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, 2006
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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 10, 2006
----- ---------------------------
Common Stock, $.001 par value 12,137,444
Intelli-Check, Inc.
Index
Part I Financial Information Page
----
Item 1. Financial Statements
Balance Sheets - March 31, 2006 (Unaudited)
and December 31, 2005 1
Statements of Operations for the three months ended
March 31, 2006 and 2005 (Unaudited) 2
Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 (Unaudited) 3
Statements of Stockholders' Equity for the three months ended
March 31, 2006 (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 15
Part II Other Information
Item 1. Legal Proceedings 15-16
Item 6. Exhibits 16
Signatures 17
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,
2006 2005
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,119,883 $ 528,250
Marketable securities and short-term
investments 4,237,895 5,263,308
Accounts receivable, net of allowance
of $2,657 and $28,467, respectively 458,383 408,542
Inventory 85,000 125,981
Other current assets 553,138 419,279
------------ ------------
Total current assets 6,454,299 6,745,360
PROPERTY AND EQUIPMENT, net 84,747 92,246
PATENT COSTS, net 34,827 36,379
OTHER ASSETS 34,916 34,916
------------ ------------
Total assets $ 6,608,789 $ 6,908,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 321,762 $ 371,521
Accrued expenses 395,503 389,742
Deferred revenue 939,365 694,958
------------ ------------
Total current liabilities 1,656,630 1,456,221
OTHER LIABILITIES 77,527 62,995
------------ ------------
Total liabilities 1,734,157 1,519,216
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000
shares authorized; 12,133,444 and 12,058,240
shares issued and outstanding, respectively 12,133 12,058
Deferred compensation -- (263,460)
Additional paid-in capital 44,915,423 44,748,969
Accumulated deficit (40,052,924) (39,107,882)
------------ ------------
Total stockholders' equity 4,874,632 5,389,685
------------ ------------
Total liabilities and stockholders' equity $ 6,608,789 $ 6,908,901
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------
REVENUES $ 535,847 $ 296,832
COST OF REVENUES (180,850) (102,632)
------------ ------------
Gross profit 354,997 194,200
------------ ------------
OPERATING EXPENSES
Selling 379,917 320,802
General and administrative 717,690 1,225,105
Research and development 258,705 233,930
------------ ------------
Total operating expenses 1,356,312 1,779,837
------------ ------------
Loss from operations (1,001,315) (1,585,637)
Interest income 56,273 16,034
------------ ------------
Net loss (945,042) (1,569,603)
Accretion of convertible redeemable
preferred stock costs -- (160,722)
Dividend on convertible redeemable
preferred stock -- (36,822)
------------ ------------
Net loss attributable to common
stockholders $ (945,042) $ (1,767,147)
============ ============
PER SHARE INFORMATION
Net loss per common share -
Basic and diluted $ (0.08) $ (0.17)
============ ============
Weighted average common shares used in
computing per share amounts-
Basic and diluted 12,088,484 10,467,186
============ ============
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (945,042) $ (1,569,603)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 9,051 16,580
Noncash stock based compensation expense 154,350 176,000
Amortization of deferred compensation 129,756 53,822
Recovery of amortization of deferred compensation (53,317) --
Changes in assets and liabilities-
(Increase) decrease in accounts receivable (49,841) 192,704
Decrease in inventory 40,981 121,864
Increase in other current assets (133,859) (10,987)
(Decrease) increase in accounts payable and accrued expenses (43,998) 252,727
Increase in deferred revenue 244,407 25,763
Increase in other liabilities 14,532 --
------------ ------------
Net cash used in operating activities (632,980) (741,130)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment of marketable securities and short term investments (1,346,672) (300,000)
Sales of marketable securities and short term investments 2,372,085 1,040,735
Purchases of property and equipment -- (2,713)
------------ ------------
Net cash provided by investing activities 1,025,413 738,022
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 199,200 --
Payment of deferred financing costs -- (109,695)
Payment of dividend to preferred stockholder -- (97,315)
------------ ------------
Net cash provided by (used in) financing activities 199,200 (207,010)
------------ ------------
Increase (decrease) in cash and cash equivalents 591,633 (210,118)
CASH AND CASH EQUIVALENTS, beginning of period 528,250 1,750,485
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,119,883 $ 1,540,367
============ ============
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
============ ============
Stock options issued for services rendered -- $ 84,774
============ ============
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2006
