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, 2004
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 13, 2004
Common Stock, $.001 par value 10,155,118
Intelli-Check, Inc.
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Balance Sheets - March 31, 2004 (Unaudited)
and December 31, 2003 1
Statements of Operations for the three months ended
March 31, 2004 (Unaudited) and March 31, 2003 (Unaudited) 2
Statements of Cash Flows for the three months ended March 31, 2004
(Unaudited) and March 31, 2003 (Unaudited) 3
Statements of Stockholders' Equity for the three months ended
March 31, 2004 (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
Part II Other Information
Item 1. Legal Matters 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibits
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 16
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 17
32. 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,
2004 2003
-------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,845,726 $ 3,306,991
Certificate of deposit, restricted 149,737 1,007,310
Marketable securities and short-term investments 5,446,767 4,856,388
Accounts receivable 175,066 249,166
Inventory 580,943 553,709
Other current assets 177,316 217,387
-------------- --------------
Total current assets 8,375,555 10,190,951
CERTIFICATE OF DEPOSIT, restricted 34,916 275,808
PROPERTY AND EQUIPMENT, net 186,732 210,407
PATENT COSTS, net 47,246 48,798
OTHER INTANGIBLES, net 4,132 5,590
-------------- --------------
Total assets $ 8,648,581 $ 10,731,554
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 253,963 $ 183,712
Accrued expenses 443,137 482,464
Litigation settlement payable -- 921,700
Deferred revenue 226,296 252,705
Current portion of capital lease obligations -- 427
-------------- --------------
Total current liabilities 923,396 1,841,008
-------------- --------------
OTHER LIABILITIES 109,650 114,898
-------------- --------------
Total liabilities 1,033,046 1,955,906
-------------- --------------
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 - liquidating preference of $3,000,000 1,941,120 1,874,940
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized;
10,145,118 and 10,154,918 shares issued and outstanding, respectively 10,144 10,154
Deferred compensation (411,920) (377,967)
Additional paid-in capital 34,296,124 34,287,631
Accumulated deficit (28,219,933) (27,019,110)
-------------- --------------
Total stockholders' equity 5,674,415 6,900,708
-------------- --------------
Total liabilities and stockholders' equity $ 8,648,581 $ 10,731,554
============== ==============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three months ended Three months ended
March 31, 2004 March 31, 2003
-------------- --------------
REVENUE $ 298,259 $ 264,135
COST OF REVENUE (103,364) (103,591)
-------------- --------------
Gross profit 194,895 160,544
-------------- --------------
OPERATING EXPENSES
Selling 303,863 339,589
General and administrative 675,043 617,951
Research and development 322,308 303,211
-------------- --------------
Total operating expenses 1,301,214 1,260,751
-------------- --------------
Loss from operations (1,106,319) (1,100,207)
-------------- --------------
OTHER INCOME (EXPENSES):
Interest income 30,854 4,357
Interest expense -- (678)
Other (Note 5) -- (921,730)
-------------- --------------
Net loss $ (1,075,465) $ (2,018,258)
Accretion of convertible redeemable preferred stock costs (66,180) --
Dividend on convertible redeemable preferred stock (59,178)
-------------- --------------
Net loss attributable to common shareholders $ (1,200,823) $ (2,018,258)
============== ==============
PER SHARE INFORMATION
Net loss per common share -
Basic and diluted $ (0.12) $ (0.23)
============== ==============
Weighted average common shares used in computing per
share amounts -
Basic and diluted 10,153,158 8,875,302
============== ==============
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended Three months ended
March 31, 2004 March 31, 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,075,465) $ (2,018,258)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 31,344 109,072
Amortization of deferred compensation 23,553 21,432
Changes in assets and liabilities -
Decrease (Increase) in certificates of deposit, restricted 1,098,465 (751)
Decrease in accounts receivable 74,100 22,835
(Increase) decrease in inventory (27,234) 32,541
Decrease in other current assets 40,071 44,878
(Decrease) Increase in accounts payable and accrued expenses 91,417 1,121,201
(Decrease) in litigation settlement payable (921,700) --
(Decrease) in deferred revenue (26,409) (72,531)
(Decrease) in other liabilities (5,248) (3,473)
-------------- --------------
Net cash used in operating activities (697,106) (743,054)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Investment in marketable securities and short term investments
