UNITED STATES
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, 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 Identification No.)
incorporation or organization)
246 Crossways Park West, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (516) 992-1900
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at August 12, 2004
----- ------------------------------
Common Stock, $.001 par value 10,277,618
(exclusive of treasury shares)
Intelli-Check, Inc.
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Balance Sheets - June 30, 2004 (Unaudited)
and December 31, 2003 1
Statements of Operations for the three and six months ended
June 30, 2004 and 2003 (Unaudited) 2
Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 (Unaudited) 3
Statements of Stockholders' Equity for the six months ended
June 30, 2004 (Unaudited) 4
Notes to Financial Statements 5-9
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 15-16
Part II Other Information
Item 1. Legal Matters 16
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibits
31.1 CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 18
31.2 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, December 31,
2004 2003
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,960,858 $ 3,306,991
Certificate of deposit, restricted -- 1,007,310
Marketable securities and short-term investments 4,813,474 4,856,388
Accounts receivable 134,511 249,166
Inventory 466,768 553,709
Other current assets 185,210 217,387
------------ ------------
Total current assets 7,560,821 10,190,951
CERTIFICATE OF DEPOSIT, restricted 185,007 275,808
PROPERTY AND EQUIPMENT, net 170,327 210,407
PATENT COSTS, net 45,693 48,798
OTHER INTANGIBLES, net 2,674 5,590
------------ ------------
Total assets $ 7,964,522 $ 10,731,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 232,710 $ 183,712
Accrued expenses 495,430 482,464
Litigation settlement payable -- 921,700
Deferred revenue 299,929 252,705
Current portion of capital lease obligations -- 427
------------ ------------
Total current liabilities 1,028,069 1,841,008
------------ ------------
OTHER LIABILITIES 109,335 114,898
------------ ------------
Total liabilities 1,137,404 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 2,007,300 1,874,940
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized;
10,273,618 and 10,154,918 shares issued and outstanding, respectively 10,273 10,154
Deferred compensation (459,626) (377,967)
Additional paid-in capital 36,782,401 34,287,631
Accumulated deficit (31,513,230) (27,019,110)
------------ ------------
Total stockholders' equity 4,819,818 6,900,708
------------ ------------
Total liabilities and stockholders' equity $ 7,964,522 $ 10,731,554
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE $ 259,901 $ 342,191 $ 558,160 $ 604,325
COST OF REVENUE (115,616) (137,632) (218,980) (241,222)
INVENTORY WRITEDOWN -- (800,000) -- (800,000)
------------ ------------ ------------ ------------
Gross profit (loss) 144,285 (595,441) 339,180 (436,897)
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling 329,006 341,560 632,869 679,500
General and administrative 2,175,349 805,434 2,850,392 1,424,669
Research and development 302,976 318,336 625,284 621,912
------------ ------------ ------------ ------------
Total operating expenses 2,807,331 1,465,330 4,108,545 2,726,081
------------ ------------ ------------ ------------
Loss from operations (2,663,046) (2,060,771) (3,769,365) (3,162,978)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 20,765 11,265 51,619 15,622
Interest expense -- (475) -- (1,153)
Other (Note 5) -- -- -- (921,730)
------------ ------------ ------------ ------------
20,765 10,790 51,619 (907,261)
------------ ------------ ------------ ------------
Net loss (2,642,281) (2,049,981) (3,717,746) (4,070,239)
Accretion of convertible redeemable
preferred stock costs (66,180) (65,758) (132,360) (65,758)
Dividend on convertible
redeemable preferred stock (59,836) (62,465) (119,014) (62,465)
------------ ------------ ------------ ------------
Net loss attributable
to common stockholders $ (2,768,297) $ (2,178,204) $ (3,969,120) $ (4,198,462)
============ ============ ============ ============
PER SHARE INFORMATION:
Net loss per common share -
Basic and diluted $ (.27) $ (.24) $ (.39) $ (.47)
============ ============ ============ ============
Weighted average common shares used in
computing per share amounts -
Basic and diluted 10,181,085 8,930,112 10,167,121 8,902,858
============ ============ ============ ============
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Six months ended
June 30, 2004 June 30, 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,717,746) $(4,070,239)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 62,977 220,523
Noncash stock based compensation expense 1,347,000 29,000
Amortization of deferred compensation 205,553 193,032
Writedown of inventory -- 800,000
Changes in assets and liabilities-
Decrease (increase) in certificates of deposit, restricted 1,098,111 (1,006,884)
Decrease in accounts receivable 114,655 9,534
Decrease in inventory 86,941 124,242
Decrease in other current assets 32,177 64,440
