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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
Commission File No.: 001-15465
 
Intellicheck Mobilisa, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
11-3234779
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
191 Otto Street, Port Townsend, WA 98368
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code:                (360) 344-3233
 
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x               No ¨
 
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes x               No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
               
Large accelerated
filer  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
 
Smaller reporting
company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x
 
Number of shares outstanding of the issuer’s Common Stock:
 
Class
 
Outstanding at November 5, 2013
Common Stock, $.001 par value
 
27,897,467
 
 
 
INTELLICHECK MOBILISA, INC.
 
Index
 
 
 
 
Page
Part I
 
               Financial Information
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Consolidated Balance Sheets – September 30, 2013 (Unaudited) and December 31, 2012
3
 
 
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (Unaudited)
4
 
 
 
 
 
 
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013 (Unaudited)
5
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited)
6
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
7-13
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13-19
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
19
 
 
 
 
 
Item 4.
Controls and Procedures
19
 
 
 
 
Part II
 
               Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
20
 
 
 
 
 
Item 1A.
Risk Factors
20
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
20
 
 
 
 
 
Item 4.
Mine Safety Disclosures
20
 
 
 
 
 
Item 5.
Other Information
20
 
 
 
 
 
Item 6.
Exhibits
21
 
 
 
 
 
 
Signatures
22
 
 
 
 
 
 
Exhibits
 
 
 
 
 
 
 
31.1                    Rule 13a-14(a) Certification of Chief Executive Officer
 
 
 
31.2                    Rule 13a-14(a) Certification of Chief Financial Officer
 
 
 
32                       18 U.S.C. Section 1350 Certifications
 
 
 
101.INS              XBRL Instance Document
 
 
 
101.SCH             XBRL Taxonomy Extension Schema
 
 
 
101.CAL             XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF             XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB             XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE              XBRL Taxonomy Extension Presentation Linkbase
 
 
 
2

 
PART I – FINANCIAL INFORMATION
 
Item 1.   FINANCIAL STATEMENTS
 
INTELLICHECK MOBILISA, INC.
 
CONSOLIDATED BALANCE SHEETS
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
643,417
 
$
1,685,879
 
Accounts receivable, net of allowance of $1,613 and $1,613
    as of September 30, 2013 and December 31, 2012, respectively
 
 
1,582,360
 
 
869,747
 
Inventory
 
 
54,275
 
 
337,559
 
Other current assets
 
 
101,451
 
 
105,881
 
Total current assets
 
 
2,381,503
 
 
2,999,066
 
 
 
 
 
 
 
 
 
PROPERTY AND EQUIPMENT, net
 
 
400,559
 
 
449,438
 
GOODWILL
 
 
12,308,661
 
 
12,308,661
 
INTANGIBLE ASSETS, net
 
 
3,951,160
 
 
4,631,577
 
OTHER ASSETS
 
 
72,006
 
 
72,006
 
 
 
 
 
 
 
 
 
Total assets
 
$
19,113,889
 
$
20,460,748
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Accounts payable
 
$
760,675
 
$
247,289
 
Accrued expenses
 
 
878,946
 
 
556,814
 
Deferred revenue, current portion
 
 
1,136,925
 
 
1,450,923
 
Total current liabilities
 
 
2,776,546
 
 
2,255,026
 
 
 
 
 
 
 
 
 
OTHER LIABILITIES
 
 
 
 
 
 
 
Deferred revenue, long-term portion
 
 
213,636
 
 
341,948
 
Deferred rent
 
 
170,649
 
 
185,339
 
Total liabilities
 
 
3,160,831
 
 
2,782,313
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Common stock - $.001 par value; 40,000,000 shares authorized;
 
 
 
 
 
 
 
27,897,467 and 27,724,267 shares issued and outstanding, respectively
 
 
27,897
 
 
27,724
 
Additional paid-in capital
 
 
100,980,276
 
 
100,882,019
 
Accumulated deficit
 
 
(85,055,115)
 
 
(83,231,308)
 
Total stockholders’ equity
 
 
15,953,058
 
 
17,678,435
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
19,113,889
 
$
20,460,748
 
 
See accompanying notes to consolidated financial statements
 
 
3

 
INTELLICHECK MOBILISA, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
 
$
2,578,863
 
$
2,123,403
 
$
5,932,239
 
$
8,274,841
 
COST OF REVENUES
 
 
(797,488)
 
