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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 June 30, 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 August 5, 2003
----- -----------------------------
Common Stock, $.001 par value 8,957,739
Intelli-Check, Inc.
Index
Part I Financial Information Page
Item 1. Financial Statements
Balance Sheets - June 30, 2003 (Unaudited)
and December 31, 2002 1
Statements of Operations for the three and six months ended June 30, 2003
and 2002 (Unaudited) 2
Statements of Cash Flows for the six months ended June 30, 2003
and 2002 (Unaudited) 3
Statements of Stockholders' Equity for the six months ended
June 30, 2003 (Unaudited) 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information
Item 1. Legal Matters 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits
31. CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 18
31. CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 19
32. CEO & CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 20
Intelli-Check, Inc.
Balance Sheets
ASSETS
June 30, 2003 December 31,
(Unaudited) 2002
CURRENT ASSETS:
Cash and cash equivalents $ 2,187,242 $ 1,910,579
Certificate of deposit, restricted 1,004,686 -
Accounts receivable 83,996 93,530
Inventory, net 878,597 1,802,839
Other current assets 209,330 273,770
------------ ------------
Total current assets 4,363,851 4,080,718
CERTIFICATE OF DEPOSIT, restricted 275,515 273,317
PROPERTY AND EQUIPMENT, net 268,039 324,112
ACQUIRED SOFTWARE, net 104,306 211,806
GOODWILL 181,447 181,447
PATENT COSTS, net 245,611 260,215
OTHER INTANGIBLES, net 42,882 83,299
------------ ------------
Total assets $ 5,481,651 $ 5,414,914
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 614,214 $ 298,635
Accrued expenses 626,523 771,405
Litigation settlement payable 921,700 -
Deferred revenue 284,982 357,059
Current portion of capital lease obligations 8,781 19,572
------------ ------------
Total current liabilities 2,456,200 1,446,671
------------ ------------
CAPITAL LEASE OBLIGATIONS - 427
------------ ------------
OTHER LIABILITIES 116,270 94,565
------------ ------------
SERIES A 8% CONVERTIBLE REDEEMABLE 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 1,742,158 -
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares
authorized; 8,953,314 and 8,875,302 shares issued and
outstanding, respectively 8,952 8,874
Additional paid-in capital 24,916,153 22,399,029
Deferred compensation (373,444) (348,476)
Accumulated deficit (23,384,638) (18,186,176)
------------ ------------
Total stockholders' equity 1,167,023 3,873,251
------------ ------------
Total liabilities and stockholders' equity $ 5,481,651 $ 5,414,914
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUE $ 342,191 $ 287,336 $ 604,325 $ 541,734
COST OF REVENUE (137,632) (116,329) (241,222) (246,712)
INVENTORY WRITEDOWN (800,000) -- (800,000) --
----------- ----------- ----------- -----------
Gross profit (loss) (595,441) 171,007 (436,897) 295,022
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling 341,560 418,842 679,500 838,974
General and administrative 805,434 789,449 1,424,669 1,947,628
Research and development 318,336 308,291 621,912 630,435
----------- ----------- ----------- -----------
Total operating expenses 1,465,330 1,516,582 2,726,081 3,417,037
----------- ----------- ----------- -----------
Loss from operations (2,060,771) (1,345,575) (3,162,978) (3,122,015)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income 11,265 14,926 15,622 32,256
Interest expense (475) (1,375) (1,153) (2,870)
Other (Note 5) -- -- (921,730) 336,344
----------- ----------- ----------- -----------
10,790 13,551 (907,261) 365,730
----------- ----------- ----------- -----------
Net loss $(2,049,981) $(1,332,024) $(4,070,239) $(2,756,285)
=========== =========== =========== ===========
PER SHARE INFORMATION:
Net loss per common share -
Net Loss $(2,049,981) $(1,332,024) $(4,070,239) $(2,756,285)
Accretion of convertible
Redeemable preferred stock costs 65,758 -- 65,758 --
Dividend on convertible
Redeemable preferred stock 62,465 -- 62,465 --
----------- ----------- ----------- -----------