Common Stock Additional
-------------------------- Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, January 1, 2006 12,058,240 $ 12,058 $ 44,748,969 $ (263,460) $(39,107,882) $ 5,389,685
Stock based compensation expense -- -- 120,000 -- -- 120,000
Exercise of options 69,000 69 199,131 -- -- 199,200
Issuance of stock from cashless
exercise of stock options 6,204 6 (6) -- -- --
Extension of options -- -- 34,350 -- -- 34,350
Surrender of stock options previously
granted and recorded as deferred
compensation -- -- (82,812) 82,812 -- --
Recovery of amortization of deferred
compensation on surrender of stock
options -- -- (53,317) -- -- (53,317)
Amortization of deferred compensation -- -- -- 129,756 -- 129,756
Transition adjustment - FASB 123 (R) -- -- (50,892) 50,892 -- --
Net loss -- -- -- -- (945,042) (945,042)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2006 12,133,444 $ 12,133 $ 44,915,423 $ -- $(40,052,924) $ 4,874,632
============ ============ ============ ============ ============ ============
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, 2006 and the results of its
operations for the three months ended March 31, 2006 and 2005, stockholders'
equity for the three months ended March 31, 2006 and cash flows for the three
months ended March 31, 2006 and 2005. 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 ended March 31, 2006 are not necessarily indicative
of the operating results that may be expected for the year ending December 31,
2006.
The balance sheet as of December 31, 2005 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, 2005.
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.
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.
Significant estimates and assumptions that affect amounts reported in the
financial statements include inventory reserves, deferred tax valuation
allowances and doubtful accounts and allowances. Due to the inherent
uncertainties involved in making estimates, actual results reported in future
periods may be different 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,
2006, 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 $1,092,526.
Marketable Securities and Short Term Investments
5
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 4.19%. The carrying value of the marketable
securities as of March 31, 2006 approximated their fair market value.
Doubtful Accounts and Allowances
The Company records its doubtful accounts and allowances based upon its
assessment of various factors. The Company considers historical experience, the
age of the accounts receivable balances, credit quality of the Company's
customers, current economic conditions and other factors that may affect
customers' ability to pay.
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.
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
Inventory is stated at the lower of cost or market and cost is determined
using the first-in, first-out method. Inventory is primarily comprised of
finished goods.
Inventory Valuation
Our current inventory consists primarily of our ID-Check terminals
purchased in 1999 that run our patented software and input devices purchased in
2005 and 2006. 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. We had previously written off the total value of the ID-Check
terminals. 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 being marketed for sale until June 30, 2006. During the first quarter of
2006, we sold a portion of the ID-Check terminals we held in inventory in excess
of their remaining value and recorded a recovery of inventory totaling
approximately $20,000. During the first quarter of 2005, there was no recovery
from the sales of these units.
Business Concentrations and Credit Risk
The Company's recorded revenues for two of its customers accounted for
approximately 35% of total revenues for the three months ended March 31, 2006.
As a result, the balance due from these customers accounted for 61% of accounts
receivable as of March 31, 2006, of which 38% of the amount due was collected
through May 10, 2006.
6
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R). SFAS(R) eliminates
the option to use the intrinsic value method of accounting that was provided in
SFAS 123, which generally resulted in non compensation expense recorded in the
financial statements related to the issuance of equity awards to employees.
SFAS(R) requires that the cost resulting from all share based payment
transactions be recognized in the financial statements. SFAS 123(R) establishes
fair value as the measurement objective in accounting for share based payment
arrangements and requires all companies to apply a fair value based measurement
method in accounting for all share based payment transactions with employees. We
adopted SFAS 123(R) using a modified prospective application, as permitted under
SFAS 123(R). Accordingly, prior period amounts have not been restated. Under
this application, we are required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption.