(4,659) --
(590,379) --
-------------- --------------
Net cash used in investing activities (595,038) --
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,280 --
Net proceeds from issuance of convertible redeemable preferred stock -- 2,722,534
Payment of dividend to preferred stockholder (119,671) --
Repayment of capital lease obligation (427) (5,508)
Purchase and retirement of common stock (50,303) --
-------------- --------------
Net cash (used in) provided by financing activities (169,121) 2,717,026
-------------- --------------
(Decrease) increase in cash (1,461,265) 1,973,972
CASH AND CASH EQUIVALENTS, beginning of period
3,306,991 1,910,579
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,845,726 $ 3,884,551
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 678
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Stock options issued for services rendered $ 542,648 $ --
============== ==============
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 $ 66,180 $ --
============== ==============
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2004
Common Stock Additional
--------------------------------- Paid-in
Shares Amount Capital
-------------- -------------- --------------
BALANCE, December 31, 2003 10,154,918 $ 10,154 $ 34,287,631
Exercise of stock options 200 -- 1,280
Purchase and retirement of common stock (10,000) (10) (50,293)
Amortization of deferred compensation -- -- --
Dividend on convertible redeemable preferred
stock -- -- --
Recognition of deferred compensation -- -- 542,648
Accretion of convertible redeemable preferred
stock -- -- --
Valuation adjustment of deferred compensation -- -- (485,142)
Net loss -- -- --
-------------- -------------- --------------
BALANCE, March 31, 2004 10,145,118 $ 10,144 $ 34,296,124
============== ============== ==============
Deferred Accumulated
Compensation Deficit Total
-------------- -------------- --------------
BALANCE, December 31, 2003 $ (377,967) $ (27,019,110) $ 6,900,708
Exercise of stock options -- -- 1,280
Purchase and retirement of common stock -- -- (50,303)
Amortization of deferred compensation 23,553 -- 23,553
Dividend on convertible redeemable preferred
stock -- (59,178) (59,178)
Recognition of deferred compensation (542,648) -- --
Accretion of convertible redeemable preferred
stock -- (66,180) (66,180)
Valuation adjustment of deferred compensation 485,142 -- --
Net loss -- (1,075,465) (1,075,465)
-------------- -------------- --------------
BALANCE, March 31, 2004 $ (411,920) $ (28,219,933) $ 5,674,415
============== ============== ==============
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, 2004 and the results of its operations
for the three months ended March 31, 2004 and 2003, stockholders' equity for the
three months ended March 31, 2004 and cash flows for the three months ended
March 31, 2004 and 2003. 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, 2004 are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 2004.
The balance sheet as of December 31, 2003 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, 2003.
The Company anticipates that its current available cash on hand and marketable
securities and cash resources from expected revenues from the sale of the units
in inventory and the 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 inventory, product development, sales and marketing, working capital
requirements and other general corporate purposes. 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.
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the quarter ended
March 31, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations since the Company does not have investments in VIE's.
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the Company's financial statements and accompanying notes. Actual
results could differ materially from those estimates.
5
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased. As of March 31,
2004, cash equivalents included money market funds, commercial paper and other
liquid short-term debt instruments (with maturities at date of purchase of three
months or less) of $1,807,812.
Marketable Securities
The Company has classified its marketable securities as held-to-maturity as the
Company has the intent and ability to hold these securities to maturity. The
securities are carried at amortized cost using the specific identification
method. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income. All of the
Company's marketable securities have maturities of less than 1 year with a
weighted average interest rate of 1.54%. The carrying value of the marketable
securities as of March 31, 2004 of $4,702,174 approximated the fair market
value.
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 and title has passed. 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, 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
they are earned.