 
(556,265)
 
 
(2,295,871)
 
 
(2,519,753)
 
Gross profit
 
 
1,781,375
 
 
1,567,138
 
 
3,636,368
 
 
5,755,088
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling
 
 
257,000
 
 
370,208
 
 
793,908
 
 
1,231,566
 
General and administrative
 
 
1,035,941
 
 
1,051,901
 
 
3,074,299
 
 
3,080,224
 
Research and development
 
 
472,711
 
 
526,325
 
 
1,592,056
 
 
1,748,597
 
Total operating expenses
 
 
1,765,652
 
 
1,948,434
 
 
5,460,263
 
 
6,060,387
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from operations
 
 
15,723
 
 
(381,296)
 
 
(1,823,895)
 
 
(305,299)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
73
 
 
-
 
 
88
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 
$
15,796
 
$
(381,296)
 
$
(1,823,807)
 
$
(305,299)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PER SHARE INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) per common share -
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.00
 
$
(0.01)
 
$
(0.07)
 
$
(0.01)
 
Diluted
 
$
0.00
 
$
(0.01)
 
$
(0.07)
 
$
(0.01)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares used
    in computing per share amounts -
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
27,795,594
 
 
27,523,587
 
 
27,771,819
 
 
27,482,865
 
Diluted
 
 
27,841,357
 
 
27,523,587
 
 
27,771,819
 
 
27,482,865
 
 
See accompanying notes to consolidated financial statements
 
 
4

 
INTELLICHECK MOBILISA, INC.
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2013
(Unaudited) 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Common Stock
 
Paid-in
 
Accumulated
 
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, January 1, 2013
 
 
27,724,267
 
$
27,724
 
$
100,882,019
 
$
(83,231,308)
 
$
17,678,435
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock option compensation
 
 
-
 
 
-
 
 
15,358
 
 
-
 
 
15,358
 
Stock option exercises
 
 
153,200
 
 
153
 
 
70,319
 
 
-
 
 
70,472
 
Issuance of common stock
 
 
20,000
 
 
20
 
 
12,580
 
 
-
 
 
12,600
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(1,823,807)
 
 
(1,823,807)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, September 30, 2013
 
 
27,897,467
 
$
27,897
 
$
100,980,276
 
$
(85,055,115)
 
$
15,953,058
 
 
See accompanying notes to consolidated financial statements
 
 
5

 
INTELLICHECK MOBILISA, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net Income (Loss)
 
$
(1,823,807)
 
$
(305,299)
 
Adjustments to reconcile net income (loss) to net cash (used in)
    provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
802,402
 
 
824,589
 
Noncash stock-based compensation expense
 
 
27,958
 
 
47,262
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
(Increase) Decrease in accounts receivable
 
 
(712,613)
 
 
1,175,746
 
Decrease (Increase) in inventory
 
 
283,284
 
 
(105,973)
 
Decrease (Increase) in other current assets
 
 
4,430
 
 
(7,599)
 
Increase (Decrease) in accounts payable, accrued expenses
 
 
835,518
 
 
(935)
 
(Decrease) in deferred revenue
 
 
(442,310)
 
 
(338,249)
 
(Decrease) in deferred rent
 
 
(14,690)
 
 
(5,608)
 
Net cash (used in) provided by operating activities
 
 
(1,039,828)
 
 
1,283,934
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Purchases of property and equipment
 
 
(73,106)
 
 
(71,024)
 
Net cash used in investing activities
 
 
(73,106)
 
 
(71,024)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Net proceeds from issuance of common stock from exercise of
    stock options
 
 
70,472
 
 
130,448
 
Net cash provided by financing activities
 
 
70,472
 
 
130,448
 
 
 
 
 
 
 
 
 
(Decrease) increase in cash and cash equivalents
 
 
(1,042,462)
 
 
1,343,358
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
 
 
1,685,879
 
 
1,394,148
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
 
$
643,417
 
$
2,737,506
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Income taxes
 
$
-
 
$
6,000
 
 
See accompanying notes to consolidated financial statements
 
 
6

 
INTELLICHECK MOBILISA, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
1.   NATURE OF BUSINESS
 
Business
 
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 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 enterprise wireless system installation in rural areas of the country.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and Positive Access Corporation (“Positive Access”).  All intercompany balances and transactions have been eliminated upon consolidation.
 