Increase in accounts payable and accrued expenses 61,964 108,232
(Decrease) increase in litigation settlement payable (921,700) 921,700
Increase (decrease) in deferred revenue 47,224 (50,372)
(Decrease) in other liabilities (5,563) --
----------- -----------
Net cash used in operating activities (1,588,407) (2,656,792)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment of marketable securities and short term investments (1,610,434) --
Sales of marketable securities and short term investments 1,653,348 --
Purchases of property and equipment (16,876) (1,929)
----------- -----------
Net cash provided by (used in) investing activities 26,038 (1,929)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 385,980 232,502
Net proceeds from issuance of convertible redeemable
preferred stock -- 2,714,100
Payment of dividend to preferred stockholder (119,014) --
Repayment of capital lease obligation (427) (11,218)
Purchase and retirement of common stock (50,303) --
----------- -----------
Net cash provided by financing activities 216,236 2,935,384
----------- -----------
(Decrease) increase in cash and cash equivalents (1,346,133) 276,663
CASH AND CASH EQUIVALENTS, beginning of period 3,306,991 1,910,579
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,960,858 $ 2,187,242
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 475
=========== ===========
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 $ 132,360 $ 65,758
=========== ===========
Dividend payable on convertible redeemable preferred stock $ 59,836 $ 62,465
=========== ===========
Stock options issued for services rendered $ 542,648 $ --
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2004
Common Stock Additional
---------------------------- Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, January 1, 2004 10,154,918 $ 10,154 $ 34,287,631 $ (377,967) $(27,019,110) $ 6,900,708
Exercise of stock options 128,700 129 385,851 -- -- 385,980
Extension of stock rights 525,000 (525,000) --
Extension of options 1,347,000 1,347,000
Purchase and retirement of common stock (10,000) (10) (50,293) -- -- (50,303)
Amortization of deferred compensation -- -- -- 205,553 -- 205,553
Dividend on convertible
redeemable preferred stock -- -- -- -- (119,014) (119,014)
Recognition of deferred compensation 542,648 (542,648) --
Accretion of convertible
redeemable preferred stock -- -- -- -- (132,360) (132,360)
Valuation adjustment
of deferred compensation -- -- (255,436) 255,436 -- --
Net loss -- -- -- -- (3,717,746) (3,717,746)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2004 10,273,618 $ 10,273 $ 36,782,401 $ (459,626) $(31,513,230) $ 4,819,818
============ ============ ============ ============ ============ ============
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, 2004 and the results of its
operations for the six months and three months ended June 30, 2004 and 2003,
stockholders' equity for the six months ended June 30, 2004 and cash flows for
the six months ended June 30, 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 six month period ending June 30, 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.
5
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.
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 June 30, 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 $1,934,858.
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 1.55%. The carrying value of the marketable
securities as of June 30, 2004 of $4,013,474 approximated their 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 when 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. Therefore, the full amount of such revenue and related
gross margin is deferred and recognized ratably over the one-year period in
which the future service, support and performance is 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 is 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, 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 the
ongoing evaluation of the Company's inventory, the Company 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, an
adjustment would be recorded at that time, which could have a material adverse
effect on the Company's 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.
6
Stock-Based Compensation
At June 30, 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
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 June 30, Six months ended June 30,
-------------------------- ------------------------------
2004 2003 2004 2003
----------- ----------- ------------- -------------
Net loss attributable to common
stockholders, as reported $(2,768,297) $(2,178,204) $ (3,969,120) $ (4,198,462)
Add:
Total stock based employee compensation
expense determined under fair value
based method for all awards 254,109 231,950 597,255 564,369
----------- ----------- ------------- -------------
Net loss, pro forma $(3,022,406) $(2,410,154) $ (4,566,375) $ (4,762,831)
Basic and diluted loss per share, as reported $ (0.27) $ (0.24) $ (0.39) $ (0.47)
Basic and diluted loss per share, pro forma $ (0.30) $ (0.27) $ (0.45) $ (0.53)
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, 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.