The Company has adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" for fiscal year ended December 31, 2003. Revenue arrangements were
allocated to the separate units of accounting based on their relative fair
values and revenue is recognized in accordance with its policy as stated above.
Inventory Valuation
The Company's inventory consists primarily of its ID-Check terminals that run
its 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 its current inventory, with margin, over a period of time. Based on ongoing
evaluation of the Company's inventory, the Company has recorded an inventory
write down of $990,000 during 2003. Should the Company determine in a future
period that an adjustment to market value of the inventory is necessary, we
would record such adjustment at that time, which could have a material adverse
effect on our results of operations. 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.
Stock-Based Compensation
At March 31, 2004, the Company has stock based compensation plans, which are
described more fully in Note 8 to the Financial Statements included in the
Company's 2003 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 common stock and the exercise price of the option. No stock based
employee compensation cost is reflected in net loss, as all options granted
6
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
employee stock based compensation:
Three Months Ended
----------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net loss attributable to common stockholders,
as reported $(1,200,823) $(2,018,258)
Add:
Total stock based employee compensation expense
determined under fair value based method for all awards (343,146) (332,419)
----------------------------------
Net loss, pro forma $(1,543,969) $(2,350,677)
Basic and diluted loss per share, as reported $ (0.12) $ (0.23)
Basic and diluted loss per share, pro forma $ (0.15) $ (0.26)
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,
2004 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 summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of March 31, 2004 and 2003 had
been converted:
2004 2003
--------- ---------
Stock options 2,689,040 2,385,866
Convertible redeemable preferred stock 454,545
454,545
Warrants 238,061 132,490
--------- ---------
Total 3,381,646 2,972,901
========= =========
Note 3. Supplier Agreement
On January 2, 2004, the Company entered into a 2 year product supply
agreement with a manufacturer of input devices and has agreed to a minimum
purchase of units totaling approximately $120,000. In March 2004, the Company
received and paid for its minimum purchase commitment. These devices, which were
private labeled, are programmed to work in conjunction with the ID-Check
technology.
7
Note 4. Investment Firm Relationships
On January 21, 2004, the Company entered into an agreement with Alexandros
Partners LLC to act as consultants in advising the Company in financial and
investor relation matters. The Company agreed to pay a consulting fee of $50,000
payable in 12 equal monthly installments. In addition, the Company issued a
warrant granting the right to purchase 100,000 shares of the Company's common
stock at a purchase price of $7.54 per share vesting ratably over the 12 month
period. We recorded the relative fair value of these warrants issued in
connection with this transaction of $542,648 against Deferred Compensation,
which was calculated using the Black-Scholes valuation method and is being
amortized against earnings over the period of the agreement. The agreement
terminates on December 31, 2004. A principal of Alexandros Partners LLC is
currently a member of the Company's Board of Directors.
Note 5. Legal Matters
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 had filed with the New York State
Supreme Court an application for setting aside the confirmation of the award. On
October 14, 2003, the court confirmed the award with interest at a rate of 9%
per annum beginning April 9, 2003. The Company recorded a charge of $921,730 in
its Statements of Operations for the three month period ending March 31, 2003.
The Company secured a one year letter of credit for the full amount of the
charge along with interest in the form of a certificate of deposit. On March 5,
2004, the Company paid $950,000, which included interest expense recorded in the
year ended December 31, 2003, to Early Bird Capital as full settlement in this
matter.
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. On October 23, 2003, the Company amended its complaint to
include infringement on an additional patent. The Company is actively pursuing
this matter.
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to have
a material adverse effect on our business.
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 were 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 at that
time 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 entering into marketing and
distributor agreements with resellers. During 2001 and through the period ended
December 31, 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 to allow for multiple meetings,
presentations and a test period. We believe that this sales cycle was further
extended by the then downturn in the economy causing delays in capital
expenditure decisions. However, after the tragic events that occurred on
September 11, 2001, we believe there has been a significant increase in
awareness of our technology to help improve security across many industries,
including airlines, rail transportation and high profile buildings and
facilities, which we believe should enhance future 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 March 31, 2004, we had an accumulated deficit of $28,219,933. We will
continue to fund operating and capital expenditures from proceeds that we
received from our recent financing and our secondary offering. 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 technology that provides the 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
8
tobacco, where the proliferation of high-tech fake IDs expose merchants to fines
and penalties for the inadvertent sale of these products to underage purchasers.