Liquidity
 
For the three and nine months ended September 30, 2013, the company incurred a net income of $16,000 and net loss of $1,824,000, respectively. As of September 30, 2013, the Company had cash and cash equivalents of $643,000, a working capital deficit of $395,000 and an accumulated deficit of $85,055,000. Based on our business plan, we expect our existing resources and revenues generated from operations to satisfy our working capital requirements for at least the next 12 months.  Management of the Company is continually balancing operating expenses to satisfy its working capital requirements.

2.   SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company’s financial position at September 30, 2013 and the results of its operations for the three and nine months ended September 30, 2013 and 2012, stockholders’ equity for the nine months ended September 30, 2013 and cash flows for the nine months ended September 30, 2013 and 2012.  All such adjustments are of a normal and recurring nature.  Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements.  Results of operations for the nine month period ended September 30, 2013, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2013. 
 
The balance sheet as of December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.
 
References in this Quarterly Report on Form 10-Q to “authoritative guidance” are to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”).
 
 
 
7

 
For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
 
Recently Issued Accounting Pronouncements
 
On February 5, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” The standard requires that entities present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. Public companies will also have to provide this information in their interim financial statements.  The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. The Company adopted ASU 2013-02 on January 1, 2013, but has no components of comprehensive income. Accordingly, its net income (loss) is equal to its comprehensive income (loss).
 
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.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less when purchased.  There were no cash equivalents held on September 30, 2013 and December 31, 2012.
 
Allowance for Doubtful Accounts
 
The Company records its allowance for doubtful accounts based upon its assessment of various factors.  The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect customers’ ability to pay.
 
Inventory
 
Inventory is stated at the lower of cost or market and cost is determined using the first-in, first-out method.  Inventory is primarily comprised of finished goods.
 
Goodwill
 
Goodwill represents the excess of acquisition cost over the fair value of net assets acquired in business combinations.  Pursuant to ASC Topic 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances, such as the occurrence of operating losses or a significant decline in earnings associated with the asset. The Company evaluates goodwill for impairment using guidance under ASU 2011-8, which allows the Company to complete a qualitative analysis to determine whether it is necessary to perform the two step quantitative impairment test.
 
 
8

 
Intangible Assets
 
              Acquired intangible assets include trade names, patents, developed technology and backlog from the acquisition of Mobilisa and Positive Access. The Company uses the straight line method to amortize these assets over their estimated useful lives. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable in accordance with ASC Topic 360. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. There were no impairment charges recognized during the nine months ended September 30, 2013 and 2012.
 
Financial Instruments
 
The Company adheres to the provisions of ASC Topic 820, which requires that the Company to calculate the fair value of financial instruments and include this additional information in the notes to financial statements when the fair value is different than the book value of those financial instruments.  The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses.  At September 30, 2013 and December 31, 2012, the carrying value of the Company’s financial instruments approximated fair value, due to their short-term nature.
 
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.
 
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.
 
   
9

 
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.
 
Business Concentrations and Credit Risk
 
During the three and nine month periods ended September 30, 2013, the Company made sales to one customer that accounted for approximately 23% and 21% of total revenues. The revenue was associated with wireless network installations in Washington State.  This customer represented 24% of total accounts receivable at September 30, 2013.  During the three and nine month periods ended September 30, 2012, the Company made sales to four customers that accounted for approximately 37% and 49% of total revenues, respectively.  These revenues resulted from a few large sales across our product mix, from commercial and government Defense ID to buoys.  These customers represented 59% of total accounts receivable at September 30, 2012.     
 