Net loss attributable to common $(2,178,204) $(1,332,024) $(4,198,462) $(2,756,285)
stockholders =========== =========== =========== ===========
Basic and diluted $ (.24) $ (.15) $ (.47) $ (.32)
Common shares used in computing per
share amounts -
Basic and diluted 8,930,112 8,596,464 8,902,858 8,657,710
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Six months ended Six months ended
June 30, 2003 June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,070,239) $(2,756,285)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 220,523 197,560
Noncash stock based compensation expense 29,000 --
Amortization of deferred compensation 193,032 641,707
Writedown of inventory 800,000 --
Changes in assets and liabilities-
Increase in certificates of deposit, restricted (1,006,884) (2,746)
Decrease (increase) in accounts receivable 9,534 (80,064)
Decrease in inventory 124,242 170,083
Decrease (increase) in other current assets 64,440 (467,233)
Increase in accounts payable and accrued expenses 108,232 152,744
Increase in litigation settlement payable 921,700 --
(Decrease) increase in deferred revenue (50,372) 174,882
(Decrease) in other liabilities -- (5,573)
----------- -----------
Net cash used in operating activities (2,656,792) (1,974,925)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,929) (38,894)
----------- -----------
Net cash used in investing activities (1,929) (38,894)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 232,502 1,584,807
Net proceeds from issuance of convertible redeemable
preferred stock 2,714,100 --
Repayment of capital lease obligation (11,218) (10,262)
Treasury stock purchased -- (70,064)
----------- -----------
Net cash provided by financing activities 2,935,384 1,504,481
----------- -----------
Increase (decrease) in cash 276,663 (509,338)
CASH AND CASH EQUIVALENTS, beginning of period 1,910,579 4,061,235
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,187,242 $ 3,551,897
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 475 $ 2,870
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Beneficial conversion feature and warrants issued in connection
with issuance of convertible redeemable preferred Stock $ 1,037,700 $ --
=========== ===========
Accretion of convertible redeemable preferred stock cost $ 65,758 $ --
=========== ===========
Dividend payable on convertible redeemable preferred stock $ 62,465 $ --
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2003
Common Stock Additional
------------ Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------ ------- ------------ ------- -----
BALANCE, January 1, 2003 8,875,302 $ 8,874 $ 22,399,029 $ (348,476) $(18,186,176) $3,873,251
Effect on extension of expiring options 29,000 29,000
Exercise of stock options 78,000 78 232,322 - - 232,400
Exercise of rights 12 - 102 - - 102
Effect on extension of expiring rights dividend - - 1,000,000 - (1,000,000) -
Warrants issued in connection with the issuance of
convertible redeemable preferred stock - - 497,700 - - 497,700
Beneficial conversion feature embedded in
convertible redeemable preferred stock issued 540,000 - - 540,000
Amortization of deferred compensation - - - 193,032 - 193,032
Dividend on convertible redeemable preferred stock - - - - (62,465) (62,465)
Recognition of deferred compensation 232,112 (232,112)
Accretion of convertible redeemable preferred stock - (65,758) (65,758)
Valuation adjustment of deferred compensation - - (14,112) 14,112 - -
Net loss - - - - (4,070,239) (4,070,239)
--------- -------- ------------ ---------- ------------ ----------
BALANCE, June 30, 2003 8,953,314 $ 8,952 $ 24,916,153 $ (373,444) $(23,384,638) $1,167,023
========= ======== ============ ========== ============ ==========
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 June 30, 2003 and the results of its
operations for the six months and three months ended June 30, 2003 and 2002,
stockholders' equity for the six months ended June 30, 2003 and cash flows for
the six months ended June 30, 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 six month period ending June 30, 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 on Form 10-K for the year ended
December 31, 2002.