Currently, we also target markets to prevent economic losses from frauds such as
identity theft and for access control. We believe that the tragic events that
occurred on September 11, 2001 have created increased awareness of our
technology in security applications involving the access control market. 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 key biometric companies, leading providers of
integrated security solutions, leading integrators in the defense industry, such
as Northrop Grumman, leading providers of passport reading and verification
systems and leading providers of systems for access control. In addition, we
have executed 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 high profile organizations and providers of
security solutions.
We have developed additional software products that utilize our patented
software technology. Our newly introduced software solutions, ID-Check(R) PC and
ID-Check(R) PDA, which replicate the features of ID-Check, are designed to be
platform-independent and compatible with both stationary and mobile hardware
applications. Another new application is the next version of C-Link(R), the
company's networkable data management software. Additionally, ID-Check(R) PC and
the next release of C-Link are designed to read the smart chip contained on the
military Common Access Card (CAC). These products are all designed for use with
Intelli-Check's new data capture module (DCM), a compact, self-contained
two-dimensional bar code and magnetic stripe reader. The DCM enables the new
software applications to be used on a variety of commercially available data
processing devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale
Computers negating the need to replace the IDC-1400 platform. 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. 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
March 31, 2004.
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 and when title has passed. 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 which
we have now discontinued, we do not yet have enough experience to identify the
fair value of each element. Therefore, the full amount of revenue and related
gross margin is deferred and recognized ratably over the one-year period in
which the future service, support and performance will be 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;
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.
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 they are 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 our current inventory, with margin, over a
period of time. Based on ongoing evaluation of our inventory, we recorded an
inventory write down of $990,000 during 2003. Should we determine in a future
period that an adjustment to market value of the inventory is necessary, we
would record such adjustment at that time, which could have a material adverse
effect on our results of operations. 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.
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, 2003. 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 three months ended March 31, 2004 to the three months
ended March 31, 2003.
Revenues increased by $34,124 from $264,135 for the three months ended
March 31, 2003 to $298,259 recorded for the three months ended March 31, 2004.
Revenues for the period ended March 31, 2004 consisted of revenues from
distributors of $49,024, revenues from direct sales to customers of $227,724 and
royalty payments of $21,511. Sales, which represent shipments of products and
contracted services, amounted to $274,571 and $187,107 for the periods ended
March 31, 2004 and 2003, respectively. The sales growth has been limited due to
our change in marketing focus from smaller customers to large commercial
customers and government agencies which require an extended sales cycle. We
believe that the time frame of the sales cycle associated with the refocus of
our marketing efforts will continue to impact our sales. We believe that based
upon the results of certain of our recent marketing tests, recent marketing
agreements, the introduction of additional products in 2004 as well as
legislative efforts to enhance security, should result in increased sales
opportunities.
Gross profit increased by $34,351 from $160,544 for the three months ended
March 31, 2003 to $194,895 for the three months ended March 31, 2004. Our gross
profit as a percentage of revenues increased to 65.3% in the three months ended
March 31, 2004 from 60.8% for the three months ended March 31, 2003. 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, increased 3.2% from $1,260,751 for the
three months ended March 31, 2003 to $1,301,214 for the three months ended March
31, 2004. Selling expenses, which consist primarily of salaries and related
costs for marketing, decreased 10.5% from $339,589 for the three months ended
March 31, 2003 to $303,863 for the three months ended March 31, 2004 primarily
due to decreases in expenses recorded, including non cash charges for options
issued in 2003 to professional consultants to promote our product totaling
approximately $61,000 partially offset by an increase in sales commissions of
approximately $20,000. 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, increased 9.2% from $617,951 for the three months ended March 31, 2003
10
to $675,043 for the three months ended March 31, 2004, primarily as a result of
an increase in expenses incurred for consultants of approximately $60,000, of
which approximately $38,000 related to the non-cash expense from the granting of
options, increases in salaries and related expenses of $33,000 and increases in
insurance, meeting and compliance fees of approximately $24,000, which were
partially offset by a decrease in amortization expense of approximately $76,000
as a result of the write off of intangible assets relating to the IDentiScan
acquisition in 2003. Research and development expenses, which consist primarily
of salaries and related costs for the development and testing of our products,
increased 6.3% from $303,211 for the three months ended March 31, 2003 to
$322,308 for the three months ended March 31, 2004 primarily as a result of
increases in salaries and related expenses of approximately $9,000 and increases
in development costs relating to our new products of approximately $4,000. 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 was not incurred for the three months ended March 31,
2004 as compared to $678 for the three months ended March 31, 2003 as we have
paid down all remaining capital leases in 2003.