Net Income (Loss) Per Share
 
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive shares.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 
$
15,796
 
$
(381,296)
 
$
(1,823,807)
 
$
(305,299)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares – basic
 
 
27,795,594
 
 
27,523,587
 
 
27,771,819
 
 
27,482,865
 
Dilutive effect of equity incentive plans
 
 
45,763
 
 
-
 
 
-
 
 
-
 
Weighted average common shares – diluted
 
 
27,841,357
 
 
27,523,587
 
 
27,771,819
 
 
27,482,865
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) per share
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.00
 
$
(0.01)
 
$
(0.07)
 
$
(0.01)
 
Diluted
 
$
0.00
 
$
(0.01)
 
$
(0.07)
 
$
(0.01)
 
 
The following table summarizes the common stock equivalents excluded from income (loss) per diluted share because their effect would be anti-dilutive because the exercise prices of these common stock equivalents exceeded the average market price of the Company’s common stock:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Stock options
 
1,130,977
 
935,635
 
1,014,731
 
935,635
 
 
 
1,130,977
 
935,635
 
1,014,731
 
935,635
 
 
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.
 
 
10

 
 
3. INTANGIBLE ASSETS
 
The following summarizes amortization of acquisition related intangible assets included in the statement of operations:
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
 
2012
 
2013
 
 
2012
 
Cost of sales
 
$
192,854
 
$
192,853
 
$
578,562
 
$
578,562
 
General and administrative
 
 
33,952
 
 
36,896
 
 
101,855
 
 
114,203
 
 
 
$
226,806
 
$
229,749
 
$
680,417
 
$
692,765
 

4. REVOLVING LINE OF CREDIT
 
On August 17, 2011, the Company entered into a 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.  The facility bears interest at a rate of U.S. prime (3.25% at September 30, 2013) plus 1.25%.  Interest is payable monthly and the principal is due upon maturity on October 15, 2014.  At September 30, 2013, there were no amounts outstanding and unused availability under the facility was approximately $957,000.

5. INCOME TAXES
 
As of September 30, 2013, the Company had net operating loss carryforwards (NOL’s) for federal and New York state income tax purposes of approximately $43.0million.   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 through 2030 if not utilized.  Under Section 382 of the Internal Revenue Code, these NOL’s may be limited due to ownership changes.  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. 
 
The Company has recorded a full valuation allowance against its net deferred assets since management believes that it is more likely than not that these assets will not be realized.
 
The effective tax rate for the nine months ended September 30, 2013 and 2012 is different from the tax benefit that would result from applying the statutory tax rates primarily due to the recognition of valuation allowances.

6. SHARE 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.  These pronouncements establish 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. 
 
All stock-based compensation is included in operating expenses for the periods as follows:
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2013
 
2012
 
 
2013
 
2012
 
Compensation cost recognized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options
 
$
5,299
 
$
5,986
 
$
15,358
 
$
47,262
 
Stock issued
 
 
-
 
 
-
 
 
12,600
 
 
-
 
 
 
$
5,299
 
$
5,986
 
$
27,958
 
$
47,262
 
 
 
11

 
Stock option activity under the 1998, 1999, 2001, 2003 and 2006 Stock Option Plans during the periods indicated below were as follows:
 
 
 
Number of
Shares
Subject to
Issuance
 
Weighted-
average
Exercise
Price
 
Weighted-
average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2012
 
746,635
 
$
2.06
 
1.66 years
 
$
32,217
 
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
135,000
 
$
0.39
 
 
 
 
 
 
Forfeited or expired
 
375,949
 
$
1.99
 
 
 
 
 
 
Exercised
 
153,200
 
$
0.46
 
 
 
 
 
 
Outstanding at September 30, 2013
 
352,486
 
$
2.18
 
2.84 years
 
$
27,000
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
212,236
 
$
3.33
 
1.82 years
 
$
-
 
 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on September 30, 2013. This amount changes based upon the fair market value of the Company’s stock.
 
As of September 30, 2013, there was $45,396 of total unrecognized compensation expense, net of estimated forfeitures, related to all unvested stock options and restricted stock, which is expected to be recognized over a weighted-average period of 3.34years.
 
As of September 30, 2013, the Company had 1,759,754 options available for future grants under the Plans.
 