The Company anticipates that its current available cash on hand, cash
resources from expected revenues from the sale of the units in inventory,
licensing of its technology, combined with the cash expected from the exercise
of options, warrants and rights and the projected proceeds from our proposed
public offering will be sufficient to meet its anticipated working capital and
capital expenditure requirements for at least the next eighteen months. Should
the Company be unsuccessful in completing the proposed public offering, it would
be required to raise additional capital during the next 12 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 18 months, the Company would be required
to raise additional capital to fund its operations. Should the Company need to
raise additional capital, there can be no assurances that the Company will be
successful in raising capital. 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. In the
event the Company is unable to raise capital, management plans to implement cost
saving measures to sustain business activities on a reduced level.
Recently Issued Accounting Standards
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
except for the provisions that were cleared by the FASB in prior pronouncements.
The Company believes that the adoption of SFAS No. 149 will not have a material
effect on its financial position and results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
5
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement is effective for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS No. 150 had no material
effect on our financial position and results of operations.
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; 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;
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.
During the second quarter of fiscal 2003, the Company began receiving
royalties from licensing its technology, which are recognized as revenues in the
period it is earned.
Inventory Valuation
The Company's inventory consists primarily of its ID-Check terminals that
run our patented software. The Company acquired such inventory in December 1999
and 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) over a period of time the current inventory. The
Company has paid a deposit of $600,000 towards the purchase of the remaining
units that are available to be purchased under the outstanding purchase order
with our manufacturer. 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 this order. The current terminal 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, it was determined that an inventory reserve
of $800,000 should be taken at this time, which has impacted the Company's
results of operations for the period ended June 30, 2003. The Company is in
discussions with its current manufacturer as well as other manufacturers to
select a new platform to run its patented software. The Company may elect to
purchase units to fulfill future orders from a new platform once it is selected.
Stock-Based Compensation
At June 30, 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
6
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 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 Six months ended Six months ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net loss, as reported ($2,049,981) ($1,332,024) ($4,070,239) ($3,122,015)
- ---------------------------------------------------------------------------------------------------------------------------
Add:
Total stock based employee compensation
expense determined under fair value
based method for all awards 231,950 314,921 564,369 1,773,010
------- ------- ------- ---------
Net loss, pro forma ($2,281,931) ($1,646,945) ($4,634,608) ($4,895,025)
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share, as reported ($0.24) ($0.15) ($0.47) ($0.32)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share, pro forma ($0.26) ($0.19) ($0.52) ($0.57)
- ---------------------------------------------------------------------------------------------------------------------------
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
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 June 30, 2003
and 2002 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 summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of June 30, 2003 and
2002 had been converted:
2003 2002
---- ----
Stock options 1,962,324 2,323,940
Warrants 128,061 10,000
Convertible redeemable preferred stock 454,545 -
--------- ---------
Total 2,544,930 2,333,940
========= =========
Note 3. Convertible Redeemable Preferred Stock
On March 27, 2003, pursuant to a Securities Purchase Agreement, the Company
sold 30,000 shares of our Series A 8% Convertible Redeemable Preferred Stock,
par value $.01 per share, for $3,000,000 before expenses to Gryphon Master Fund,
L.P. Each share of Preferred Stock entitles the holder to receive dividends of
8% per annum and is currently convertible into 15.1515 shares of our common
stock. Additionally, each share of Preferred Stock received one (1) five 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
7
$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 and
issued warrants and options to purchase 8,854 shares of common stock at a price
of $6.78. The Company also paid legal fees of approximately $127,000. 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 Redeemable Preferred Stock as of March 27, 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 are
being accreted along with issuance cost of $285,900 over the five year period
until the mandatory redemption date of the Preferred Stock, the fifth
anniversary of closing. The Company recorded accretion of $65,758 for the period
ended June 30, 2003. 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.
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 that were 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, 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 ended
March 31, 2003 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
A class action lawsuit was filed on October 18, 2001 on behalf of
short-sellers of the Company's stock, who allegedly suffered losses because of
the rise in the price of the Company's stock, in the United States District
Court for New Jersey. The class action suit was amended in November 2001 and
became an individual action. On July 26, 2002, the Company filed a motion to
dismiss the lawsuit. On July 30, 2003, the court granted the Company's motion to
dismiss the lawsuit. The Plaintiff has 30 days in which to file an amended
complaint pertaining to certain of the pleadings.
