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 March 31, 2005
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 May 11, 2005
----- ---------------------------
Common Stock, $.001 par value 10,754,240
Intelli-Check, Inc.
Index
Part I Financial Information Page
----
Item 1. Financial Statements
Balance Sheets - March 31, 2005 (Unaudited)
and December 31, 2004 1
Statements of Operations for the three months ended
March 31, 2005 and 2004 (Unaudited) 2
Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (Unaudited) 3
Statements of Stockholders' Equity for the three months ended
March 31, 2005 (Unaudited) 4
Notes to Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14-15
Part II Other Information
Item 1. Legal Matters 15
Item 6. Exhibits 15
Signatures 16
Exhibits
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32. 18 U.S.C. Section 1350 Certifications
Intelli-Check, Inc.
Balance Sheets
ASSETS
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,540,367 $ 1,750,485
Marketable securities and short-term investments 1,968,061 2,708,796
Accounts receivable, net 261,408 454,112
Inventory 89,299 211,163
Other current assets 325,453 314,466
------------ ------------
Total current assets 4,184,588 5,439,022
PROPERTY AND EQUIPMENT, net 120,591 132,905
PATENT COSTS, net 41,036 42,589
DEFERRED FINANCING COSTS 109,695 --
------------ ------------
Total assets $ 4,455,910 $ 5,614,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 842,707 $ 759,218
Accrued expenses 682,788 574,043
Deferred revenue 502,150 476,387
------------ ------------
Total current liabilities 2,027,645 1,809,648
------------ ------------
OTHER LIABILITIES 97,266 97,266
------------ ------------
Total liabilities 2,124,911 1,906,914
------------ ------------
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; 0 and 30,000 shares issued
and outstanding as of March 31, 2005 and December 31, 2004,
respectively -- 2,839,278
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized;
10,744,963 and 10,290,418 shares issued and outstanding, respectively 10,745 10,290
Deferred compensation (181,913) (126,469)
Additional paid-in capital 39,940,693 36,655,882
Accumulated deficit (37,438,526) (35,671,379)
------------ ------------
Total stockholders' equity 2,330,999 868,324
------------ ------------
Total liabilities and stockholders' equity $ 4,455,910 $ 5,614,516
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three months ended Three months ended
March 31, 2005 March 31, 2004
------------ ------------
REVENUE $ 296,832 $ 298,259
COST OF REVENUE (102,632) (103,364)
------------ ------------
Gross profit 194,200 194,895
------------ ------------
OPERATING EXPENSES
Selling 320,802 303,863
General and administrative 1,225,105 675,043
Research and development 233,930 322,308
------------ ------------
Total operating expenses 1,779,837 1,301,214
------------ ------------
Loss from operations (1,585,637) (1,106,319)
------------ ------------
Interest income 16,034 30,854
------------ ------------
Net loss (1,569,603) (1,075,465)
Accretion of convertible redeemable preferred stock costs (160,722) (66,180)
Dividend on convertible redeemable preferred stock (36,822) (59,178)
------------ ------------
Net loss attributable to common shareholders $ (1,767,147) $ (1,200,823)
============ ============
PER SHARE INFORMATION
Net loss per common share -
Basic and diluted $ (0.17) $ (0.12)
============ ============
Weighted average common shares used in computing per
share amounts -
Basic and diluted 10,467,186 10,153,158
============ ============
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,569,603) $(1,075,465)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 16,580 31,344
Noncash stock based compensation expense 176,000 --
Amortization of deferred compensation 53,822 23,553
Changes in assets and liabilities-
Decrease in certificates of deposit, restricted -- 1,098,465
Decrease in accounts receivable 192,704 74,100
Decrease (increase) in inventory 121,864 (27,234)
(Increase) decrease in other current assets (10,987) 40,071
Increase in accounts payable and accrued expenses 252,727 91,417
Decrease in litigation settlement payable -- (921,700)
Increase (decrease) in deferred revenue 25,763 (26,409)
Decrease in other liabilities -- (5,248)
----------- -----------
Net cash used in operating activities (741,130) (697,106)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment of marketable securities and short term investments (300,000) (590,379)
Sales of marketable securities and short term investments 1,040,735 --
Purchases of property and equipment (2,713) (4,659)
----------- -----------
Net cash provided by (used in) investing activities 738,022 (595,038)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 1,280
Payment of deferred financing costs (109,695) --
Payment of dividend to preferred stockholder (97,315) (119,671)
Repayment of capital lease obligation -- (427)
Purchase and retirement of common stock -- (50,303)
----------- -----------
Net cash used in financing activities (207,010) (169,121)
----------- -----------
Decrease in cash and cash equivalents (210,118) (1,461,265)