The Company uses the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected life of the options in years. The expected life computation is based on the time to option expiration. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
 
The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
 
2012
 
Weighted average fair value of grants
 
$
0.39
 
$
0
 
Valuation assumptions:
 
 
 
 
 
 
 
Expected dividend yield
 
 
0
 
 
0
 
Expected volatility
 
 
100.4
%
 
0
 
Expected life (in years)
 
 
5.00
 
 
0
 
Risk-free interest rate
 
 
0.77
%
 
0
 

7. LEGAL PROCEEDINGS
 
The Company is not aware of any infringement by the Company’s products or technology on the proprietary rights of others. 
 
The Company is not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on its business.
 
 
12

 
8. COMMITMENTS AND CONTINGENCIES
 
In March 2009, the Company entered into an agreement with an investor relations firm. The agreement is automatically renewed for successive twelve month periods unless either party gives written notice no later than 30 days prior to the expiration period.  Afterwards, the fee may be subject to change by mutual agreement of the parties.  As of April 1, 2011, the fee was reduced to $10,000 per month.
 
On November 16, 2010, the Company entered into an Executive Severance Agreement with Mr. Mundy, the Company’s former Chief Financial Officer. Under the agreement, if Mr. Mundy was terminated without cause, if he resigned with “good reason” (as defined in the agreement), or if he was terminated as a result of a change of control, he would have been entitled to 1.99 years of his then base salary, a gross amount equal to any quarterly bonus target applicable during the quarter, accelerated vesting of all outstanding stock options and coverage of health benefits for a period of up to 12 months. The agreement had a term of two years.     On April 1, 2012, Mr. Mundy resigned from the Company. In lieu of the above mentioned agreement, the Company entered into a consulting agreement with Mr. Mundy which had a term of nine months at $15,250 per month. Pursuant to this agreement, the final payment was made January 4, 2013.

9. RELATED PARTY TRANSACTIONS
 
Mobilisa leases office space from a company that is wholly-owned by two directors, who are members of management.  The Company entered into a 10-year lease for the office space ending in 2017.  The annual rent for this facility is currently $85,498 and is subject to annual increases based on the increase in the CPI index plus 1%.  The Company is a guarantor of the leased property.  For the three and nine months ended September 30, 2013, total rental payments for this office space were $22,075 and $66,226 respectively.  For the three and nine months ended September 30, 2012, total rental payments for this office space were $0 and $42,750, respectively, because the third quarter’s rent of $22,075 was accrued but not paid until October, 15, 2012.
 
As of September 30, 2013, the Company had $320,604 in accrued expenses related to board fees for the first three quarters of 2013 and the CEO’s salary for the second quarter of 2013.

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 nine month periods ended September 30, 2013 and 2012.  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, 2012.  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 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 enterprise wireless system installation in rural areas of the country.
 
 
13

   
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
 
For the year ended December 31, 2012, the Company performed a two-step quantitative analysis of its goodwill. From this analysis, the Company determined that the fair value of its reporting unit was higher than its carrying value, at 102%. The Company also believed that the stock price at December 31, 2012, was artificially deflated because of certain factors. Management’s evaluation determined that no goodwill impairment charge was required as of December 31, 2012.
 
Since December 31, 2012, and prior to the filing of this document, the Company’s closing stock price has ranged from a low of $0.28 to a high of $0.94. Market capitalization is a relevant and objective, but not conclusive, indicator of the Company’s fair value considered in its evaluation of potential indicators of goodwill impairment. The Company believes that recent fluctuations in its stock price do not represent an indication of goodwill impairment. The Company will, however, continue to monitor its stock price and operations for any potential indicators of impairment. The Company will conduct its 2013 annual test for goodwill impairment in the fourth quarter.
 
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.
 
 
14

 
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, 2013, 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 September 30, 2013 to the three months ended September 30, 2012
 
Revenues for quarter ended September 30, 2013 increased 21.5% to $2,579,000 compared to $2,123,000 for the previous year.
 