Prior to the Company's adoption of SFAS No. 123(R), SFAS No. 123 required
that the Company provide pro forma information regarding net loss attributable
to common stockholders and net loss per common share as if compensation cost for
the Company's stock based awards had been determined in accordance with the fair
value method prescribed therein. The Company had previously adopted the
disclosure portion of SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure," requiring quarterly SFAS No. 123 pro forma
disclosure. The pro forma charge for compensation cost related to stock based
awards granted was recognized over the service period. For stock options, the
service period represents the period of time between the date of grant and the
date each option becomes exercisable without consideration of acceleration
provisions (e.g., retirement, change of control, etc.).
The following table illustrates the effect on net loss per common share as
if the fair value method had been applied to all outstanding awards for the
three months ended March 31, 2005.
Three Months
Ended
March 31,
2005
------------
Net loss attributable to common
stockholders, as reported $ (1,767,147)
Add:
Total stock based employee compensation
expense determined under fair value
based method for all awards (379,895)
------------
Net loss, pro forma $ (2,147,042)
============
Basic and diluted loss per share, as reported $ (0.17)
============
Basic and diluted loss per share, pro forma $ (0.21)
============
Beginning with our 2006 fiscal year, with the adoption of SFAS 123(R), we
included stock based compensation in selling, general and administrative expense
for the cost of stock options. Stock based compensation expense for the three
months ended March 31, 2006 was $154,350.
Under SFAS No. 123(R) the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model.
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.
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 is computed by dividing net loss by the weighted average number
of common shares outstanding. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common then outstanding, but
does not include the impact of stock options and warrants 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, 2006 and
2005 had been converted:
2006 2005
------------ ------------
Stock options 2,738,530 2,746,949
Warrants 938,636 328,061
------------ ------------
Total 3,677,166 3,075,010
============ ============
Note 3. Investment Firm Relationship
On April 6, 2006, the Company entered into a non-exclusive agreement with
an investment banking firm to act as consultants in advising the Company in
various financial and investment related matters. The Company agreed to pay an
upfront fee of $25,000 and all future fees will be based upon the successful
consummation of a transaction.
Note 4. Employment Agreement
Effective January 1, 2006, the Company entered into a letter of
understanding with its Chairman and Chief Executive Officer, Mr. Mandelbaum,
which provides for an annual base salary of $256,804. In addition, on November
8, 2005, the Company granted to Mr. Mandelbaum an option to purchase 25,000
shares of common stock at an exercise price of $3.22 per share. The Company also
agreed in case it were to terminate Mr. Mandelbaum for any reason other than
cause, the Company would pay Mr. Mandelbaum two (2) years of cash base salary in
twelve (12) equal monthly installments.
Note 5. Legal Proceedings
On August 1, 2003, the Company filed a summons and complaint against
Tricom Card Technologies, Inc. alleging infringement on its patent and 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. The principals moved to dismiss the claims
against them, and Tricom moved to dismiss the false advertising claims, which
motions have been administratively terminated by the Court. On August 1, 2005,
defendants filed an Answer and Affirmative Defenses to the Second Amended
Complaint and Tricom filed a declaratory counterclaim. On November 2, 2005, the
Court allowed Tricom to plead two additional defenses and declaratory
counterclaims in the case, and on January 3, 2006, the parties filed a
Stipulation of Dismissal of the Estoppel and Unenforceability Counterclaims and
Affirmative Defenses. On February 28, 2006, the parties filed a Supplemental
Proposed Joint Pretrial Order, and on March 1, 2006, the Court certified that
fact discovery in this action was complete.
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.
8
Note 6. Stock Options
During January 2006, the Company's Board of Directors approved the
cashless exercise of 25,000 options which were converted into 6,204 shares of
its common stock for the Company's Chairman and CEO. As a result, the Company
recorded the transaction as an adjustment to paid-in capital in accordance with
SFAS 123(R).
On March 24, 2006, the board of directors extended the expiration date of
56,500 stock options for one of our directors originally due to expire May 14,
2006 until February 13, 2007. As a result, we recorded the incremental value of
the extension of $34,350 as a non cash expense during the first quarter ended
March 31, 2006, which was calculated in accordance with SFAS 123(R).
