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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-15465
Intelli-Check, Inc.
(Exact name of the issuer as specified in its charter)
Delaware 11-3234779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
246 Crossways Park West, Woodbury, New York 11797
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (516) 992-1900
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- -----
Number of shares outstanding of the issuer's Common Stock:
CLASS OUTSTANDING AT MAY 12, 2003
Common Stock, $.001 par value 8,952,814
Intelli-Check, Inc.
Index
Part I Financial Information Page
Item 1. Financial Statements
Balance Sheets - March 31, 2003 (Unaudited)
and December 31, 2002 1
Statements of Operations for the three months ended March 31, 2003
(Unaudited) and March 31, 2002 (Unaudited) 2
Statements of Cash Flows for the three months ended March 31, 2003
(Unaudited) and March 31, 2002 (Unaudited) 3
Statements of Stockholders' Equity for the three months ended
March 31, 2003 (Unaudited) 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13 - 14
Part II Other Information
Item 1. Legal Matters 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 16
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 17
CEO & CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 18
Intelli-Check, Inc.
Balance Sheets
ASSETS
March 31, December 31,
2003 2002
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,884,551 $ 1,910,579
Accounts receivable 70,695 93,530
Inventory 1,770,298 1,802,839
Other current assets 228,892 273,770
------------- ---------------
Total current assets 5,954,436 4,080,718
CERTIFICATE OF DEPOSIT 274,068 273,317
PROPERTY AND EQUIPMENT, net 296,300 324,112
ACQUIRED SOFTWARE, net 158,056 211,806
GOODWILL 181,447 181,447
PATENT COSTS, net 252,913 260,215
OTHER INTANGIBLES, net 63,091 83,299
------------ ----------------
Total assets $ 7,180,311 $ 5,414,914
============ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 615,471 $ 298,635
Accrued expenses 1,575,770 771,405
Deferred revenue 284,528 357,059
Current portion of capital lease obligations 14,491 19,572
------------- ---------------
Total current liabilities 2,490,260 1,446,671
------------- ---------------
CAPITAL LEASE OBLIGATIONS - 427
------------- ----------------
OTHER LIABILITIES 91,092 94,565
------------- ----------------
SERIES A 8% CONVERTIBLE PREFERRED STOCK,
Net of beneficial conversion feature, warrants issued and
issuance costs - $.01 par value; 1,000,000 shares
authorized; 30,000 shares issued and outstanding 1,684,834 -
-------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares
authorized; 8,875,302 and 8,875,302 shares issued and
outstanding, respectively 8,874 8,874
Additional paid-in capital 24,436,729 22,399,029
Deferred compensation (327,044) (348,476)
Accumulated deficit (21,204,434) (18,186,176)
------------- ----------------
Total stockholders' equity 2,914,125 3,873,251
------------- ----------------
Total liabilities and stockholders' equity $ 7,180,311 $ 5,414,914
============= ================
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three months ended Three months ended
March 31, 2003 March 31, 2002
REVENUE $ 264,135 $ 254,398
COST OF REVENUE 103,591 130,384
------------- -------------
Gross profit 160,544 124,014
------------- -------------
OPERATING EXPENSES:
Selling 339,589 423,419
General and administrative 617,951 1,155,353
Research and development 303,211 317,187
-------- -------------
Total operating expenses 1,260,751 1,895,959
---------- -------------
Loss from operations (1,100,207) (1,771,945)
----------- -------------
OTHER INCOME (EXPENSES):
Interest income 4,357 17,330
Interest expense (678) (1,494)
Other (expense) income (note 5) (921,730) 331,808
---------- --------
(918,051) 347,644
---------- --------
Net loss $ (2,018,258) $ (1,424,301)
============== =============
PER SHARE INFORMATION:
Net loss per common share-
Basic and diluted ($0.23) ($0.17)
============= ============
Common shares used in computing per
share amounts-
Basic and diluted 8,875,302 8,530,807
============== ============
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended Three months ended
March 31, 2003 March 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,018,258) $(1,424,301)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 109,072 98,489
Amortization of deferred compensation 21,432 580,763
Changes in assets and liabilities-
Increase in certificate of deposit, restricted (751) (1,722)
Decrease (Increase) in accounts receivable 22,835 (147,372)
Decrease in inventory 32,541 63,271
Decrease (Increase) in other current assets 44,878 (66,468)
Increase in accounts payable and accrued expenses 1,121,201 214,828
(Decrease) Increase in deferred revenue (72,531) 125,417
(Decrease) Increase in other liabilities (3,473) 5,181
----------- -----------
Net cash used in operating activities (743,054) (551,914)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (18,899)
----------- -----------
Net cash used in investing activities -- (18,899)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 835,770
Net proceeds from issuance of convertible preferred stock 2,722,534 --
Repayment of capital lease obligation (5,508) (3,459)
----------- -----------