7
The following table summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of June 30, 2004 and
2003 had been converted:
2004 2003
--------- ---------
Stock options 2,686,299 1,962,324
Convertible redeemable preferred stock 454,545 454,545
Warrants 238,061 128,061
--------- ---------
Total 3,378,905 2,544,930
========= =========
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 and will purchase
additional units as needed to fulfill orders. These devices, which were private
labeled, are programmed to work in conjunction with the ID-Check technology.
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. On May 18, 2004, the
Company filed a Second Amended Complaint alleging infringement and inducement to
infringe against certain principals of Tricom in their personal capacities, as
well as alleging in the alternative false advertising claims under the Lanham
Act against all the defendants. These principals have moved to dismiss the
claims against them, and Tricom has moved to dismiss the false advertising
claims. 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.
8
Note 6. Extension of Stock Options
On May 10, 2004, the Board of directors extended the expiration date of
375,000 stock options for the Company's Chairman and Chief Executive officer
originally due to expire July 1, 2004 until July 1, 2008. As a result, the
Company recorded the fair value of the extension of $1,320,000 as a non cash
expense during the second quarter ended June 30, 2004, which was calculated
using the Black-Scholes valuation method.
Note 7. Subsequent Event
At the Annual Meeting of Shareholders held on July 8, 2004, the
stockholders approved the 2004 Stock Option Plan covering up to 850,000 of the
Company's common shares, pursuant to which the officers, directors, key
employees and consultants to the Company are eligible to receive incentive stock
options and nonqualified stock options. As of August 13, 2004 no options were
granted under this plan.
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 June 30, 2004, we had an accumulated deficit of $31,513,230. 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 which 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, 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. Additionally, we currently are in pilot programs with some
multi-billion dollar public companies. 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.
9
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. Since 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, we will not 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 June
30, 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;
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.
10
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 the ongoing evaluations
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 six months ended June 30, 2004 to the six months ended
June 30, 2003.
Revenues decreased by $46,165 from $604,325 for the six months ended June
30, 2003 to $558,160 for the six months ended June 30, 2004. Revenues for the
period ended June 30, 2004 consisted of revenues from distributors of $146,169,
revenues from direct sales to customers of $377,012 and royalty payments of
$34,979. Sales, which represent shipments of products and contracted services,
amounted to $593,862 and $557,792 for the periods ended June 30, 2004 and 2003,
respectively. 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 are optimistic that sales opportunities should increase
as a result of certain of our recent marketing tests and agreements, our
introduction of additional products in 2004 as well as legislative efforts to
enhance security.
Gross profit, excluding an inventory writedown of $800,000 in the second
quarter of 2003, would have decreased by $23,923 from $363,103 for the six
months ended June 30, 2003 to $339,180 for the six months ended June 30, 2004.
Our gross profit, excluding the inventory writedown of $800,000 in the second
quarter of 2003, as a percentage of revenues did not materially change amounting
to 60.8% in the six months ended June 30, 2004 compared to 60.1% for the six
months ended June 30, 2003.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 50.7% from $2,726,081 for the
six months ended June 30, 2003 to $4,108,545 for the six months ended June 30,
2004. Selling expenses, which consist primarily of salaries and related costs
for marketing, decreased 6.9% from $679,500 for the six months ended June 30,
2003 to $632,869 for the six months ended June 30, 2004 primarily due to
decreased travel and convention expenses of approximately $33,000 and a
reduction of non-recurring expenses of $43,000 from the hiring of professional
consultants during the six months ended June 30, 2003 to promote our product,
which was partially offset by an increase in salaries and employee costs of
approximately $13,000 and the cost of demonstration equipment of approximately
$15,000. 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
100.0% from $1,424,669 for the six months ended June 30, 2003 to $2,850,392 for
the six months ended June 30, 2004, primarily as a result of an increase in
non-cash expenses from the extension of stock options totaling $1,335,000, an
increase in legal fees of approximately $156,000 relating to patent infringement
litigation, increases in salaries and related expenses of approximately $14,000,
11
an increase in investor relations fees of approximately $31,000 and an increase
in meeting and compliance fees of approximately $20,000, which was partially
offset by a decrease in amortization expense of approximately $156,000 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 of our products, amounted to
$621,912 for the six months ended June 30, 2003 compared to $625,284 for the six
months ended June 30, 2004, 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. Research and development expenses may also increase as we
complete and introduce additional products based upon our patented ID-Check
technology.
