UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at August 10, 2006
----- ------------------------------
Common Stock, $.001 par value 12,150,328
Intelli-Check, Inc.
Index
Page
-----
Part I Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 2006 (Unaudited)
and December 31, 2005 1
Statements of Operations for the three and six months ended
June 30, 2006 and 2005 (Unaudited) 2
Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 (Unaudited) 3
Statements of Stockholders' Equity for the six months ended
June 30, 2006 (Unaudited) 4
Notes to Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
Part II Other Information
Item 1. Legal Proceedings 17-18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Significant Holders 18
Item 6. Exhibits 19
Signatures 20
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
June 30, December 31,
2006 2005
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 356,545 $ 528,250
Marketable securities and short-term investments 4,739,134 5,263,308
Accounts receivable, net of allowance of $2,957 and $28,467,
respectively 240,781 408,542
Inventory 91,038 125,981
Other current assets 587,163 419,279
------------ ------------
Total current assets 6,014,661 6,745,360
PROPERTY AND EQUIPMENT, net 98,800 92,246
PATENT COSTS, net 33,275 36,379
OTHER ASSETS 34,916 34,916
------------ ------------
Total assets $ 6,181,652 $ 6,908,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 293,601 $ 371,521
Accrued expenses 494,886 389,742
Deferred revenue 990,983 694,958
------------ ------------
Total current liabilities 1,779,470 1,456,221
OTHER LIABILITIES 134,213 62,995
------------ ------------
Total liabilities 1,913,683 1,519,216
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized;
12,150,328 and 12,058,240 shares issued and outstanding, respectively 12,150 12,058
Deferred compensation -- (263,460)
Additional paid-in capital 45,246,472 44,748,969
Accumulated deficit (40,990,653) (39,107,882)
------------ ------------
Total stockholders' equity 4,267,969 5,389,685
------------ ------------
Total liabilities and stockholders' equity $ 6,181,652 $ 6,908,901
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES $ 717,821 $ 996,967 $ 1,253,668 $ 1,293,799
COST OF REVENUES (221,827) (116,032) (402,677) (218,664)
----------- ----------- ----------- -----------
Gross profit 495,994 880,935 850,991 1,075,135
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling 415,151 306,603 795,068 627,405
General and administrative 820,752 536,386 1,538,442 1,761,491
Research and development 254,020 239,792 512,725 473,722
----------- ----------- ----------- -----------
Total operating expenses 1,489,923 1,082,781 2,846,235 2,862,618
----------- ----------- ----------- -----------
Loss from operations (993,929) (201,846) (1,995,244) (1,787,483)
Interest income 56,200 20,003 112,473 36,037
----------- ----------- ----------- -----------
Net loss (937,729) (181,843) (1,882,771) (1,751,446)
Accretion of convertible redeemable
preferred stock costs -- -- -- (160,722)
Dividend on convertible redeemable
preferred stock -- -- -- (36,822)
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders $ (937,729) $ (181,843) $(1,882,771) $(1,948,990)
=========== =========== =========== ===========
PER SHARE INFORMATION
Net loss per common share -
Basic and diluted $ (.08) $ (.02) $ (.16) $ (.18)
=========== =========== =========== ===========
Weighted average common shares
used in computing per share amounts -
Basic and diluted 12,143,392 10,765,064 12,116,090 10,621,407
=========== =========== =========== ===========
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,882,771) $(1,751,446)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 15,810 28,362
Noncash stock based compensation expense 411,356 220,250
Amortization of deferred compensation 129,756 70,931
Recovery of amortization of deferred compensation (53,317) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 167,761 (586,383)
Decrease in inventory 34,943 115,529
(Increase) in other current assets (167,884) (17,708)
Increase in accounts payable and accrued expenses 27,224 20,888
Increase in deferred revenue 296,025 171,435
Increase in other liabilities -- 71,218
----------- -----------
Net cash used in operating activities (949,879) (1,728,142)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities and short term investments (3,347,911) (100,000)
Sales of marketable securities and short term investments 3,872,085 2,708,796
Purchases of property and equipment (19,260) (10,459)
----------- -----------
Net cash provided by investing activities 504,914 2,598,337
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 273,260 129,700
Payment of deferred financing costs -- (109,695)
Payment of dividend to preferred stockholder -- (97,315)
----------- -----------
Net cash provided by (used in) financing activities 273,260 (77,310)
----------- -----------
(Decrease) increase in cash and cash equivalents (171,705) 792,885
CASH AND CASH EQUIVALENTS, beginning of period 528,250 1,750,485
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 356,545 $ 2,543,370
=========== ===========
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 $ 16,006 $ 84,774
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Statement of Stockholders' Equity
For the Six Months Ended June 30, 2006
(Unaudited)
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 -- -- 361,000 -- -- 361,000
Exercise of options 83,000 83 273,177 -- -- 273,260
Issuance of stock from cashless exercise of
stock options 6,204 6 (6) -- -- --
Issuance of stock as director's compensation 2,884 3 16,003 16,006
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 -- -- -- -- (1,882,771) (1,882,771)
---------- ------- ----------- --------- ------------ -----------
BALANCE, June 30, 2006 12,150,328 $12,150 $45,246,472 $ -- $(40,990,653) $ 4,267,969
========== ======= =========== ========= ============ ===========
See accompanying notes to financial statements
4
Intelli-Check, Inc.