Net cash provided by financing activities 2,717,026 832,311
----------- -----------
Net increase in cash 1,973,972 261,498
CASH AND CASH EQUIVALENTS, beginning of period 1,910,579 4,061,235
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,884,551 $ 4,322,733
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 678 $ 1,494
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Beneficial conversion feature and warrants issued in
connection with issuance of Convertible preferred stock $ 1,037,700 $ --
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Quarter Ended March 31, 2003
Additional
Common Stock Paid-in Deferred Accumulated
------------
Shares Amount Capital Compensation Deficit Total
------ ------ ------- ------------ ------- ------
BALANCE, December 31, 2002 8,875,302 $ 8,874 $22,399,029 $ (348,476) $(18,186,176) $3,873,251
Effect on extension of expiration of rights
dividend - - 1,000,000 - (1,000,000) -
Warrants issued in connection with the issuance
of convertible preferred stock - - 497,700 - - 497,700
Beneficial conversion feature embedded in
convertible preferred stock issued 540,000 540,000
Amortization of deferred compensation - - - 21,432 21,432
Net Loss - - - - (2,018,258) (2,018,258)
- - - - ----------- -----------
BALANCE, March 31, 2003 8,875,302 $ 8,874 $24,436,729 $ (327,044) $ (21,204,434) $ 2,914,125
========= ======= =========== ============ ============= ===========
See accompanying notes to financial statements
4
Intelli-Check, Inc.
Notes to Financial Statements
(Unaudited)
Note 1. Basis of Presentation and 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 Article 10 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 March 31, 2003 and the results of its
operations for the three months ended March 31, 2003 and 2002 and cash flows for
the three months ended March 31, 2003 and 2002. 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 three month period ending March 31, 2003 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2003.
The balance sheet as of December 31, 2002 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.
For further information, refer to the financial statements and notes
thereto included in the Company's Annual Report of Form 10-K for the year ended
December 31, 2002.
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 its financial statements and accompanying notes. Actual results
could differ materially from those estimates.
Revenue Recognition
The Company sells its products directly through its sales force and through
distributors. Revenue from direct sales of the Company's product is recognized
upon shipment to the customer. The Company's products require continuing service
or post contract customer support and performance by the Company, and
accordingly a portion of the revenue pertaining to the service and support 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
year. Currently, with respect to sales to distributors and sales of the
Company's IDentiScan products, the Company does not have enough experience to
identify the fair value of each element and the full amount of the revenue and
related gross margin is deferred and recognized ratably over the one-year period
in which the future service, support and performance are provided.
In addition, the Company recognizes sales from licensing of its patented
software to customers. The Company's licensed software requires continuing
service or post contract customer support and performance by the Company, and
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 year.
5
Inventory Valuation
The Company's inventory consists primarily of its ID-Check terminals that
run our patented software. The inventory was originally received in December
1999. Shortly thereafter, it was returned to the manufacturer for upgrade and
became available for sale in the fourth quarter of 2000. The Company
periodically evaluates the current market value of its inventory, taking into
account any technological obsolescence that may occur due to changes in hardware
technology and the acceptance of the product in the marketplace. Even though the
Company has had limited sales to date, it believes that a sufficient market
exists to sell (with margin) the current inventory as well as the remaining
units required to be purchased from our manufacturer for which the Company has
paid a deposit of $600,000. The current terminal, for which this deposit was
paid, is fully capable of running the Company's patented software as it utilizes
a state-of-the-art imager/scanner and magnetic stripe reader. However, since the
Company's policy is to periodically evaluate the market value of the inventory,
should it determine in a future period that an adjustment is necessary, it would
record such adjustment at that time, which could have a material effect on the
Company's results of operations. The Company is in discussions with our current
manufacturer as well as other manufacturers to select a new platform to run its
patented software. However, during the fourth quarter of 2002, the Company
reserved 100% of this deposit due to the uncertainty of whether or not it will
place the order to purchase the additional units from the manufacturer under the
open purchase order or purchase units to fulfill future orders from a new
platform once it is selected.