Interest income increased from $15,622 for the six months ended June 30,
2003 to $51,619 for the six months ended June 30, 2004, which is a result of an
increase in our cash and cash equivalents, marketable securities and short term
investments available for investment during this period.
Interest expense was not incurred for the six months ended June 30, 2004
as compared to $1,153 for the six months ended June 30, 2003 as we have paid
down all the remaining capital leases in 2003.
We did not incur other expenses for the six months ended June 30, 2004
compared to the six months ended June 30, 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
income taxes.
As a result of the factors noted above, our net loss decreased from
$4,070,239 for the six months ended June 30, 2003 to $3,717,746 for the six
months ended June 30, 2004.
Comparison of the three months ended June 30, 2004 to the three months
ended June 30, 2003.
Revenues decreased by $82,290 from $342,191 for the three months ended
June 30, 2003 to $259,901 for the three months ended June 30, 2004. Revenues for
the period ended June 30, 2004 consisted of revenues from distributors of
$97,145, revenues from direct sales to customers of $149,288 and royalty
payments of $13,468. Sales, which represent shipments of products and contracted
services, amounted to $319,291 and $372,885 for the periods ended June 30, 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 are optimistic that sales
opportunities should increase as a result of certain of our recent marketing
tests and agreements, our introduction of additional products in 2004 as well as
legislative efforts to enhance security.
Gross profit, excluding an inventory writedown of $800,000 in the second
quarter of 2003, would have decreased by $60,274 from $204,559 for the three
months ended June 30, 2003 to $144,285 for the three months ended June 30, 2004.
Our gross profit excluding the inventory writedown of $800,000 in the second
quarter of 2003 as a percentage of revenues, decreased to 55.5% in the three
months ended June 30, 2004 compared to 59.8% for the three months ended June 30,
2003. Our gross profit percentage was negatively impacted by a change in our
sales mix of increased sales of our software and hardware products which are at
lower margins as compared to sales from licensing our technology.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 91.6% from $1,465,330 for the
three months ended June 30, 2003 to $2,807,331 for the three months ended June
30, 2004. Selling expenses, which consist primarily of salaries and related
costs for marketing, decreased 3.7% from $341,560 for the three months ended
June 30, 2003 to $329,006 for the three months ended June 30, 2004 primarily due
to a reduction in expenses relating to conventions of approximately $16,000.
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 170% from
$805,434 for the three months ended June 30, 2003 to $2,175,349 for the three
months ended June 30, 2004, primarily as a result of an increase in non-cash
expenses from the extension of stock options totaling $1,298,000, an increase in
legal fees of approximately $193,000 relating to patent infringement litigation
and increases in salaries and related expenses of approximately $13,000, which
were partially offset by a decrease in amortization expense of approximately
$78,000 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, decreased 4.8% from $318,336 for the three months ended June 30, 2003
to $302,976 for the three months ended June 30, 2004, primarily as a result of
decreases in salaries and related expenses of approximately $16,000. We believe
12
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. Research and development expenses may also increase
as we complete and introduce additional products based upon our patented
ID-Check technology.
Interest income increased from $11,265 for the three months ended June 30,
2003 to $20,765 for the three months ended June 30, 2004, which is a result of
an increase in our cash and cash equivalents, marketable securities and short
term investments available for investment during this period.
Interest expense was not incurred for the three months ended June 30, 2004
as compared to $475 for the three months ended June 30, 2003 as we have paid
down all the remaining capital leases in 2003.
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
$2,049,981 for the three months ended June 30, 2003 to $2,642,281 for the three
months ended June 30, 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 underwriter's exercise of
their over-allotment option, we received approximately $6,907,000 in net
proceeds after deducting the underwriter's commissions and offering expenses.