On February 19, 2003, the Company filed a summons and complaint upon
CardCom Technology, Inc. alleging infringement on its patent. During June 2003,
the Company settled this case with CardCom Technology, Inc. The Company granted
CardCom a three year royalty license to use certain of the Company's patents in
connection with the manufacture, use and sale of CardCom's age verification
products in the United States and Canada. It also provides that CardCom will pay
royalties of approximately 10% on its net sales. For the quarter ended June 30,
2003, the Company received $25,229 in royalty fees pursuant to this agreement.
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 has filed with the New York State
Supreme Court an application for setting aside the confirmation of the award.
The Company recorded a charge of $921,730 in its Statements of Operations for
the three month period ending March 31, 2003. If the Company is unsuccessful in
its application to overturn the award, the Company would owe additional interest
on the award at an annual rate of 9% from the date of the award. The Company
secured a one year letter of credit for the full amount of the charge along with
interest totaling $1,004,686 until April 9, 2004 in the form of a certificate of
deposit.
On August 1, 2003, the Company filed a summons and Complaint against Tricom
Card Technologies, Inc. alleging infringement on its patent seeking injunctive
and monetary relief.
Note 6. Financing Arrangement
On August 14, 2003, the Company filed a Form S-2 Registration Statement
with the Securities and Exchange Commission under which it proposes to offer one
million shares of the Company's common stock. There can be no assurances that
the offering will become effective.
8
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 allowed our software to 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 June 30,
2003, sales were limited due to the refocus of our marketing efforts towards
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 downturn in the economy,
whereby decisions for capital expenditures have been delayed. However, after the
tragic events that occurred on September 11, 2001, we believe there has been a
significant increase in awareness to help improve security across many
industries, including airlines, rail transportation and high profile buildings
and facilities, which should enhance demand for our technology. 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
June 30, 2003, we had an accumulated deficit of approximately $23,400,000. 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 non-driver ID cards that contain magnetic
stripes or bar codes that conform to AAMVA/ANSI/ISO standards, enables us to
target three distinct markets. The original target market was focused on
resellers of age-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. Commercial Fraud
which includes identity theft has additionally exposed industry to economic
losses through various frauds that utilize fake IDs to support these
transactions. Our technology is designed to help prevent losses from these
frauds. 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 and high
profile buildings and have successfully completed tests of our technology in one
of the largest mass merchandisers in the United States and a large
quasi-government department. We currently are testing our products with some
large public companies and in several locations in a large population State. We
have entered into strategic alliances with Bioscrypt Inc., Identix Corporation
and Ultra-Scan Inc., biometric companies; E-Certify, an information security
company; Lenel Systems International, a provider of integrated security
solutions; and Northrop Grumman Mission Systems, an integrator in the defense
industry, to utilize our systems and software as the proposed or potential
enrollment application for their technologies and to jointly market these
security applications. In addition, we have recently signed agreements with some
high profile organizations to promote the use of our technology and our
products, such as Credit Union National Association (CUNA), Mothers Against
Drunk Driving (MADD) and the American Association of Airport Executives (AAAE).
We believe these relationships have broadened our marketing reach through their
sales efforts and we intend to develop additional strategic alliances with
additional providers of security solutions.
We have developed additional software products that utilize our patented
software technology Our C-Link(R) software product, 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 six
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
June 30, 2003.
9
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; 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;
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.
During the second quarter of fiscal 2003, we began receiving royalties from
licensing our technology. We will recognize these payments as revenues in the
period it is earned.
B. Inventory Valuation
Our inventory consists primarily of our ID-Check terminals that run our
patented software. We acquired such inventory in December 1999 and 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)
over a period of time the current inventory. We have paid a deposit of $600,000
towards the purchase of the remaining units that are available to be purchased
under the outstanding purchase order with our manufacturer. However, during the
fourth quarter of 2002, we reserved 100% of this deposit due to the uncertainty
of whether or not we will place this order. The current terminal 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 our inventory, we have determined that
an inventory reserve of $800,000 should be taken at this time, which has
impacted our results of operations for the period ended June 30, 2003. We are in
discussions with our current manufacturer as well as other manufacturers to
select a new platform to run our patented software. We may elect to purchase
units to fulfill future orders from a new platform once it is selected.