In March, 2006, one of our consultants returned and cancelled a stock
option agreement which the Company issued in February 2002 that granted options
to purchase 50,000 shares of common stock at an exercise price of $12.10. The
remaining unamortized balance in deferred compensation of $82,812 was reversed
and offset against additional paid in capital and amortization expense of
$53,317 recorded through December 31, 2005 was recognized as income in the first
quarter of 2006.
Note 7. Subsequent event
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of its 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. On
May 10, 2006, the Board of directors authorized extending these rights, which
were due to expire on June 30, 2006 to June 30, 2007.
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
increase productivity by addressing 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 available 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. The adaptation of
Homeland Security Presidential Directive 12 (HSPD 12) and the promulgation of
Federal Identity Processing Standards 201 (FIPS 201) have raised the awareness
of our technology in the government sector. We, therefore, 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,
2006, we had an accumulated deficit of approximately $40 million. 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.
9
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 conform to
AAMVA/ANSI/ISO standards, which enables us to target three distinct markets. Our
original target market was focused on resellers of age-restricted products, such
as alcohol and tobacco, where the proliferation of high-tech fake IDs exposes
merchants to fines and penalties for the inadvertent sale of these products to
underage purchasers. We now also target commercial fraud, which 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
significant retailer, several large financial service companies, Certegy, one of
the largest providers of check authorization services in the United States, a
state port authority, military establishments, airports, nuclear power plants
and high profile buildings. Our technology is currently being tested by several
Fortune 50 Companies. We have entered into strategic alliances with Verifone,
the largest provider of credit card terminals in the U.S., the two largest
providers of driver licenses in North America to assist with their compliance
with the provisions of the Real ID Act (which is intended to set standards for
the issuance of driver licenses and identification cards), several biometric
companies, and Northrop Grumman and Anteon, integrators in the defense industry,
Intermec Technologies and Metrologic, hardware manufacturers, to utilize our
systems and software as the proposed or potential enrollment application for
their technologies and to jointly market these security applications. The
passage of the Real ID ACT together with the regulations arising from HSPD-12,
which sets the policy for a common identification standard for federal employees
and contractors, have additionally created opportunities for our verification
technology in the governmental market at the federal, state and local levels. 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-Check(R) POS, ID-Check(R)
BHO, ID-Traveler and ID-Prove. ID-Check(R) POS is the technology that has been
integrated into the Verifone 37XX to enable the user to do verification of a
driver license as an additional function of the terminal. ID-Check(R) BHO is a
browser helper object that enables a customer to add intelligence to any
browser-based form and deploy the ID-Check(TM) technology as a "plug-in," to
Internet Explorer(TM) pages without requiring software programming expertise. 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 user's 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
application is an enhanced version of C-Link(R), the company's networkable 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 data capture devices, which are compact, and contain either both or one of
two-dimensional bar code and magnetic stripe readers. The devices enable 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 technology 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. We introduced a new product,
ID-Mobile, which gives the user the additional flexibility of utilizing our
software in a hand-held product. To date, we have entered into multiple
licensing agreements and are in discussions with additional companies to license
our software to be utilized within other existing systems.
Critical Accounting Policies and the 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.
Significant estimates and assumptions that affect amounts reported in the
financial statements include inventory reserves, deferred tax valuation
allowances and doubtful accounts and allowances. Due to the inherent
uncertainties involved in making estimates, actual results reported in future
periods may be different from those estimates.
10
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.
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 current inventory consists primarily of our ID-Check terminals
purchased in 1999 that run our patented software and input devices purchased in
2005 and 2006. 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. We had previously written off the total value of the ID-Check
terminals. 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 being marketed for sale until June 30, 2006. During the first quarter of
2006, we sold a portion of the ID-Check terminals we held in inventory in excess
of their remaining value and recorded a recovery of inventory totaling
approximately $20,000. During the first quarter of 2005, there was no recovery
from the sales of these units.