Stock-Based Compensation
At March 31, 2003, the Company has stock based compensation plans, which
are described more fully in Note 7 to Financial Statements included in the
Company's 2002 Annual Report on Form 10-K. As permitted by the SFAS No. 123,
"Accounting for Stock Based Compensation", the Company accounts for stock-based
compensation arrangements with employees in accordance with provisions of
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees". Compensation expense for stock options issued to employees is
based on the difference on the date of grant, between the fair value of the
Company's stock and the exercise price of the option. No stock based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock at the date of grant. The Company accounts for equity instruments issued
to non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, or in Conjunction With Selling Goods or Services". All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
The following table illustrates the effect on net loss and loss per share
if the company had applied the fair value recognition provisions of SFAS No. 123
to employees stock based compensation:
- ---------------------------------------------- ------------------- ------------------
Three Months Ended Three Months Ended
March 31,2003 March 31,2002
- ---------------------------------------------- ------------------- ------------------
Net loss, as reported $ (2,018,258) $ (1,424,301)
- ---------------------------------------------- ------------------- ------------------
- ---------------------------------------------- ------------------- ------------------
Add:
Total stock based employee compensation
expense determined under fair value based
method for all awards (332,419) (1,458,089)
--------------- ----------------
Net loss, pro forma $ (2,350,677) $ (2,882,390)
- ---------------------------------------------- ------------------- ------------------
- ---------------------------------------------- ------------------- ------------------
Basic and diluted loss per share, as reported $ (0.23) $ (0.17)
- ---------------------------------------------- ------------------- ------------------
- ---------------------------------------------- ------------------- ------------------
Basic and diluted loss per share, pro forma $ (0.26) $ (0.34)
- ---------------------------------------------- ------------------- ------------------
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
6
Liquidity
The Company anticipates that its current available cash resources combined
with the expected revenues from the sale of the units in inventory and licensing
of its technology will be sufficient to meet its anticipated working capital and
capital expenditure requirements for at least the next twelve months. These
requirements are expected to include the purchase of additional inventory to run
its patented software, product development, sales and marketing, working capital
requirements and other general corporate purposes. Should sales of its products
fall below expectations during the next 12 months, the Company would be required
to raise capital to fund its operations. Should the Company need to raise
capital, there can be no assurances that it would be successful. The impact on
the Company could be adverse if it is not able to ship products as projected or
raise capital as discussed above. In addition, the Company may need 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 its ID-Check technology, enhance our operating infrastructure,
respond to competitive pressures, or acquire complementary businesses or
necessary technologies.
Note 2. Net Loss Per Common Share
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings Per Share". Under the provisions of SFAS No. 128, basic net loss
per common share ("Basic EPS") is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss by the weighted average number
of common shares and dilutive common share equivalents then outstanding. SFAS
No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face
of the statements of operations. Diluted EPS for the periods ended March 31,
2002 and 2003 does not include the impact of stock options, warrants and
convertible preferred stock then outstanding, as the effect of their inclusion
would be antidilutive.
The following table summarized the equivalent number of common shares
assuming the related securities that were outstanding as of March 31, 2003 and
2002 had been converted.
2003 2002
---- -----
Stock options 2,385,866 2,372,940
Warrants 132,490 10,000
Convertible preferred stock 454,545 -
--------- ---------
Total 2,972,901 2,382,940
========= =========
Note 3. Financing Agreement
On March 27, 2003, pursuant to a Securities Purchase Agreement, the Company
sold 30,000 shares of our Series A 8% Convertible Preferred Stock, par value
$.01 per share for $3,000,000 before expenses to Gryphon Master Fund, L.P. Each
preferred share entitles the holder to receive dividends of 8% per annum and is
convertible into 15.1515 shares of our common stock. Additionally, each share of
Preferred Stock will receive one (1) 5 year warrant to purchase 3.787875 shares
of common stock at a price of $6.78. The total amount of shares that may be
issued upon conversion and the exercising of the warrants are 454,545 and
113,636 shares, respectively. Dividend payments of $120,000 are due
semi-annually in cash beginning September 30, 2003. In connection with this
financing, the Company paid agent fees of $150,000, plus legal fees estimated to
be approximately $127,000 and issued warrants and options to purchase 8,854
shares of common stock at a price of $6.78. The Company recorded the relative
fair value of all the warrants issued in connection with this transaction of
$497,700 against the amount of the Convertible Preferred Stock as of March 31,
2003, which was calculated using the Black-Scholes valuation method, as well as
$540,000 of beneficial conversion feature in accordance with EITF 00-27 and such
amounts will be amortized along with issuance cost of $277,466 over the five
year period until the preferred stock mandatory redemption date. Shares of
Preferred Stock are convertible at the option of Gryphon Master Fund, L.P at any
time prior to redemption. The Company may redeem any or all of the Preferred
Shares at any time after one year from the closing date at a cash redemption
price of $100 per share, providing the volume weighted average price of the
Company's Common Stock for any 20 out of 30 consecutive trading days exceeds
$13.20 per share. The Company must redeem all of the Preferred Stock outstanding
on the fifth anniversary of the closing date at a redemption price, in cash,
equal to the purchase price of the Preferred Stock.