C. Commitments and Contingencies
10
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.
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 six months ended June 30, 2003
to the six months ended June 30, 2002.
Revenues increased by $62,591 from $541,734 for the six months ended June
30, 2002 to $604,325 for the six months ended June 30, 2003. Revenues for the
period ended June 30, 2003 consisted of revenues from distributors of $169,976,
revenues from direct sales to customers of $409,120 and royalty payments of
$25,229. Shipments of products and contracted services amounted to $557,792 and
$723,701 for the periods ended June 30, 2003 and 2002, respectively. The refocus
of our marketing efforts to larger retailers and government agencies continues
to impact our sales as a result of the extended time frame involved associated
with these sales cycles. In addition, during 2001, 2002 and continuing in 2003,
the sales cycle has been further extended by the economic downturn in the
economy delaying capital expenditures decisions. We believe that based upon the
results of certain tests, recent marketing agreements and legislative efforts to
enhance security, these events will result in increased sales opportunities.
Gross profit, excluding an inventory writedown of $800,000 in the second
quarter of 2003, would have increased by $68,081 from $295,022 for the six
months ended June 30, 2002 to $363,103 for the six months ended June 30, 2003.
Our gross profit excluding the inventory writedown of $800,000 in the second
quarter of 2003 as a percentage of revenues would have increased to 60.1% in the
six months ended June 30, 2003 from 54.5% for the six months ended June 30,
2002. Our gross profit percentage was positively impacted by an increase in
sales from licensing our patented technology at higher gross margins.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, decreased 20.2% from $3,417,037 for the
six months ended June 30, 2002 to $2,726,081 for the six months ended June 30,
2003. Selling expenses, which consist primarily of salaries and related costs
for marketing, decreased 19% from $838,974 for the six months ended June 30,
2002 to $679,500 for the six months ended June 30, 2003 primarily due to
decreased travel and convention expenses of approximately $23,000 and a
reduction of non-recurring expenses of $155,000 from the hiring of professional
consultants during the six months ended June 30, 2002 to promote our product,
which was partially offset by an increase in salaries and employee costs of
approximately $25,000. 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 26.9% from $1,947,628 for the six months ended June 30, 2002
to $1,424,669 for the six months ended June 30, 2003, primarily as a result of a
reduction of non-recurring fees of approximately $519,000 incurred in the prior
year for the hiring of consultants primarily relating to the recognized non-cash
expense of the granting of options to this group in the prior year and a
decrease in legal and accounting fees of approximately $57,000, which was
partially offset by an increase in depreciation and amortization expenses of
approximately $23,000 and increases in insurance costs of approximately $15,000.
Research and development expenses, which consist primarily of salaries and
related costs for the development of our products, amounted to $630,435 for the
six months ended June 30, 2002 compared to $621,912 for the six months ended
June 30, 2003, which has not materially changed. We believe that we will require
additional investments in development and operating infrastructure as the
Company grows. Therefore, we expect that expenses will continue to increase in
line with increases in the growth of the business as we may increase
expenditures for advertising, brand promotion, public relations and other
marketing activities. We expect that we will incur incremental general and
administrative expenses as the business grows. Research and development expenses
may also increase as we complete and introduce additional products based upon
our patented ID-Check technology.
Interest income decreased from $32,256 for the six months ended June 30,
2002 to $15,622 for the six months ended June 30, 2003, which is a result of a
decrease in our cash and cash equivalents available for investment and lower
interest rates in effect during this period.
11
Interest expense decreased from $2,870 for the six months ended June 30,
2002 to $1,153 for the six months ended June 30, 2003 as we have paid down
certain capital leases which had higher interest rates.