CASH AND CASH EQUIVALENTS, beginning of period 1,750,485 3,306,991
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,540,367 $ 1,845,726
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Conversion of convertible redeemable preferred stock
into Common Stock $ 3,000,000 $ --
=========== ===========
Accretion of convertible redeemable preferred stock cost $ 160,722 $ 66,180
=========== ===========
Stock options issued for services rendered $ 84,774 $ 542,648
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2005
Common Stock Additional
------------ Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2004 10,290,418 $ 10,290 $ 36,655,882 $ (126,469) $(35,671,379) $ 868,324
Conversion of Convertible Redeemable
Preferred Stock 454,545 455 2,999,545 -- -- 3,000,000
Extension of options -- -- 176,000 -- -- 176,000
Amortization of deferred compensation -- -- -- 53,822 -- 53,822
Dividend on convertible redeemable
preferred stock -- -- -- -- (36,822) (36,822)
Recognition of deferred compensation -- -- 84,774 (84,774) -- --
Accretion of convertible redeemable
preferred stock -- -- -- -- (160,722) (160,722)
Valuation adjustment of deferred
compensation -- -- 24,492 (24,492) -- --
Net loss -- -- -- -- (1,569,603) (1,569,603)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2005 10,744,963 $ 10,745 $ 39,940,693 $ (181,913) $(37,438,526) $ 2,330,999
============ ============ ============ ============ ============ ============
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, 2005 and the results of its
operations for the three months ended March 31, 2005 and 2004, stockholders'
equity for the three months ended March 31, 2005 and cash flows for the three
months ended March 31, 2005 and 2004. 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, 2005 are not necessarily indicative
of the operating results that may be expected for the year ending December 31,
2005.
The balance sheet as of December 31, 2004 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, 2004.
Liquidity
The Company anticipates that its cash on hand, 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 expenses, 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 its operating infrastructure,
respond to competitive pressures, or acquire complementary businesses or
necessary technologies.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004) ("123(R)"), "Share-Based Payment." SFAS No. 123(R)
will provide investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation
cost relating to share based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion No. 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair-value based method been used. Public entities (other than
those filing as small business issuers) will be required to apply SFAS No.
123(R) as of the first interim or annual reporting period of the first fiscal
year beginning on or after June 15, 2005. We are in the process of evaluating
whether the adoption of SFAS No. 123(R) will have a significant impact on our
overall results of operations or financial position.
5
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
Amendment of ARB No. 43," Chapter 4 ("SFAS No. 151"). The amendments made by
SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. SFAS No.
151 will become effective beginning in fiscal 2006. The adoption of this
Statement will not have a significant impact on our financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets" an amendment of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions" ("SFAS No. 153"). The amendments made by SFAS No. 153 are based on
the principle that exchanges on nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive assets and
replace it with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods after the date of issuance. The provisions of SFAS No. 153 shall be
applied prospectively. The adoption of this Statement will not have a
significant impact on our financial condition or results of operations.
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in 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 March 31,
2005, 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 $1,510,469.
Marketable Securities
The Company has classified its marketable securities as held-to-maturity
because 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 2.36%. The carrying value of the marketable
securities as of March 31, 2005 of $1,968,061 approximated their fair market
value.
Revenue Recognition
We sell our products directly through our sales force and through
distributors. Revenue from direct sales of our product is recognized when
shipped to the customer and title has passed. Our products require 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 of certain of our products, we do not have
enough experience to identify the fair value of each element, 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.
6
In addition, we recognize sales from licensing of our patented software to
customers. Our licensed software requires 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 the licensing of our technology, which are recognized as revenues in the
period they are earned.