7
Note 4. Rights Extension
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of the Company's common stock for
every 10 outstanding shares of common stock continuous held from the record date
to the date of exercise, as well as common stock underlying vested stock options
and warrants, held of record on March 30, 2001, at an exercise price of $8.50.
The rights, which were due to expire on October 4, 2002, were extended by the
Company on October 1, 2002 until April 4, 2003 and further extended in March
2003 until December 31, 2003. The Company recorded the fair value of the
additional rights extension of $1,000,000 during the quarter using the
Black-Scholes valuation method and recorded an increase in additional
paid-in-capital and a reduction in accumulated deficit.
Note 5. Legal Matters
On February 19, 2003, the Company filed a summons and complaint upon
CardCom Technology, Inc. alleging infringement on its patent. Under Federal
rules, absent an extension of time, the CardCom answer was originally due on or
before April 1, 2003. The Company granted CardCom an extension of time to file
its answer and have begun discussions for settlement.
On April 9, 2003, the Company received notification from the American
Arbitration Association that it had awarded Early Bird Capital $921,730 on the
settlement of their demand. The Company intends to file with the New York State
Supreme Court an application for setting aside the confirmation of the award.
The Company believes it has a basis for such an appeal. The Company recorded a
charge of $921,730 in the Statements of Operations for the Three Month Period
ending March 31, 2003. If the Company is unsuccessful in its appeal, the Company
would owe additional interest on the award at an annual rate of 9% from the date
of the award.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Overview
Our company was formed in 1994 to address a growing need for a reliable
document and age verification system to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. Our
sales through September 30, 2000 had been minimal since through 1998 we had
previously produced only a limited pre-production run of our product for testing
and market acceptance. In late 1999, we received a limited number of ID-Check
terminals, which were then available for sale. Shortly thereafter, these
terminals were returned to the manufacturer to be upgraded to contain an
advanced imager/scanner, which allows our software to currently read the
encoding on over 50 jurisdictions as opposed to 32 jurisdictions on the original
scanner. During the fourth quarter of 2000, we experienced a material increase
in sales as a result of product availability and establishing marketing and
distributor agreements with resellers. During 2001 and through the quarter ended
March 31, 2003, sales were limited due to the refocus of our marketing efforts
towards the larger customers in the retail market, in which the sales cycle
normally requires an extended time frame involving multiple meetings,
presentations and a test period, which has been further extended by the rapid
slowing of the economy, whereby decisions for capital expenditures have been
delayed. However, after the tragic events that occurred on September 11, 2001,
there has been a significant increase in awareness and demand for our technology
to help improve security across many industries, including airlines, rail
transportation and high profile buildings and facilities. We have also begun to
market to various government and state agencies, which have long sales cycles
including extended test periods. Since inception, we have incurred significant
losses and negative cash flow from operating activities, and as of March 31,
2003 we had an accumulated deficit of approximately $21,200,000. We will
continue to fund operating and capital expenditures from proceeds that we
received from our recent financing as well as the exercise of warrants, options
and rights. In view of the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and should not be
relied upon as indications of future performance.
Our ID-Check's unique ability to verify the validity of military ID's,
driver licenses and state issued ID cards, that contain magnetic stripes or bar
codes that conform to AAMVA/ANSI/ISO standards, enables us to target three
8
distinct markets. The original target market was focused on resellers of
aged-restricted products, such as alcohol and tobacco, whereby the proliferation
of high-tech fake IDs exposed merchants to fines and penalties for the
inadvertent sale of these products to underage purchasers. Identity Theft, the
fastest growing crime in America, has additionally exposed industry to huge
economic losses through various frauds that utilize fake IDs to support these
transactions, which our technology can help prevent. The tragic events that
occurred on September 11, 2001 have created increased awareness of our
technology in security applications involving access control. As a result of its
applicability in these markets, we have sold our products to some of the largest
companies in the gaming industry, a state port authority, military
establishments, airports, nuclear power plants, high profile buildings and has
completed successful tests of our technology in one of the largest mass
merchandisers in the United States and a large quasi-government department. We
currently have our product in tests with some large public companies and in
several locations in a large State. In addition, we have recently signed
agreements with some high profile organizations which will promote the use of
our technology and our products, such as Mothers Against Drunk Driving (MADD)
and the American Association of Airport Executives (AAAE).