Other expenses for the six months ended June 30, 2003 totaling $921,730
resulted from an arbitration decision awarding Early Bird Capital settlement on
their demand. Other income for the six months ended June 30, 2002 totaling
$336,344 resulted from a settlement of certain obligations under a Master
Licensing agreement between us and Sensormatic Electronics Corporation, which
expired on March 31, 2002. We received $412,000 and incurred $75,656 in
refurbishment costs for previously customized terminals.
We have incurred net losses to date; therefore we have paid nominal income
taxes.
As a result of the factors noted above, our net loss increased from
$2,756,285 for the six months ended June 30, 2002 to $4,070,239 for the six
months ended June 30, 2003.
Comparison of the three months ended June 30, 2003
to the three months ended June 30, 2002.
Revenues increased by $54,855 from $287,336 for the three months ended June
30, 2002 to $342,191 recorded for the three months ended June 30, 2003. Revenues
for the period ended June 30, 2003 consisted of revenues from distributors of
$80,234, revenues from direct sales to customers of $236,728 and royalty
payments of $25,229. Shipments of products and contracted services amounted to
$372,885 and $339,178 for the periods ended June 30, 2003 and 2002,
respectively. The refocus of our marketing efforts to larger retailers and
government agencies continues to impact our sales as a result of the extended
time frame involved associated with these sales cycles. In addition, during
2001, 2002 and continuing in 2003, the sales cycle has been further extended by
the downturn in the economy, in delaying capital expenditures decisions. We
believe that based upon the results of certain tests, recent marketing
agreements and legislative efforts to enhance security, these events will result
in increased sales opportunities.
Gross profit, excluding an inventory writedown of $800,000 in the second
quarter of 2003, would have increased by $33,552 from $171,007 for the three
months ended June 30, 2002 to $204,559 for the three months ended June 30, 2003.
Our gross profit, excluding the inventory writedown of $800,000 in the second
quarter of 2003 as a percentage of revenues, would have amounted to 59.8% in the
three months ended June 30, 2003 compared to 59.5% for the three months ended
June 30, 2002 and remained relatively stable.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, decreased 3.4% from $1,516,582 for the
three months ended June 30, 2002 to $1,465,330 for the three months ended June
30, 2003. Selling expenses, which consist primarily of salaries and related
costs for marketing, decreased 18.5% from $418,842 for the three months ended
June 30, 2002 to $341,560 for the three months ended June 30, 2003 primarily due
to a reduction in non-recurring fees of $65,000 incurred in the prior year from
the hiring of professional consultants to promote our product. 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 amounted to $789,449 for the three
months ended June 30, 2002 compared to $805,434 for the three months ended June
30, 2003, which has not materially changed. Research and development expenses,
which consist primarily of salaries and related costs for the development and
testing of our products, amounted to $308,291 for the three months ended June
30, 2002 compared to $318,336 for the three months ended June 30, 2003, which
has not materially changed. We believe that we will require additional
investments in development and operating infrastructure as the Company grows.
Therefore, we expect that expenses will continue to increase in line with
increases in the growth of the business as we may increase expenditures for
advertising, brand promotion, public relations and other marketing activities.
We expect that we will incur incremental general and administrative expenses as
the business grows. Research and development expenses may also increase as we
complete and introduce additional products based upon our patented ID-Check
technology.
Interest income decreased from $14,926 for the three months ended June 30,
2002 to $11,265 for the three months ended June 30, 2003, which is a result of a
decrease in our cash and cash equivalents available for investment and lower
interest rates in effect during this period.
Interest expense decreased from $1,375 for the three months ended June 30,
2002 to $475 for the three months ended June 30, 2003 as we have paid down
certain capital leases which had higher interest rates than those currently
prevailing.
12
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
$1,332,024 for the three months ended June 30, 2002 to $2,049,981 for the three
months ended June 30, 2003.
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective in November 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 the net proceeds we received from 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 in net proceeds 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 Redeemable
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.