C. Stock-Based Compensation
On January 1, 2006, we adopted SFAS 123(R). We adopted SFAS 123(R) using a
modified prospective application, as permitted under SFAS 123(R). Accordingly,
prior period amounts have not been restated. Under this application, we are
required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. SFAS(R) requires that the cost resulting
from all share based payment transactions be recognized in the financial
statements. SFAS 123(R) establishes fair value as the measurement objective in
accounting for share based payment arrangements and requires us to apply a fair
value based measurement method in accounting for generally all share based
payment transactions with employees.
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 carry forwards. 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, 2006, due to the uncertainty of the realizability of those assets.
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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, 2005. 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, 2006 to the three months
ended March 31, 2005.
Revenues increased $239,015 or 81% from $296,832 for the three months
ended March 31, 2005 to $535,847 recorded for the three months ended March 31,
2006. Revenues for the period ended March 31, 2006 consisted of revenue from
distributors of $294,364, revenues from direct sales to customers of $233,407
and royalty income of $8,076. Sales bookings, which represent shipments of
products and contracted services, which include revenues that are deferred in
accordance with generally accepted accounting principles, increased by 113% or
$391,317 from the period ended March 31, 2005 to $736,431 for the period ended
March 31, 2006. Revenues and sales bookings increases are due to Intelli-Check's
continuing success in penetrating certain key target markets. We are optimistic
that sales opportunities should continue to increase as a result of our recent
success in the retail market, the positive results of certain of our recent
marketing tests and agreements and our introduction of additional products in
2005 and 2006, as well as legislative efforts to improve identity management and
security and control sales of age restricted products. However, period to period
comparisons may not be indicative of future operating results, since we still
face long sales cycles, particularly in the government sector, and therefore, we
cannot predict with certainty at this time, in which period the opportunities
currently in the pipeline will develop into sales. As of March 31, 2006 we have
a backlog, which represents non-cancelable sales orders for products and
services not yet shipped or performed, as the case may be, of approximately
$614,000.
Gross profit increased by $160,797 or 83% from $194,200 for the three
months ended March 31, 2005 to $354,997 for the three months ended March 31,
2006. Our gross profit as a percentage of revenues amounted to 66.2% for the
three months ended March 31, 2006 as compared to 65.4% for the three months
ended March 31, 2005. Our gross profit percentage was positively impacted by an
increase in revenues from licensing our patented technology at higher gross
margins than our bundled hardware and software products.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, decreased 23.8% from $1,779,837 for the
three months ended March 31, 2005 to $1,356,312 for the three months ended March
31, 2006. Selling expenses, which consist primarily of salaries and related
costs for marketing, increased 18.4% from $320,802 for the three months ended
March 31, 2005 to $379,917 for the three months ended March 31, 2006, primarily
due to increases in expenses recorded, including non cash charges for options
granted to employees and professional consultants to promote our product
totaling approximately $35,000 and increases in marketing-related expenses
totaling 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, decreased 41.4% from $1,225,105 for the three months ended March 31,
2005 to $717,690 for the three months ended March 31, 2006, primarily as a
result of a decrease in expenses relating to investor relations fees of
approximately $24,000, a decrease in legal fees of approximately $499,000
relating to decreased activity on our patent infringement litigation, a decrease
in rent expense of approximately $12,000 due to the reduction in rented space
and a recovery of bad debts of approximately $17,000, which were partially
offset by increases in employee costs and related expenses and travel of
approximately $48,000. Research and development expenses, which consist
primarily of salaries and related costs for the development and testing of our
products, increased 10.6% from $233,930 for the three months ended March 31,
2005 to $258,705 for the three months ended March 31, 2006, primarily as a
result of increases in salaries and related expenses of approximately $29,000 in
the hiring of additional employees. 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.
12
Interest income increased from $16,034 for the three months ended March
31, 2005 to $56,273 for the three months ended March 31, 2006, which is a result
of an increase in our cash and cash equivalents, marketable securities and short
term investments available for investment from the completion of our private
placement in August 2005, as well as higher interest rates from investments
during 2006.