We have developed additional software products that utilize our patented
software technology. On October 28, 2002, our intellectual property portfolio
was further strengthened by the issuance of U.S. Patent No. 6,463,416 B1.
C-Link(R) which runs on a personal computer and was created to work in
conjunction with the ID-Check unit allows a user to instantly view the encoded
data for further verification, to analyze the data and to generate various
reports where permitted by law. We have also developed software containing our
patented technology that can be integrated onto a Windows platform that will
enable a user of the software to perform all the functions of the ID-Check
terminal. To date, we have entered into five licensing agreements and are in
discussions with additional companies to license our software to be utilized
within other existing systems. The revenue received from such licensing
agreements has not been significant through the period ended March 31, 2003.
The foregoing contains certain forward-looking statements. Due to the fact
that we could face intense competition in a business characterized by rapidly
changing technology and high capital requirements, actual results and outcomes
may differ materially from any such forward looking statements and, in general
are difficult to forecast.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of our 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
our financial statements and accompanying notes. Actual results could differ
materially 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, valuation of inventory and commitments and
contingencies. These policies and our procedures related to these policies are
described in detail below.
A. Revenue Recognition
We sell our products directly through our sales force and through
distributors. Revenue from direct sales of our product is recognized upon
shipment to the customer. Our product requires continuing service or post
contract customer support and performance by us, and accordingly a portion of
the revenue pertaining to the service and support 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 year. Currently,
with respect to sales to distributors and sales of our IDentiScan products, we
do not have enough experience to identify the fair value of each element and the
full amount of the revenue and related gross margin is deferred and recognized
ratably over the one-year period in which the future service, support and
performance are provided.
During the third quarter of fiscal 2002, we began recognizing sales from
the licensing of our technology to customers. Our licensing products require
continuing service or post contract customer support and performance by us, and
9
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 year.
B. Inventory Valuation
Our inventory consists primarily of ID-Check terminals that run our
patented software. The inventory was originally received in December 1999.
Shortly thereafter, it was returned to the manufacturer for upgrade and became
available for sale in the fourth quarter of 2000. We periodically evaluate the
current market value of our inventory, taking into account any technological
obsolescence that may occur due to changes in hardware technology and the
acceptance of the product in the marketplace. Even though we have had limited
sales to date, we believe that a sufficient market exists to sell (with margin)
the current inventory as well as the remaining units required to be purchased
from our manufacturer for which we have paid a deposit of $600,000. The current
terminal, for which this deposit was paid, is fully capable of running our
patented software as it utilizes a state-of-the-art imager/scanner and magnetic
stripe reader. However, since our policy is to periodically evaluate the market
value of the inventory, should we determine in a future period that an
adjustment is necessary, we would record such adjustment at that time, which
could have a material effect on our results of operations. We are in discussions
with our current manufacturer as well as other manufacturers to select a new
platform to run our patented software. However, during the fourth quarter of
2002, we reserved 100% of this deposit due to the uncertainty of whether or not
we will place the order to purchase the additional units from the manufacturer
under the open purchase order or purchase units to fulfill future orders from a
new platform once it is selected.
C. Commitments and Contingencies
We are currently involved in certain legal proceedings as discussed in the
"Commitments and Contingencies" note in the Notes to the Financial Statements
filed in our form 10-K for the year ended December 31, 2002. Other than as
described in footnote 5 above, we do not believe these legal proceedings will
have a material adverse effect on our financial position, results of operations
or cash flows. However, were an unfavorable ruling to occur, there exists the
possibility of a material impact on the operating results of that period.
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.
(b) Results of Operations
Comparison of the three months ended March 31, 2003 to the three months
ended March 31, 2002.
We sell our product directly through our sales force and through
distributors. Revenue from direct sales of our product is recognized upon
shipment to the customer. Our product requires continuing service or post
contract customer support and performance by us, and accordingly a portion of
the revenue pertaining to the service and support 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 year. Currently,
with respect to sales to distributors, we do not have enough experience to
identify the fair value of each element and the full amount of the revenue and
related gross margin is deferred and recognized ratably over the one-year period
in which the future service, support and performance are provided.
Revenues increased by $9,737 from $254,398 for the three months ended March
31, 2002 to $264,135 recorded for the three months ended March 31, 2003.