Cash used in operating activities for the six months ended June 30, 2003 of
$2,656,792 was primarily attributable to the net loss of $4,070,239, an increase
in certificates of deposit, restricted of $1,006,884 resulting from the award in
the legal matter with Early Bird Capital, which was primarily offset by a
decrease of inventory of $124,242 and an inventory reserve of $800,000, an
increase in accounts payable and accrued expenses of $108,232, an increase in
litigation settlement payable of $921,700 resulting from the legal award
recorded in the first quarter of 2003, depreciation and amortization of $220,523
and amortization of deferred compensation of $193,032 from the granting of stock
options to consultants. Cash used in operating activities for the six months
ended June 30, 2002 of $1,974,925 resulted primarily from the net loss of
$2,756,285 and an increase in other current assets of $467,233 resulting
primarily from a deposit made to our manufacturer for additional inventory,
which was primarily offset by an increase in amortization of deferred
compensation of $641,707 from the granting of stock options to consultants, a
decrease in inventory of $170,083, an increase in accounts payable and accrued
expenses of $152,744 and an increase in deferred revenues of $174,882. Cash used
in investing activities was $1,929 for the six months ended June 30, 2003 and
$38,894 for the six months ended June 30, 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 $2,935,384
for the six months ended June 30, 2003 and $1,504,481 for the six months ended
June 30, 2002 and was primarily related to the issuance of Series A 8%
Convertible Redeemable Preferred Stock and exercise of stock options for the
period ended June 30, 2003 and primarily related to the exercise of outstanding
rights and stock options for the period ended June 30, 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
August 14, 2003. We had reserved 970,076 shares of common stock for future
issuance under this rights offering. As of June 30, 2003, we received $2,444,651
before expenses from the exercise of 287,606 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, we sold
30,000 shares of our Series A 8% Convertible Redeemable Preferred Stock, par
value $.01 per share, for $3,000,000 before expenses to Gryphon Master Fund,
L.P. Each share of Preferred stock entitles the holder to receive dividends of
8% per annum and is currently convertible into 15.1515 shares of our common
stock. Additionally, each share of Preferred Stock received one (1) five 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
13
$120,000 are due semi-annually in cash beginning September 30, 2003. In
connection with this financing, we paid agent fees of $150,000 and issued
warrants and options to purchase 8,854 shares of our common stock at a price of
$6.78. We also paid legal fees of approximately $127,000. We recorded the
relative fair value of all the warrants issued in connection with this
transaction of $497,700 against the amount of the Convertible Redeemable
Preferred Stock as of March 27, 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 are being accreted along
with issuance cost of $285,900 over the five year period until the mandatory
redemption date of the Preferred Stock, the fifth anniversary of closing. We
recorded accretion of $65,758 for the period ended June 30, 2003 as a dividend.
Shares of Preferred Stock are convertible at the option of Gryphon Master Fund,
L.P at any time prior to redemption. We 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 our
Common Stock for any 20 out of 30 consecutive trading days exceeds $13.20 per
share. We 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 $232,000 from the exercise of
78,000 stock options.
On August 14, 2003, we filed a Form S-2 Registration Statement with the
United States Security and Exchange Commission under which we propose to sell 1
million shares of the our common stock. Under the terms of the Underwriter's
term sheet, the Underwriter will receive 8% commission of gross proceeds of the
offering. In addition, the Underwriter will receive for its expenses on a
non-accountable basis an amount equal to 2.5% of the gross proceeds of the
offering. We expect to receive net proceeds of approximately $9,500,000 upon
successful completion of the offering. There can be no assurances that the
offering will become effective.
We anticipate that our current available cash in hand, cash resources from
expected revenues from the sale of the units in inventory, licensing of its
technology, combined with the cash expected from the exercise of options,
warrants and rights and the projected proceeds from our proposed public offering
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next eighteen months. Should we be
unsuccessful in completing the proposed public offering, we would be required to
raise additional capital during the next 12 months. These requirements are
expected to include the purchase of additional inventory to run our patented
software, product development, sales and marketing, working capital requirements
and other general corporate purposes. Should sales of our products fall below
expectations during the next 18 months, we would be required to raise additional
capital to fund our operations. Should we need to raise additional capital,
there can be no assurances that we will be successful in raising capital. The
impact on us could be adverse if it is not able to ship products as projected or
raise capital as discussed above. In addition, we 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 our ID-Check technology, enhance our operating infrastructure,
respond to competitive pressures, or acquire complementary businesses or
necessary technologies. . In the event we are unable to raise capital,
management plans to implement cost saving measures to sustain business
activities on a reduced level.