During 2000, we received $3,426,374 from the issuance of common stock upon
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 upon 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 six months ended June 30, 2004
of $1,588,407 resulted primarily from the net loss of $3,717,746 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 $1,098,111 primarily from the payment of the litigation
settlement, recognition of noncash stock based compensation expense resulting
from the extension of stock options of $1,347,000, amortization of deferred
compensation of $205,553 and a decrease in accounts receivable of $114,655. 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 and 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
13
options to consultants. Cash provided by investing activities for the six months
ended June 30, 2004 of $26,038 resulted primarily from the sale of marketable
securities and short term investments of $42,914. Cash used in investing
activities was $1,929 for the six months ended June 30, 2003 and resulted from
the purchase of equipment. Cash used in financing activities was $216,236 for
the six months ended June 30, 2004 and was primarily related to proceeds of
$385,980 from the issuance of common stock from the exercise of stock options,
which was partially offset by the payment of dividends to preferred stock
holders of $119,014. Cash provided by financing activities was $2,935,384 for
the six months ended June 30, 2003 and was primarily related to the issuance of
Series A 8% Convertible Redeemable Preferred Stock and exercise of stock
options.
Our current ratio for the period ended June 30, 2004 was 7.35:1 compared
to 1.78:1 for the period ended June 30, 2003. This increase resulted primarily
from the proceeds we received from our secondary public offering completed in
October 2003.
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, June 30, 2004, and, finally, extended the
expiration date again to June 30, 2005. We have the right to redeem the
outstanding rights for $.01 per right under certain conditions, which were not
met as of August 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. In July 2004, we
purchased an additional 10,000 shares totaling $48,448. 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.
14
(d) Net Operating Loss Carry forwards
As of June 30, 2004 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $24.9 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.
CONTRACTUAL OBLIGATIONS
Below is a table, which presents our contractual obligations and
commitments at June 30, 2004:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------
TOTAL LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
ONE YEAR
---------- ---------- ---------- ---------- ----------
Operating Leases $1,754,849 $ 247,376 $ 784,845 $ 573,558 $ 149,070
Purchase commitments (1) -- -- -- -- --
Employment contracts 199,419 199,419 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligation $1,954,268 $ 446,795 $ 784,845 $ 573,558 $ 149,070
---------- ---------- ---------- ---------- ----------
(1) We paid $114,750 in July 2004 under a purchase commitment entered into
during June 2004 for certain products.
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 and procedures 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.
15
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 of the end of the period
covered by this report. Based on such evaluation, our Chief Executive and Chief
Financial Officer have concluded that these controls and procedures are
effective.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls over
financial reporting that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
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 June 30, 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. On May 18, 2004 we filed a Second Amended
Complaint alleging infringement and inducement to infringe against certain
principals of Tricom in their personal capacities, as well as alleging in the
alternative false advertising claims under the Lanham Act against all the
defendants. These principals have moved to dismiss the claims against them, and
Tricom has moved to dismiss the false advertising claims. We are 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
The Annual Meeting of Shareholders was held July 8, 2004.
A proposal to elect three (3) directors to serve for a three-year term was
approved by the stockholders. The nominees received the following votes:
Name Votes For Votes Withheld
---- --------- --------------
Frank Mandelbaum 9,495,028 79,838
Charles McQuinn 9,500,828 74,038
Thomas A. Prendergast 9,502,428 72,438
16
A proposal to approve the 2004 Stock Option Plan was accepted by the
stockholders. This proposal received the following votes:
For Against Abstain Not Voted
--- ------- ------- ---------
2,995,796 290,561 66,689 6,221,820
In addition, stockholders ratified the appointment of Amper, Politziner &
Mattia, P.C. as the Company's independent public accountants for the year ended
December 31, 2004. This proposal received the following votes:
For Against Abstain
--- ------- -------
9,468,751 97,190 8,928
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
----------- -----------
31.1 CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32. CEO & CFO Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) On April 23, 2004, we filed a report on Form 8-K under Item 4 to disclose
the change in our Certifying Accountant.
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 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
17