Revenues for the period ended March 31, 2003 consisted of revenues from
distributors of $125,543 and revenues from direct sales to customers of
$138,592. Sales, which represent shipments of products and contracted services
amounted to $187,107 and $393,952 for the periods ended March 31, 2003 and 2002,
respectively. The refocus of our marketing efforts for Intelli-Check's patented
technology to the document verification and access control markets, which
consists of the larger retailers and government agencies, in which the sales
cycle requires an extended time frame involving multiple meetings, presentations
and a test period, continues to impact our sales. In addition, during 2001, 2002
and continuing in 2003, the sales cycle has been further extended by the rapid
slowing of the economy, resulting in decisions for capital expenditures being
10
delayed. Certain tests, recent marketing agreements and legislative efforts from
the government to enhance security are expected to result in increased sales
opportunities.
Gross profit increased by $36,530 from $124,014 for the three months ended
March 31, 2002 to $160,544 for the three months ended March 31, 2003. Our gross
profit as a percentage of revenues increased to 60.8% in the three months ended
March 31, 2003 from 48.8% for the three months ended March 31, 2002. Our gross
profit percentage was positively impacted by an increase in sales from licensing
our patented technology at high gross margins.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, decreased 33.5% from $1,895,959 for the
three months ended March 31, 2002 to $1,260,751 for the three months ended March
31, 2003. Selling expenses, which consist primarily of salaries and related
costs for marketing, decreased 19.8% from $423,419 for the three months ended
March 31, 2002 to $339,589 for the three months ended March 31, 2003 primarily
due to decreases in non cash expenses recorded in 2002 from the hiring of
professional consultants to promote our product totaling approximately $79,000.
General and administrative expenses, which consist primarily of salaries and
related costs for general corporate functions, including executive, accounting,
facilities and fees for legal and professional services, decreased 46.5% from
$1,155,353 for the three months ended March 31, 2002 to $617,951 for the three
months ended March 31, 2003, primarily as a result of a decrease in expenses
incurred for consultants of approximately $524,000, of which approximately
$480,000 related to the non-cash expense of the granting of options and
decreased legal fees of approximately $27,000. Research and development
expenses, which consist primarily of salaries and related costs for the
development and testing of our products, amounted to $317,187 for the three
months ended March 31, 2002 and $303,211 for the three months ended March 31,
2003, which has not materially changed. As the Company experiences sales growth,
we expect that we will incur additional operating expenses to support this
growth. Research and development expenses may increase as we integrate
additional products and technologies with our patented ID-Check technology.
Interest expense decreased from $1,494 for the three months ended March 31,
2002 to $678 for the three months ended March 31, 2003 as we have paid down
certain capital leases.
Interest income decreased from $17,330 for the three months ended March 31,
2002 to $4,357 for the three months ended March 31, 2003, which is a result of a
decrease in our average cash and cash equivalents balances available for
investment and lower interest rates in effect during this period.
Other expenses for the three months ended March 31, 2003 totaling $921,730
resulted from an arbitration decision awarding Early Bird Capital settlement on
their demand. Other income for the three months ended March 31, 2002 totaling
$331,808 resulted from a settlement of certain obligations under a Master
Licensing agreement between us and Sensormatic Electronics Corporation, which
was due to expire on March 31, 2002. We received $412,000 and incurred $80,192
in refurbishment costs for previously customized terminals.
We have incurred net losses to date; therefore we have paid nominal taxes.
As a result of the factors noted above, our net loss increased from
$1,424,301 for the three months ended March 31, 2002 to $2,018,258 for the three
months ended March 31, 2003.
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective on November 18, 1999, we financed
our operations primarily through several private placements of stock and debt
financings. We used the net proceeds of these financings for the primary purpose
of funding working capital and general corporate purposes and for the purchase
of hardware terminals. As a result of our IPO and the underwriters exercise of
their over allotment option, we received approximately $6,907,000 in net
proceeds after deducting underwriters commissions and offering expenses. During
2000, 2001 and 2002, we received $8,400,014 from the issuance of common stock
from the exercise of warrants, rights and stock options. In March 2003, we
received net proceeds before legal expenses of $2,850,000, from the issuance of
Convertible Preferred Stock. We funded the purchase of hardware terminals for
resale and working capital primarily from these proceeds. We will continue to
use these proceeds to fund working capital.