Inventory Valuation
Our inventory consists primarily of our ID-Check terminals that run our
patented software and input devices purchased in 2004. 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. Based
on ongoing evaluation of our inventory, prior to January 1, 2005, we recorded a
cumulative inventory write down of $1,347,332. The manufacturer discontinued the
production of the ID-Check terminals in 2003. The ID-Check terminal is fully
capable of running our patented software as it utilizes a high quality
imager/scanner and magnetic stripe reader and is currently being marketed for
sale.
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.
Stock-Based Compensation
At March 31, 2005, the Company has stock based compensation plans, which
are described more fully in Note 8 to the Financial Statements included in the
Company's 2004 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.
In accordance with SFAS No.148 "Accounting for Stock Based
Compensation-Transition and Disclosure," 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, 2005 March 31, 2004
----------- -----------
Net loss attributable to common stockholders,
as reported $(1,767,147) $(1,200,823)
Add:
Total stock based employee compensation expense
determined under fair value based method for all awards (379,895) (343,146)
----------- -----------
Net loss, pro forma $(2,147,042) $(1,543,969)
Basic and diluted loss per share, as reported $ (0.17) $ (0.12)
Basic and diluted loss per share, pro forma $ (0.21) $ (0.15)
7
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,
2005 and 2004 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, 2005 and
2004 had been converted:
2005 2004
--------- ---------
Stock options 2,746,949 2,689,040
Convertible redeemable preferred stock -- 454,545
Warrants 328,061 238,061
--------- ---------
Total 3,075,010 3,381,646
========= =========
Note 3. Conversion of Redeemable Convertible Preferred Stock
On February 25, 2005, Gryphon Master Fund, L.P. converted their Preferred
Stock into 454,545 shares of our common stock at a conversion price of $6.60 per
share. A final dividend payment of $97,315 was paid for the period up to the
date of conversion. As a result of this conversion, the period we used in
estimating the accretion of all of the costs associated with the issuance of the
Preferred Stock changed from 5 years to 1.9166 years. Accordingly, the accretion
was increased in the first quarter of 2005 by $119,956 and amounted to $160,722
for the quarter ended March 31, 2005. Additionally, as a result of this
conversion, we retired the 30,000 shares of preferred stock, issued 454,545
shares of our common stock and recorded $3,000,000 as an increase to
stockholders equity.
Note 4. Investment Firm Relationships
On January 1, 2005, we renewed our agreement with Alexandros Partners LLC
to act as consultants in advising us in financial and investor relation matters.
We agreed to pay a consulting fee of $50,000 payable in 12 equal monthly
installments. The agreement terminates on December 31, 2005. Mr. John
Hatsopoulos, a principal of Alexandros Partners LLC, is currently a member of
our Board of Directors. This transaction was approved by all of the independent
directors of our Board of Directors.
On December 7, 2004, we entered into a one year agreement with a
consulting firm to help with our investor relations activities. We agreed to pay
a consulting fee of $100,000 payable in 12 monthly installments. In addition,
the Company issued 11,500 restricted shares of its common stock to the
consulting firm. However, as a result of certain conditions not being met,
effective April 6, 2005, we cancelled all of those shares previously issued but
have agreed to continued paying the consulting fee of $8,000 per month on a
month to month basis.
On November 2, 2004, we entered into an exclusive agreement with an
investment banking firm for the purpose of investigating the opportunities in
raising additional capital for us. On May 3, 2005, we modified the agreement
eliminating the provision of exclusivity and are in discussions with other
investment banking firms. There can be no assurances that the Company will be
successful in raising additional capital on acceptable terms.
8
Note 5. Legal Matters
On August 1, 2003, we filed a summons and complaint against Tricom Card
Technologies, Inc. alleging infringement on our patent and 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. The Company has
opposed the motions. We filed a Joint Pretrial Order on November 19, 2004, which
has not yet been executed. The parties appeared before the court for a
settlement conference on March 17, 2005.
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 would have
a material adverse effect on our business.
Note 6. Extension of Stock Options
On March 22, 2005, the board of directors extended the expiration date of
124,500 stock options for one of our directors originally due to expire
September 8, 2005 until June 8, 2006. As a result, we recorded the fair value of
the extension of $176,000 as a non cash expense during the first quarter ended
March 31, 2005, which was calculated in accordance with financial interpretation
44 "Accounting for Certain Transactions involving stock compensation".