 
 
Three months ended September 30,
 
 
 
2013
 
2012
 
% Change
 
Identity Systems
 
$
1,641,000
 
$
1,572,000
 
 
4
 
Wireless/R&D
 
 
938,000
 
 
551,000
 
 
70
 
 
 
$
2,579,000
 
$
2,123,000
 
 
21
 
 
 
15

   
The increase in Identity Systems revenues in the third quarter of 2013 is primarily the result of two large DID hardware sales in September, 2013, offset slightly by lower commercial hardware sales overall.  The increase in Wireless revenue in the third quarter of 2013 is attributable to wireless network installations in Q3 of 2013 exceeding wireless buoy revenue in Q3 of 2012. The Company collected $250,000 and recognized $209,000 in Q3 of 2013 related to revenue for the 2012 buoy contract written off in Q4 of 2012. The Company collected and recognized an additional $135,000 related to clean-up of the project in Q3, 2013. Total booked orders were $1.5 million in the third quarter of 2013 compared to $1.4 million in the third quarter of 2012.  As of September 30, 2013, our backlog, which represents non-cancelable sales orders for products not yet shipped and services to be performed, was approximately $0.4 million compared to $0.3 million at September 30, 2012. As of September 30, 2013, we expect $0.2 million of our backlog to be recognized in excess of one year. Backlog at December 31, 2012 was $1.2 million. 
 
Our gross profit as a percentage of revenues was 69.1% for the three months ended September 30, 2013 compared to 73.8% for the three months ended September 30, 2012.  The decrease in the percentage is primarily a result of a change in product mix: 23.7% of our Q3, 2013 revenue was generated by wireless network installation projects, which has lower overall margins than our other product offerings.
 
Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $183,000 or 9.4% to $1,766,000 for the three months ended September 30, 2013 compared to $1,948,000 for the three months ended September 30, 2012.  Selling expenses for the quarter decreased by $113,000 resulting from a decrease in certain sales personnel. General and administrative expenses decreased by $16,000 largely due to a decrease in personnel. Research and development expenses decreased by $54,000 also because of the decrease in personnel.
 
Interest income and expense was insignificant in both periods presented.
 
As a result of the anticipated net loss for the full 2013 year, no provision for income tax has been made for the three months ended September 30, 2013.
 
As a result of the factors noted above, the Company generated net income of $16,000 for the three months ended September 30, 2013 as compared to a net loss of $381,000 for the three months ended September 30, 2012.
 
Comparison of the nine months ended September 30, 2013 to the nine months ended September 30, 2012
 
Revenues decreased by 28.3%, to $5,932,000 for the nine months ended September 30, 2013 from $8,275,000 for the nine months ended September 30, 2012. 
 
 
 
Nine months ended September 30,
 
 
 
2013
 
2012
 
% Change
 
Identity Systems
 
$
4,326,000
 
$
6,341,000
 
 
(32)
 
Wireless/R&D
 
 
1,606,000
 
 
1,934,000
 
 
(17)
 
 
 
$
5,932,000
 
$
8,275,000
 
 
(28)
 
 
The decrease in Identity Systems revenues in 2013 is primarily the result of lower hardware sales, driven by two sales in the second quarter of 2012 for $1.0 million and $447,000. The remainder was driven mainly by lower overall hardware sales to existing commercial customers. The decrease in Wireless revenue is attributable to work on buoys in 2012 exceeding wireless installations in 2013.
 
Our gross profit as a percentage of revenues was 61.3% for the nine months ended September 30, 2013 compared to 69.5% for the nine months ended September 30, 2012.  The decrease in the percentage is primarily a result of a change in product mix: 21.6% of our 2013 revenue was generated by wireless network installation projects, which has lower overall margins than our other product offerings. 
 
Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased $600,000 or 9.9% to $5,460,000 for the nine months ended September 30, 2013 from $6,060,000 for the nine months ended September 30, 2012.  Selling expenses decreased by $438,000 principally due to a decrease in certain sales personnel.  General and administrative expenses decreased by $6,000 primarily due to the decrease in personnel. Research and development costs decreased by $156,000 due to the decrease in personnel, and this expense decreased further because of the shifting of some R&D salary expense to G&A.
 
 
16

   
Interest income and expense was insignificant in both periods presented.
 
As a result of the anticipated net loss for the full 2013 year, no provision for income tax has been made for the nine months ended September 30, 2013.
 
As a result of the factors noted above, the Company generated a net loss of $1,824,000 for the nine months ended September 30, 2013 as compared to a net loss of $305,000 for the nine months ended September 30, 2012.
 
Intangible Assets
 
As of September 30, 2013, the Company had no indication of impairment of goodwill or any of its definite-lived intangible assets.
 