Interest income increased from $4,357 for the three months ended March 31,
2003 to $30,854 for the three months ended March 31, 2004, as a result of an
increase in our average cash and cash equivalents and marketable securities
balances available for investment during this period on the cash received from
the successful completion of our secondary offering in October 2003.
We did not incur other expenses for the three months ended March 31, 2004
compared to the three months ended March 31, 2003 totaling $921,730 which
resulted from an arbitration decision awarding Early Bird Capital settlement on
their demand.
We have incurred net losses to date; therefore, we have paid nominal
taxes.
As a result of the factors noted above, our net loss decreased from
$2,018,258 for the three months ended March 31, 2003 to $1,075,465 for the three
months ended March 31, 2004.
(c) Liquidity and Capital Resources
Prior to our initial public offering in November 1999, we financed our
operations primarily through several private placements of equity and debt
securities. 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, we received $3,426,374 from the issuance of common stock from the exercise
of warrants and stock options. During 2001, 2002 and 2003, we received $717,071,
$3,231,174 and $1,742,466, respectively, from the issuance of common stock from
the exercise of warrants, stock options and rights. 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. In October 2003, we
successfully completed our secondary public offering of 1,100,000 shares of
common stock at $8.00 per share and received proceeds net of underwriting
discounts and commissions and before other offering expenses of approximately
$7,906,000. Offering expenses totaled $324,574 and were fully paid as of
December 31, 2003. In addition, we sold to the underwriter 110,000 warrants for
a price of $110 to purchase 110,000 shares of our common stock at a price of
$9.60 per share. The warrants become exercisable on the first anniversary of the
offering and expire four years from such date. We will continue to use these
proceeds to fund working capital.
Cash used in operating activities for the three months ended March 31,
2004 of $697,106 resulted primarily from the net loss of $1,075,465 and a
decrease in litigation settlement payable of $921,700 resulting from payout of
the settlement, which was primarily offset by a decrease in certificates of
deposits, restricted of $1,098,465 primarily from the payment of the litigation
settlement. 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 $1,121,201 primarily resulting from the legal award of $921,730
recorded in this period and depreciation and amortization of $109,072. Cash used
in investing activities for the three months ended March 31, 2004 of $595,038
resulted primarily from the purchase of marketable securities and short term
investments from available cash and cash equivalents. Cash used in investing
activities was nil for the three months ended March 31, 2003. Cash used in
financing activities was $169,121 for the three months ended March 31, 2004 and
was primarily related to the purchase of 10,000 shares of common stock totaling
$50,303 in the open market and the payment of dividends to preferred
stockholders of $119,671. Cash provided by financing activities was $2,717,026
11
for the three months ended March 31, 2003 and was primarily related to the
issuance of Series A 8% Convertible Preferred Stock.