Below is a table, which presents our contractual obligations and commitments at
June 30, 2003:
Payments Due by Period
- ----------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 4-5 years After 5 years
One Year
- ----------------------------------------------------------------------------------------------------------
Capital Lease Obligations $8,781 $8,781 -- -- --
- ----------------------------------------------------------------------------------------------------------
Operating Leases 2,013,519 258,674 $761,885 $551,486 $441,474
- ----------------------------------------------------------------------------------------------------------
Purchase commitments (1) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Employment contracts 632,358 433,333 199,025 -- --
- ----------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligation $2,654,658 $700,788 $960,910 $551,486 $441,474
- ----------------------------------------------------------------------------------------------------------
(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.
14
(d) Net Operating Loss Carry forwards
As of June 30, 2003, we had a net operating loss carry forward of
approximately $19,000,000, 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 as to the end of the
period covered by 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.
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 as to the end
of the period covered by 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 Proceedings
A lawsuit was filed as a class action on October 18, 2001 on behalf of
short-sellers of the Company's stock, who allegedly suffered losses because of
the rise in the price of our stock, in the United States District Court for New
Jersey. The class action suit was amended in November 2001 and became an
individual action. On July 26, 2002, the Company filed a motion to dismiss the
lawsuit. On July 30, 2003, the court granted the Company's motion to dismiss the
lawsuit. The Plaintiff has 30 days in which to file an amended complaint
pertaining to certain of the pleadings.
On February 19, 2003, we filed a summons and complaint upon CardCom
Technology, Inc. alleging infringement on its patent. During June 2003, we
settled with CardCom Technology, Inc. granting a three year royalty license to
use certain of our patents in connection with the manufacture, use and sale of
CardCom's age verification products in the United States and Canada. It also
provides that CardCom will pay approximately 10% royalties on its net sales. For
the quarter ended June 30, 2003 we received $25,229 in royalty fees.
15
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 have filed with the New York State Supreme Court an application
for setting aside the confirmation of the award. We recorded a charge of
$921,730 in the Statements of Operations during 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. We
secured a one year letter of credit for the full amount of the charge along with
interest totaling $1,004,686 until April 9, 2004.
On August 1, 2003, we filed a summons and Complaint against Tricom Card
Technologies, Inc. alleging infringement on its patent seeking injunctive and
monetary relief.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on July 10, 2003.
A proposal to elect two (2) directors to serve for a three-year term was
approved by the stockholders. The nominees received the following votes:
Name Votes For Votes Withheld
---- --------- --------------
Howard Davis (three-year term) 8,221,458 59,250
Jeffrey Levy (three-year term) 8,261,958 18,750
A proposal to approve the 2003 Stock Option Plan was accepted by the
stockholders. This proposal received the following votes:
For Against Abstain Not Voted
--- ------- ------- ---------
3,369,501 244,375 52,826 4,159,461
In addition, stockholders ratified the appointment of Grant Thornton LLP as
the independent public accountants for the Company for the year ended December
31, 2003. This proposal received the following votes:
For Against Abstain
--- ------- -------
7,715,607 100,486 10,070
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the Quarterly Report on
Form 10-Q:
Exhibit No. Description
----------- -----------
31. Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32. Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) On April 8, 2003, we filed a report on Form 8-K to disclose the sale
of our Series A 8% Convertible Preferred Stock.
(c) On July 2, 2003, we filed a report on Form 8-K to disclose the terms
of settlement with CardCom Technology, Inc.
16
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 - August 14, 2003
Intelli-Check, Inc.
By: /s/ Frank Mandelbaum
------------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
---------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer/CFO
17