Liquidity and Capital Resources (All figures have been rounded to the nearest $1,000)
 
As of September 30, 2013, the Company had cash and cash equivalents of $643,000, working capital (defined as current assets minus current liabilities) deficit of $395,000, total assets of $19,114,000 and stockholders’ equity of $15,953,000. 
 
During the nine months ended September 30, 2013, the Company used net cash from operating activities of $1,040,000 compared to generating net cash from operating activities of $1,284,000 in the nine months ended September 30, 2012.  Cash used by investing activities was $73,000 for the nine months ended September 30, 2013 compared to $71,000 for the nine months ended September 30, 2012.  Cash provided by financing activities was $70,000 during the period ended September 30, 2013 compared to $130,000 in the same period last year.
 
As discussed in Note 9, Related Party Transactions, as of September 30, 2013, the Company has $321,000 in accrued expenses related to board fees for the first three quarters of 2013 and the CEO’s salary for the second quarter of 2013.
 
On August 17, 2011, the Company entered into a 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.  The facility bears interest at a rate of U.S. prime (3.25% at September 30, 2013) plus 1.25%.  Interest is payable monthly and the principal is due upon maturity on October 15, 2014.  At September 30, 2013, there were no amounts outstanding and unused availability under the facility was approximately $957,000.
 
We currently anticipate that our available cash, as well as expected cash from operations and availability under the current credit facility with Silicon Valley Bank, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. The Company has already implemented some cost-cutting measures, some of which took effect in the third quarter of 2013. We continue to monitor cash levels and consider other necessary cost cuts that will not interfere with our roll out of new products and into new markets.
 
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 filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which became effective July 6, 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 Company renewed its registration with the SEC on July 31, 2013.
 
 
17

 
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, 2013, the Company had net operating loss carryforwards (“NOL’s”) for federal and New York state income tax purposes of approximately $43.0 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 2030, 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 (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 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 income (loss) to Adjusted EBITDA follows:
 
 
18

  
 
 
 
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net Income (Loss)
 
$
15,796
 
$
(381,296)
 
$
(1,823,807)
 
$
(305,299)
 
Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest – net
 
 
(73)
 
 
-
 
 
(88)
 
 
-
 
Depreciation and amortization
 
 
265,943
 
 
273,125
 
 
802,402
 
 
824,589
 
Stock-based compensation costs
 
 
5,299
 
 
5,986
 
 
27,958
 
 
47,262
 
Adjusted EBITDA
 
$
286,965
 
$
(102,185)
 
$
(993,535)
 
$
566,552
 
 
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.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents.  The Company maintains cash in one financial institution.  The Company performs periodic evaluations of the relative credit standing of this institution.
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  As of September 30, 2013, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e) and 15d-15(e), were effective. 
 
Our disclosure controls and procedures have been formulated to ensure (i) that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) that the information required to be disclosed by us is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
 
 
19

   
Changes in Internal Controls over Financial Reporting
 
There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2013 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
Part II - Other Information
 
Item 1.  LEGAL PROCEEDINGS
 
None.
 
Item 1A.  Risk Factors
 
Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.
 
While a significant portion of our business is with the U.S. government, our operating results may be impacted by the overall health of the North American economy. Our business and financial performance, including collection of our accounts receivable, realization of inventory, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, etc.
 
Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our annual report on Form 10-K for fiscal year 2012 for information concerning other risks and uncertainties that could negatively impact us.
 
Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None
 
Item 3.  DEFAULTS UPON SENIOR SECURITIES
 
None
 
Item 4.  MINE SAFETY DISCLOSURES
 
Not applicable.
 
Item 5.  OTHER INFORMATION
 
None
 
 
20

   
Item 6.    Exhibits
 
(a)
The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
 
Exhibit No.
 
Description
 
 
 
31.1
 
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer
32
 
18 U.S.C. Section 1350 Certifications
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
 
 
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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:    November 5, 2013
Intellicheck Mobilisa, Inc.
 
 
 
 
By:
/s/ Nelson Ludlow
 
 
Nelson Ludlow, PhD
 
 
Chief Executive Officer
 
 
 
 
By: 
/s/ Bill White
 
 
Bill White
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 
 
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