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, further extended
the rights until December 31, 2003 and subsequently extended the date to June
30, 2004. We have the right to redeem the outstanding rights for $.01 per right
under certain conditions, which were not met as of May 13, 2004. We have
reserved 970,076 shares of common stock for future issuance under this rights
offering. Since inception, we received $2,482,009 before expenses from the prior
exercise of 292,001 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. In March, 2004, we purchased 10,000
shares totaling $50,303 and subsequently retired these shares. We may purchase
additional shares as 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 entitled the holder to receive dividends of
8% per annum and is currently convertible into 15.1515 shares of our common
stock for a total of 454,545 shares of common stock. Additionally, the investors
were issued five year warrants to purchase 113,636 shares of common stock at an
exercise price of $6.78. Dividend payments of approximately $120,000 in cash are
due semi-annually 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 common stock at a price of $6.78. 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 Stock 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 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. A registration statement covering the common stock issuable upon
conversion of the preferred stock and exercise of the warrants was declared
effective in June 2003.
We currently anticipate that our available cash in hand and marketable
securities and cash resources from expected revenues from the sale of the units
in inventory and the licensing of our technology will be sufficient to meet our
anticipated working capital and capital expenditure requirements 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.
(d) Net Operating Loss Carry forwards
As of March 31, 2004 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $23.3 million. There
can be no assurance that the Company will realize the benefit of the NOL's. The
federal NOL's are available to offset future taxable income and expire from 2018
through 2023 if not utilized. Under Section 382 of the Internal Revenue Code,
these NOL's may be limited due to ownership changes.
12
CONTRACTUAL OBLIGATIONS
Below is a table, which presents our contractual obligations and
commitments at March 31, 2004:
PAYMENTS DUE BY PERIOD
TOTAL LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
ONE YEAR
---------- ---------- ---------- ---------- ----------
Capital Lease Obligations -- -- -- --
Operating Leases 1,816,170 245,895 $ 778,737 567,933 223,605
Employment contracts 300,000 300,000 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligation $2,116,170 $ 545,895 $ 778,737 $ 567,933 $ 223,605
---------- ------------ ---------- ---------- ----------
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements and have
never established any special purpose entities. We have not guaranteed any debt
or commitments of other entities or entered into any options on non-financial
assets.
FORWARD LOOKING STATEMENTS
The foregoing contains certain forward-looking statements. Due to the fact that
our business is characterized by rapidly changing technology, high capital
requirements and an influx of new companies trying to respond to enhanced
security needs as a result of current events, actual results and outcomes may
differ materially from any such forward looking statements and, in general, are
difficult to forecast.
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) records are maintained in reasonable
detail to accurately and fairly reflect our transactions and dispositions of
assets; (iii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles, and to maintain accountability for assets; (iv) access to assets is
permitted only in accordance with management's general or specific
authorization; and (v) 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 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-15 and 15d-15) that are designed to ensure that (i) we collect the
information we are required to disclose in the reports we file with the SEC (ii)
we process, summarize and disclose this information within the time periods
specified in the rules of the SEC and (iii) the information collected is
communicated to management to allow timely decisions regarding required
disclosure. 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.
13
Part II Other Information
Item 1. Legal Matters
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 had filed with the New York State Supreme Court an application
for setting aside the confirmation of the award. On October 14, 2003, the court
confirmed the award with interest at a rate of 9% per annum beginning April 9,
2003. We recorded a charge of $921,730 in our Statements of Operations for the
three month period ending March 31, 2003. We secured a one year letter of credit
for the full amount of the charge along with interest in the form of a
certificate of deposit. On March 5, 2004, we paid $950,000 to Early Bird
Capital, which included interest expense recorded in the year ended December 31,
2003, as full settlement in this matter.
On August 1, 2003, we filed a summons and complaint against Tricom Card
Technologies, Inc. alleging infringement on our patent seeking injunctive and
monetary relief. On October 23, 2003, we amended our complaint to include
infringement on an additional patent. The Company is actively pursuing this
matter.
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to have
a material adverse effect on our business.
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of our fiscal year ending December 31, 2004, there were
no matters submitted to a vote of security holders.
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 23, 2004, we filed a report on Form 8-K to disclose the change in
our Certifying Accountant.
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 13, 2004 Intelli-Check, Inc.
(Registrant)
By: /s/ Frank Mandelbaum
-----------------------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
-----------------------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer/CFO
15