Notes to Financial Statements
(Unaudited)
Note 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited interim financial statements
furnished herein include all adjustments necessary for a fair presentation of
the Company's financial position at June 30, 2006 and the results of its
operations for the six and three months ended June 30, 2006 and 2005,
stockholders' equity for the six months ended June 30, 2006 and cash flows for
the six months ended June 30, 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 six month period ended June 30, 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 June 30, 2006
and December 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 $314,395 and $467,991, respectively.
5
Marketable Securities and Short Term Investments
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 4.46%. The carrying value of the marketable
securities as of June 30, 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.
Royalties from the licensing of our technology 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
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 was being marketed for
sale through June 30, 2006. During the six months ended June 30, 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
$33,000.
Business Concentrations and Credit Risk
The Company recorded revenues for two of its customers which accounted for
approximately 43% of total revenues for the six months ended June 30, 2006. As a
result, the balance due from these customers was 24% of accounts receivable as
of June 30, 2006, of which 39.1% of the amount due was collected as of August 7,
2006. During the second quarter ended June 30, 2005, the Company made a large
credit sale to one customer that accounted for approximately 54.1% and 70.2%,
respectively of total revenues for the six month and three month periods ended
June 30, 2005.
6
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123(R). SFAS No. 123(R)
eliminates the option to use the intrinsic value method of accounting that was
provided in APB #25, which generally resulted in no compensation expense
recorded in the financial statements related to the issuance of equity awards to
employees. SFAS 123(R) requires that the cost resulting from all share based
payment transactions be recognized in the financial statements. SFAS No. 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 No. 123(R) using a modified prospective
application, as permitted under SFAS No. 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 and six months ended June 30, 2005.
Three months ended Six months ended
------------------ ----------------
June 30, 2005 June 30, 2005
------------- -------------
Net loss attributable to common stockholders, as reported ($181,843) ($1,948,990)
Add:
Total stock based employee compensation expense determined
under fair value based method for all awards 706,849 1,086,744
--------- -----------
Net loss, pro forma ($888,692) ($3,035,734)
Basic and diluted loss per share, as reported ($0.02) ($0.18)
Basic and diluted loss per share, pro forma ($0.08) ($0.29)
The fair value of the Company's stock-based awards issued to employees
prior to 2006 was estimated at the date of grant using the Black-Scholes method,
assuming no dividends and using an expected life of 5 to 10 years, volatility of
60% to 90%, and a risk free rate of 2.0% to 5.0%.
The fair value of the Company's stock-based awards issued to employees in
the first and second quarters of 2006 was estimated at the date of grant using
the Black-Scholes method, assuming no dividends and using an expected life of 5
to 10 years, volatility of 50% to 74% and a risk free rate of 4.2% to 5.3%.
Beginning with our 2006 fiscal year, with the adoption of SFAS 123(R), we
included stock based compensation in operating expenses for the cost of stock
options. Stock based compensation expense for the three months and six months
ended June 30, 2006 was $241,000 and $361,000, respectfully.
7
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.