We have incurred net losses to date; therefore, we have paid nominal
taxes.
As a result of the factors noted above, our net loss decreased from
$1,569,603 for the three months ended March 31, 2005 to $945,042 for the three
months ended March 31, 2006.
(c) Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31,
2006 of $632,980 resulted primarily from the net loss of $945,042 and the
increase of other current assets of $133,859 consisting of deferred cost of
revenues, which was offset by an increase of deferred revenue of $244,407,
recognition of noncash stock based compensation expense resulting primarily from
the granting and exercise of stock options of $154,350, and amortization of
deferred compensation of $129,756. 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 and a decrease in inventory of $121,864. Cash
provided by investing activities for the three months ended March 31, 2006 of
$1,025,413 resulted from net sales exceeding purchases of marketable securities
and short term investments. 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
provided by financing activities was $199,200 for the three months ended March
31, 2006 and was related to proceeds from the issuance of common stock from the
exercise of stock options. 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.
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 expiration date of
the rights of June 30, 2006 has been extended until June 30, 2007. We have the
right to redeem the outstanding rights for $.01 per right under certain
conditions, which were not met as of May 10, 2006. We reserved 970,076 shares of
common stock for future issuance under this rights offering. 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.
None of these rights were exercised in the three months ended March 31, 2006.
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, 2006, we cumulatively purchased 40,200 shares totaling
approximately $222,000 and subsequently retired these shares. None of these
shares were purchased during 2006. We may purchase additional shares when
warranted by certain conditions.
We currently anticipate that our 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 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.
13
(d) Net Operating Loss Carry forwards
As of March 31, 2006 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $31.9 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 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 change.
Contractual Obligations
Below is a table, which presents our contractual obligations and
commitments at March 31, 2006:
Payments Due by Period
Less than After
Total One Year 1-3 years 4-5 years 5 years
------------ ------------ ------------ ------------ ------------
Operating Leases $ 1,034,096 $ 204,389 $ 432,913 $ 396,794 --
Consulting Contracts 79,000 79,000 -- -- --
Employment contracts 121,563 121,563 -- -- --
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligation $ 1,234,659 $ 404,952 $ 432,913 $ 396,794 $ --
------------ ------------ ------------ ------------ ------------
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.
Non-GAAP Financial Measures
This 10-Q contains disclosure of our "sales bookings" for certain periods,
which may be deemed to be a non-GAAP financial measure within the meaning of
Regulation G promulgated by the Securities and Exchange Commission. We believe
that discussion of our sales bookings provides investors with additional
information regarding revenues it has received in respect of products and
services that have been shipped to a customer, but which are required to be
deferred for a period of less than one year under applicable principles of GAAP.
The disclosure of "sales bookings" may not be comparable to similarly titled
measures reported by other companies. "Sales bookings," while providing useful
information, should not be considered in isolation or as an alternative to other
financial measures determined in accordance with GAAP.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, cash equivalents and marketable
securities. The Company maintains cash between two financial institutions. The
marketable securities consist primarily of short term investment grade corporate
and government bonds and Certificate of Deposits. The Company performs periodic
evaluations of the relative credit standing of these institutions.
14
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 changes in our internal controls over
financial reporting that materially affected or are reasonably likely to
materially 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, 2007, 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
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 began in 2005 and continues 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 Proceedings
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. The principals moved to dismiss the claims against them, and Tricom
moved to dismiss the false advertising claims, which motions have been
administratively terminated by the Court. On August 1, 2005, defendants filed an
Answer and Affirmative Defenses to the Second Amended Complaint and Tricom filed
a declaratory counterclaim. On November 2, 2005, the Court allowed Tricom to
plead two additional defenses and declaratory counterclaims in the case, and on
January 3, 2006, the parties filed a Stipulation of Dismissal of the Estoppel
and Unenforceability Counterclaims and Affirmative Defenses. On February 28,
2006, the parties filed a Supplemental Proposed Joint Pretrial Order, and on
March 1, 2006, the Court certified that fact discovery in this action was
complete.
15
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
(a) 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
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date - May 12, 2006 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