11
Cash used in operating activities for the three months ended March 31, 2003
of $743,054 was primarily attributable to the net loss of $2,018,258, which was
primarily offset by an increase in accounts payable and accrued expenses of
$1,121,201primarily resulting from the legal award of $921,730 recorded in this
period and depreciation and amortization of $109,072. Cash used in operating
activities for the three months ended March 31, 2002 of $551,914 resulted
primarily from the net loss of $1,424,301 and an increase in accounts receivable
of $147,372, which was primarily offset by an increase in amortization of
deferred compensation of $580,763 from the granting of stock options to
consultants, an increase in accounts payable and accrued expenses of $214,828
and an increase in deferred revenues of $125,417. Cash used in investing
activities was nil for the three months ended March 31, 2003 and $18,899 for the
three months ended March 31, 2002. Net cash used in investing activities
consisted primarily of capital expenditures for computer equipment and furniture
and fixtures. Cash provided by financing activities was $2,717,026 for the three
months ended March 31, 2003 and $832,311 for the three months ended March 31,
2002 and was primarily related to the issuance of Series A 8% Convertible
Preferred Stock for the period ended March 31, 2003 and primarily related to the
exercise of outstanding rights and stock options for the period ended March 31,
2002.
In March 2001, we declared a dividend distribution of one non-transferable
right to purchase one share of our common stock for every 10 outstanding shares
of common stock continuously held from the record date to the date of exercise,
as well as common stock underlying vested stock options and warrants, held of
record on March 30, 2001, at an exercise price of $8.50. The rights were due to
expire on October 4, 2002, which was one year after the effective date of the
registration statement related to the shares of common stock underlying the
rights. We extended the expiration date until April 4, 2003 and further extended
the rights until December 31, 2003. We have the right to redeem the outstanding
rights for $.01 per right under certain conditions, which were not met as of
March 26, 2003. We had reserved 970,076 shares of common stock for future
issuance under this rights offering. As of March 31, 2003, we received
$2,444,549 before expenses from the exercise of 287,594 of these rights.
In March 2001, our Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of our common
stock. During 2002, we purchased 20,000 shares totaling approximately $123,000
and subsequently retired these shares. We do not expect to purchase additional
shares unless certain conditions warrant it.
On March 27, 2003, pursuant to a Securities Purchase Agreement, the Company
sold 30,000 shares of our Series A 8% Convertible Preferred Stock, par value
$.01 per share for $3,000,000 before expenses to Gryphon Master Fund, L.P. Each
preferred share entitles the holder to receive dividends of 8% per annum and is
convertible into 15.1515 shares of our common stock. Additionally, each share of
Preferred Stock will receive one (1) 5 year warrant to purchase 3.787875 shares
of common stock at a price of $6.78. The total amount of shares that may be
issued upon conversion and the exercising of the warrants are 454,545 and
113,636 shares, respectively. Dividend payments of $120,000 are due
semi-annually in cash beginning September 30, 2003. In connection with this
financing, the Company paid agent fees of $150,000, plus legal fees estimated to
be approximately $127,000 and issued warrants and options to purchase 8,854
shares of common stock at a price of $6.78. The Company recorded the relative
fair value of all the warrants issued in connection with this transaction of
$497,700 against the amount of the Convertible Preferred Stock as of March 31,
2003, which was calculated using the Black-Scholes valuation method, as well as
$540,000 of beneficial conversion feature in accordance with EITF 00-27 and such
amounts will be amortized along with issuance cost of $277,466 over the five
year period until the preferred stock mandatory redemption date. Shares of
Preferred Stock are convertible at the option of Gryphon Master Fund, L.P. at
any time prior to redemption. The Company may redeem any or all of the Preferred
Shares at any time after one year from the closing date at a cash redemption
price of $100 per share, providing the volume weighted average price of the
Company's Common Stock for any 20 out of 30 consecutive trading days exceeds
$13.20 per share. The Company must redeem all of the Preferred Stock outstanding
on the fifth anniversary of the closing date at a redemption price, in cash,
equal to the purchase price of the Preferred Stock.
During April 2003, we received approximately $230,000 from the exercise of
77,500 warrants.
We currently anticipate that our available cash in hand, cash resources
from expected revenues from the sale of the units in inventory and licensing of
our software products, cash resources collected from the issuance of Convertible
Preferred Stock combined with the expected exercise of the options by our option
holders will be sufficient to meet our anticipated working capital and capital
expenditure requirements, including the potential payment of the award of
12
$921,730 for at least the next twelve months. These requirements are expected to
include the purchase of inventory, product development, sales and marketing,
working capital requirements and other general corporate purposes. We may need
to raise additional funds, however, to respond to business contingencies which
may include the need to fund more rapid expansion, fund additional marketing
expenditures, develop new markets for our ID-Check technology, enhance our
operating infrastructure, respond to competitive pressures, or acquire
complementary businesses or necessary technologies.