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(a) Overview
Intelli-Check was formed in 1994 to address a growing need for a reliable
document and age verification system that could be used to detect fraudulent
driver licenses and other widely accepted forms of government-issued
identification documents. Since then, our technology has been further developed
for application in the commercial fraud protection, access control and
governmental security markets. Additionally, it is currently being used to
address inefficiencies and inaccuracies associated with manual data entry. The
core of Intelli-Check's product offerings is our proprietary software technology
that verifies the authenticity of driver licenses, state issued non-driver and
military identification cards used as proof of identity. Our patented
ID-Check(R) software technology instantly reads, analyzes, and verifies the
encoded data in magnetic stripes and barcodes on government-issue IDs from
approximately 60 jurisdictions in the U.S. and Canada to determine if the
content and format is valid. We have served as the national testing laboratory
for the American Association of Motor Vehicle Administrators (AAMVA) since 1999
and have access to all the currently encoded driver license formats. After the
tragic events that occurred on September 11, 2001, we believe there has been a
significant increase in awareness of our software technology to help improve
security across many industries, including airlines, rail transportation and
high profile buildings and infrastructure, 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, 2005, we had an
accumulated deficit of $37,438,526. We will continue to fund operating and
capital expenditures from proceeds that we received from sales of our equity
securities. 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 provides the ability to verify the
validity of military ID's, driver licenses and state issued non-driver ID cards
that contain magnetic stripes, bar codes and SMART chips that in most cases
conform to AAMVA/ANSI/ISO standards, which 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. We now also target commercial fraud, which
9
includes identity theft, and our technology is designed to help prevent losses
from these frauds. We are also marketing our products for security applications
involving access control. As a result of its applicability in these markets, we
have sold our products to some of the largest companies in the gaming industry,
a state port authority, military establishments, airports, nuclear power plants
and high profile buildings and have successfully completed tests of our
technology in one of the largest mass merchandisers in the United States. We
currently are testing our products with some large public companies. We have
entered into strategic alliances with several biometric companies; Lenel Systems
International, a provider of integrated security solutions; and Northrop Grumman
and Anteon, integrators in the defense industry, to utilize our systems and
software as the proposed or potential enrollment application for their
technologies and to jointly market these security applications. In addition, we
have executed agreements with some high profile organizations to promote the use
of our technology and our products. 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 latest products include ID-Traveler and ID-Prove. ID
Traveler electronically verifies and matches two forms of government issued ID's
instantaneously while the ID Prove product offering provides "out of wallet"
questions to assist in proving a users claimed identity. Additional software
solutions include ID-Check(R) PC and ID-Check(R) PDA, which replicate the
features of ID-Check. These products are designed to be platform-independent and
compatible with both stationary and mobile hardware applications. Another new
application is an enhanced version of C-Link(R), the company's net workable data
management software. Additionally, ID-Check(R) PC and the most recent 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 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, therefore negating the need to
replace the ID-Check terminal. 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 first analyze the data, then view the encoded data
for further verification and to generate various reports where permitted by law.
To date, we have entered into thirteen (13) 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, 2005.
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, stock based compensation,
deferred taxes 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 when
shipped to the customer and title has passed. Our products require 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 of certain of our products, we do not have
enough experience to identify the fair value of each element and the full amount
of the revenue and related gross margin is deferred and recognized ratably over
the one-year period in which the future service, support and performance are
provided.
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In addition, we recognize sales from licensing of our patented software to
customers. Our licensed software requires 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, which are recognized 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 and input devices purchased in 2004. 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. Based
on ongoing evaluation of our inventory, prior to January 1, 2005, we recorded a
cumulative inventory write down of $1,347,332. The manufacturer discontinued the
production of the ID-Check terminals in 2003. The ID-Check terminal is fully
capable of running our patented software as it utilizes a high quality
imager/scanner and magnetic stripe reader and is currently being marketed for
sale.
C. Stock-Based Compensation
Options, warrants and stock awards issued to non-employees and
consultants are recorded at their fair value as determined in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and EITF No. 96-18, "Accounting for Equity Instrument That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services" and recognized as expense over the related vesting period.
D. Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards. Deferred tax assets
and liabilities are measured using expected tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. We
have recorded a full valuation allowance for our net deferred tax assets as of
March 31, 2005, due to the uncertainty of the realizability of those assets.
E. 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, 2004. 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, 2005 to the three months
ended March 31, 2004.
Revenues remained relatively unchanged from the $298,259 recorded for the
three months ended March 31, 2004 compared to the $296,832 recorded for the
three months ended March 31, 2005. Revenues for the period ended March 31, 2005
consisted of revenues from distributors of $113,776, revenues from direct sales
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to customers of $167,596 and royalty payments of $15,460. Sales, which represent
shipments of products and contracted services, increased from $274,571 for the
period ended March 31, 2004 to $350,179 for the period ended March 31, 2005. Our
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 extended 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 and our introduction of
additional products in 2004, the fact that over 90% of the issued licenses now
contain encoded and verifiable data, as well as legislative efforts to enhance
security and deal with the problem of under-age access to alcohol products.
Gross profit did not materially change from the $194,895 recorded for the
three months ended March 31, 2004 compared to the $194,200 recorded for the
three months ended March 31, 2005. Our gross profit as a percentage of revenues
did not materially change and amounted to 65.4% for the three months ended March
31, 2005 compared to 65.3% for the three months ended March 31, 2004.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 36.8% from $1,301,214 for the
three months ended March 31, 2004 to $1,779,837 for the three months ended March
31, 2005. Selling expenses, which consist primarily of salaries and related
costs for marketing, increased 5.6% from $303,863 for the three months ended
March 31, 2004 to $320,802 for the three months ended March 31, 2005, primarily
due to increases in expenses recorded, including non cash charges for options
issued in 2005 to professional consultants to promote our product totaling
approximately $64,000, partially offset by a decrease in marketing expenses and
convention and trade show expenses of approximately $39,000. 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 81.5% from $675,043 for the
three months ended March 31, 2004 to $1,225,105 for the three months ended March
31, 2005, primarily as a result of an increase in non-cash expenses from the
extension of stock options totaling $176,000 and an increase in legal fees of
approximately $525,000 relating to patent infringement litigation, which were
partially offset by decreases in employee costs and related expenses of
approximately $36,000, a decrease of consulting expense of approximately $16,000
and a decrease in depreciation expense of approximately $15,000 as a result of
the discontinuance of our IDentiScan division in 2004 and certain assets
becoming fully depreciated. Research and development expenses, which consist
primarily of salaries and related costs for the development and testing of our
products, decreased 27.4% from $322,308 for the three months ended March 31,
2004 to $233,930 for the three months ended March 31, 2005 primarily as a result
of decreases in salaries and related expenses of approximately $77,000 and
decreases in development costs of approximately $10,000, which were partially
offset by an increase in consulting expenses for product development of
approximately $16,000. 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 income decreased from $30,854 for the three months ended March
31, 2004 to $16,034 for the three months ended March 31, 2005, as a result of a
decrease in our average cash and cash equivalents and marketable securities
balances available for investment during this period.
We have incurred net losses to date; therefore, we have paid nominal
taxes.
As a result of the factors noted above, our net loss increased from
$1,075,465 for the three months ended March 31, 2004 to $1,569,603 for the three
months ended March 31, 2005.
(c) Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31,
2005 of $741,130 resulted primarily from the net loss of $1,569,603, which was
primarily offset by recognition of noncash stock based compensation expense
resulting from the extension of stock options of $176,000, a decrease in
accounts receivable of $192,704 from the collection of significant sales made
towards the end of 2004 and an increase in accounts payable and accrued expenses
of $252,727 primarily from litigation expenses incurred from our patent lawsuit.
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
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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 provided by investing activities for the three months ended
March 31, 2005 of $738,022 resulted primarily from the net sales over purchases
of marketable securities and short term investments. 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 financing activities was
$207,010 for the three months ended March 31, 2005 and was primarily related to
costs associated with our investigating the opportunities in raising additional
capital of $109,695 and the payment of dividends to preferred stockholders of
$97,315. 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.
