general cost reduction measures. General and administrative expenses increased by $112,000 because of increased salaries for business development, bids and proposals, and professional services. Research and development costs decreased $66,000 primarily because of a decrease in personnel.

Interest income was insignificant in the three month periods ended September 30, 2012 and 2011.

Interest expense for the three months ending September 30, 2012 was $0 compared to $4,000 for the same period last year. The 2011 expense represented the interest and amortization of deferred debt discount on the notes payable to the former principals of Positive Access, which has been paid in full.

As a result of the net loss, no provision for income tax has been made for the three months ended September 30, 2012.

As a result of the factors noted above, the Company generated a net loss of $381,000 for the three months ended September 30, 2012 as compared to net income of $306,000 for the three months ended September 30, 2011.

Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011

Revenues decreased by 14%, to $8,275,000 for the nine months ended September 30, 2012 from $9,616,000 for the nine months ended September 30, 2011.

                                Nine months ended September 30,
                                  2012                   2011           % Change
         Identity Systems   $      6,341,000       $      7,458,000           (15 )
         Wireless R&D              1,934,000              2,158,000           (10 )
                            $      8,275,000       $      9,616,000           (14 )

The decrease in Identity Systems revenues in 2012 is primarily the result of decreased Fugitive Finder and Defense ID sales to military bases. The decrease in Wireless revenue in 2012 is the result of decreased direct equipment buoy sales.

Our gross profit as a percentage of revenues was 69.5% for the nine months ended September 30, 2012 compared to 64.5% for the nine months ended September 30, 2011. The increase in the percentage is primarily a result of changes in the product mix as discussed in the three month period discussed above.

Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $412,000 or 6% to $6,060,000 for the nine months ended September 30, 2012 from $6,472,000 for the nine months ended September 30, 2011. Selling expenses decreased by $234,000 principally because of the decrease in Defense ID military sales. General and administrative expenses increased by $30,000 primarily because of an increase in salaries for business development, bids and proposals, and professional services. Research and development costs decreased by $208,000 because of a decrease in personnel.

Interest income was insignificant in both periods presented.

Interest expense for the nine months ending September 30, 2012 was $0 compared to $9,000 for the same period last year. The 2011 expense represented the interest and amortization of deferred debt discount on the notes payable to the former principals of Positive Access, which has been paid in full.

Because of the net loss, no provision for income tax has been made for the nine months ended September 30, 2012.

As a result of the factors noted above, the Company generated a net loss of $305,000 for the nine months ended September 30, 2012 as compared to a net loss of $277,000 for the nine months ended September 30, 2011.

Liquidity and Capital Resources (All figures have been rounded to the nearest $1,000)

As of September 30, 2012, the Company had cash and cash equivalents of $2,738,000, working capital (defined as current assets minus current liabilities) of $2,644,000, total assets of $22,473,000 and stockholders' equity of $19,628,000.

During the nine months ended September 30, 2012, the Company generated net cash from operating activities of $1,284,000 compared to $45,000 in the nine months ended September 30, 2011. Cash used by investing activities was $71,000 for the nine months ended September 30, 2012 compared to $46,000 for the nine months ended September 30, 2011. Cash provided by financing activities was $130,000 during the period ended September 30, 2012 compared to $27,000 in the same period last year.

On August 17, 2011, the Company entered into a two year revolving credit facility with Silicon Valley Bank. The maximum borrowing under the facility is $2 million. Borrowings under the facility are subject to certain limitations based on a percentage of accounts receivable, as defined in the agreement, and are secured by all of the Company's assets. At September 30, 2012, there were no outstanding borrowings and unused availability under the facility was $0.7 million.

We currently anticipate that our available cash, as well as 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 the Company will be able to secure the additional funds when needed or obtain such on terms satisfactory to the Company, if at all.

The Company has 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, the Company may offer and sell, from time to time in the future in one or more public offerings, its common stock, preferred stock, warrants, and units. The aggregate initial offering price of all securities sold by the Company will not exceed $25,000,000, and, pursuant to SEC rules, the Company may only sell up to one-third of the market cap held by non-affiliate stockholders in any 12-month period.

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 September 30, 2012, the Company had net operating loss carryforwards ("NOL's") for federal and New York state income tax purposes of approximately $38.1 million. There can be no assurance that the Company will realize the entire benefit of the NOL's. The federal and New York state NOL's are available to offset future taxable income and expire from 2018 to 2031, if not utilized. The Company has not yet completed its review to determine whether or not these NOL's will be limited under Section 382 of the Internal Revenue Code due to the ownership change from the acquisition of Mobilisa, Inc.

Adjusted EBITDA

The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net income 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 Intellicheck Mobilisa 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 the Company's operations and can compare its 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.

Intellicheck Mobilisa considers Adjusted EBITDA to be an important indicator of the Company's operational strength and performance of its business and a useful measure of the Company's historical operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest income and expense, impairments of long lived assets and goodwill, stock based compensation expense, all of which impact the Company's profitability, as well as depreciation and amortization related to the use of long term assets which benefit multiple periods. The Company believes 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 the Company may not be comparable with similarly named measures provided by other entities.

A reconciliation of GAAP net (loss) income to Adjusted EBITDA follows:

                                                            (Unaudited)
                                          Three Months Ended            Nine months ended
                                            September 30,                 September 30,
                                          2012          2011           2012           2011
Net (loss) income                      $ (381,296 )   $ 305,965     $ (305,299 )   $ (276,952 )
Reconciling items:
Interest - net                                  -         3,658              -          8,630
(Benefit) provision for income taxes            -             -              -              -
Depreciation and amortization             273,125       280,948        824,589        847,654
Stock-based compensation costs              5,986        19,582         47,262         11,997
Adjusted EBITDA                        $ (102,185 )   $ 610,153     $  566,552     $  591,329

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. Other than Mobilisa's guarantee on the mortgage of the property it leases from a related party as disclosed in Note 9, 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.

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