Below is a table, which presents our contractual obligations and
commitments at March 31, 2003:
PAYMENTS DUE BY PERIOD
- --------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
ONE YEAR
- --------------------------------------------------------------------------------------------------------
Capital Lease Obligations $14,491 $14,491 -- -- --
- --------------------------------------------------------------------------------------------------------
Operating Leases 2,087,232 203,516 $758,236 $540,665 $584,815
- --------------------------------------------------------------------------------------------------------
Purchase commitments (1) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Employment contracts 719,619 437,378 282,241 -- --
-------- -------- -------- -- --
- --------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligation $2,821,342 $655,385 $1,040,477 $540,665 $584,815
- --------------------------------------------------------------------------------------------------------
(1) We paid the manufacturer $600,000 through April 1, 2002, as an advance
inventory deposit towards the open purchase order of approximately 2,850
ID-Check units.
(d) Net Operating Loss Carry forwards
As of March 31, 2003, we had a net operating loss carry forward of
approximately $18,000,000, which expires beginning in the year 2013. The
issuance of equity securities in the future, together with our recent financings
and our IPO, could result in an ownership change and, thus could limit our use
of our prior net operating losses. If we achieve profitable operations, any
significant limitation on the utilization of our net operating losses would have
the effect of increasing our tax liability and reducing net income and available
cash reserves. We are unable to determine the availability of these
net-operating losses since this availability is dependent upon profitable
operations, which we have not achieved in prior periods.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
Item 4. CONTROLS AND PROCEDURES
INTERNAL CONTROLS
We maintain a system of internal controls designed to provide reasonable
assurance that: (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles, and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of the our internal
controls and procedures. Such evaluation was conducted within the 90 days prior
to the date of filing of this report. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of such evaluation.
13
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) that are designed (i) to collect the information we are
required to disclose in the reports we file with the SEC, and (ii) to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Such evaluation was conducted within the 90
days prior to the date of filing of this report. Based on such evaluation, our
Chief Executive and Chief Financial Officer have concluded that these procedures
are effective.
Part II Other Information
Item 1. Legal Matters
On February 19, 2003, we filed a summons and complaint upon CardCom
Technology, Inc. alleging infringement on our patent. Under Federal rules,
absent an extension of time, the CardCom answer was originally due on or before
April 1, 2003. We have granted CardCom an extension of time to file its answer
and have begun discussions for settlement.
On April 9, 2003, we received notification from the American Arbitration
Association that it had awarded Early Bird Capital $921,730 on the settlement of
their demand. We intend to file with the New York State Supreme Court an
application for setting aside the confirmation of the award. We believe we have
a basis for such an appeal. We recorded a charge of $921,730 in the Statements
of Operations for the Three Month Period ending March 31, 2003. If we are
unsuccessful in our appeal, we would owe additional interest on the award at an
annual rate of 9% from the date of the award.
Item 6. Exhibits and Reports on Form 8-K
On April 8, 2003, we filed a report on Form 8-K to disclose the sale of our
Series A 8% Convertible Preferred Stock.
14
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 - May 12, 2003
Intelli-Check, Inc.
By: /s/ Frank Mandelbaum
------------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
---------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer/CFO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Frank Mandelbaum, certify that:
1. I have reviewed this Form 10-Q of Intelli-Check, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Frank Mandelbaum
--------------------------------
Name: Frank Mandelbaum
Title: Chief Executive Officer
16
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Edwin Winiarz, certify that:
1. I have reviewed this Form 10-Q of Intelli-Check, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Edwin Winiarz
--------------------------------
Name: Edwin Winiarz
Title: Chief Financial Officer
17
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of
the undersigned officers of Intelli-Check, Inc. (the "Company"), does hereby
certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: May 12, 2003 /s/ Frank Mandelbaum
---------------------------------
Name: Frank Mandelbaum
Title: Chief Executive Officer
Dated: May 12, 2003 /s/ Edwin Winiarz
--------------------------
Name: Edwin Winiarz
Title: Chief Financial Officer
THE FOREGOING CERTIFICATION IS BEING FURNISHED SOLELY PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350,
CHAPTER 63 OF TITLE 18, UNITED STATES CODE) AND IS NOT BEING FILED AS PART OF
THE FORM 10-Q OR AS A SEPARATE DISCLOSURE DOCUMENT.
18