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 May 10, 2005. We reserved 970,076 shares of common stock for future
issuance under this rights offering. However, to date, we have received
$2,482,009 before expenses from the exercise of 292,001 of these rights, which
has reduced the amount of shares available for future issuance.
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. As of March 31, 2005, we cumulatively purchased 40,200 shares totaling
approximately $222,000 and subsequently retired these shares. None of these
shares were purchased during the first quarter of 2005. We may purchase
additional shares when warranted by certain conditions.
On February 25, 2005, Gryphon Master Fund, L.P. converted their Preferred
Stock into 454,545 shares of our common stock at a conversion price of $6.60 per
share. A final dividend payment of $97,315 was paid for the period up to the
date of conversion. As a result of this conversion, the period we used in
estimating the accretion of all of the costs associated with the issuance of the
Preferred Stock changed from 5 years to 1.9166 years. Accordingly, the accretion
was increased in the first quarter of 2005 by $119,956 and amounted to $160,722
for the quarter ended March 31, 2005. Additionally, as a result of this
conversion, we retired the 30,000 shares of preferred stock, issued 454,545
shares of our common stock and recorded $3,000,000 as an increase to equity. The
investors were originally issued five year warrants to purchase 113,636 shares
of common stock at an exercise price of $6.78, which will expire on October 3,
2008.
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. Therefore, we are currently
in the process of investigating various opportunities to raise additional
capital.
(d) Net Operating Loss Carry forwards
As of March 31, 2005 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $28.3 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 which expires
beginning in the year 2013 if not utilized. Under Section 382 of the Internal
Revenue Code, these NOL's may be limited in the event of an ownership changes.
13
Contractual Obligations
Below is a table, which presents our contractual obligations and
commitments at March 31, 2005:
Payments Due by Period
Less than
Total One Year 1-3 years 4-5 years After 5 years
---------- ---------- ---------- ---------- ----------
Operating Leases $1,561,305 $ 256,133 $ 522,161 $ 562,919 $ 220,092
Consulting Contracts 37,500 37,500 -- -- --
Employment contracts 471,151 349,586 121,565 -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligation $2,069,956 $ 643,219 $ 643,726 $ 562,919 $ 220,092
---------- ---------- ---------- ---------- ----------
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 disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) that are designed (i) to collect the information
we are required to disclose in the reports we file with the SEC, and (ii) to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Such evaluation was
conducted as 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 procedures are effective.
Additionally, there were no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the end of the period covered by this report. We have not identified any
significant deficiencies or material weaknesses in our internal controls, and
therefore there were no corrective actions taken.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act),
beginning with our Annual Report on Form 10-K for the fiscal year ending
December 31, 2006, we will be required to furnish a report by our management on
our internal control over financial reporting. This report will contain, among
other matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including a statement as
14
to whether or not our internal control over financial reporting is effective.
This assessment must include disclosure of any material weaknesses in our
internal control over financial reporting identified by management. If we
identify one or more material weaknesses in our internal control over financial
reporting, we will be unable to assert that our internal control over financial
reporting is effective. This report will also contain a statement that our
independent registered public accountants have issued an attestation report on
management's assessment of such internal controls and conclusion on the
operating effectiveness of those controls.
Management acknowledges its responsibility for internal controls over
financial reporting and seeks to continually improve those controls. In order to
achieve compliance with Section 404 of the Act within the prescribed period, we
are currently performing the system and process documentation and evaluation
needed to comply with Section 404, which is both costly and challenging. We
believe our process, which will begin in 2005 and continue in 2006 for
documenting, evaluating and monitoring our internal control over financial
reporting is consistent with the objectives of Section 404 of the Act.
Part II Other Information
Item 1. Legal Matters
On August 1, 2003, we filed a summons and complaint against Tricom Card
Technologies, Inc. alleging infringement on our patent and 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. The Company has
opposed the motions. We filed a Joint Pretrial Order on November 19, 2004, which
has not yet been executed. The parties appeared before the court for a
settlement conference on March 17, 2005.
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 6. Exhibits
The following exhibits are filed as part of the Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- -----------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32. 18 U.S.C. Section 1350 Certifications
15
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, 2005 Intelli-Check, Inc.
(Registrant)
By: /s/ Frank Mandelbaum
---------------------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
---------------------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer/CFO
16