In order to retain and attract qualified personnel necessary for the success of
the Company, the Company adopted several Stock Option Plans from 1998 through
2004 (and an amendment to the 2004 plan in 2006 pursuant to which the plan was
renamed the "2006 Equity Incentive Plan" and amended to provide for the issuance
of other types of equity incentives such as restricted stock grants) covering up
to 3,250,000 of the Company's common shares, pursuant to which officers,
directors, key employees and consultants to the Company are eligible to receive
incentive stock options and nonqualified stock options. The Compensation
Committee of the Board of Directors administers these Plans and determines the
terms and conditions of options granted, including the exercise price. These
Plans generally provide that all stock options will expire within ten years of
the date of grant. Incentive stock options granted under these Plans must be
granted at an exercise price that is not less than the fair market value per
share at the date of the grant and the exercise price must not be less than 110%
of the fair market value per share at the date of the grant for grants to
persons owning more than 15% of the voting stock of the Company. These Plans
also entitle non-employee directors to receive grants of non-qualified stock
options as approved by the Board of Directors.
Stock option activity under the 1998, 1999, 2001, 2003 and 2006 Plans during the
periods indicated below is as follows:
Number Of Options(1) Weighted Average
Exercise Price
-------------------- ----------------
Outstanding at January 1, 2006 2,764,955 $6.77
Granted 115,550 5.94
Canceled (149,500) 8.88
Exercised (108,000) 3.22
--------- ----
Outstanding at June 30, 2006 2,623,005 $6.76
========= =====
(1)Included in the table are 839,425 non-plan options, of which all options are
fully vested.
The weighted-average remaining life of the options outstanding at June 30,
2006 is 3.21 years. The weighted-average grant-date fair value of the options
granted during the six month period ended June 30, 2006 was $3.16.
As of June 30, 2006, the Company had 2,443,055 options exercisable with a
weighted average exercise price of $6.76. As of June 30, 2006, the Company had
732,311 options available for future grant under the 1998, 1999, 2001, 2003 and
2006 Plans.
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.
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 shares then
outstanding, but does not include the impact of stock options and warrants then
outstanding, as the effect of their inclusion would be antidilutive.
8
The following table summarizes the additional number of common shares that
would be outstanding assuming that all the options and warrants that were
outstanding as of June 30, 2006 and 2005 had been converted:
2006 2005
--------- ---------
Stock options 2,623,005 2,990,149
Warrants 938,636 328,061
--------- ---------
Total 3,561,641 3,318,210
--------- ---------
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 a consultant 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 that if 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. On June 29, 2006, the Court held a
pre-motion conference at the request of the Company to discuss the Company's
proposed motion to disqualify defendants' counsel for a conflict of interest.
Pursuant to the Court's order, the Company served moving papers upon defendants
on July 14, 2006 and defendants served opposition to the motion on around July
28, 2006. The Company served a reply to the opposition on August 11, 2006 and
filed the motion with the Court. Also, on or about July 21, 2006, defendants
filed with the Court a motion for claim construction together with the Company's
opposition to defendants' motion and defendants' reply to the opposition. The
Court has not scheduled a hearing date for either motion and there is no trial
date pending.
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.
9
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. Extension of Rights
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 June 30,
2006, we had an accumulated deficit of approximately $41 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.
Our ID-Check's patented 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 instances
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 General Dynamics (formally Anteon),
integrators in the defense industry, Intermec Technologies and Metrologic,
hardware manufacturers, to utilize our systems and software as the proposed or
potential verification application for their proposed solutions for
credentialing in the government sector 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.
10
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.
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.
11
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.
Royalties from licensing our technology 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
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 six months ended June 30, 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
$33,000.
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
June 30, 2006, due to the uncertainty of the realizability of those assets.
12
E. Commitments and Contingencies
We are currently involved in certain legal proceedings as discussed in
footnote 5, above. Other than as described in footnote 5 above, we do not
believe these legal proceedings will have a material adverse effect on our
financial position, results of operations or cash flows.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
(b) Results of Operations
Comparison of the six months ended June 30, 2006 to the six months ended
June 30, 2005.
Revenues decreased by 3.1%, or $40,131, from $1,293,799 for the six months
ended June 30, 2005 to $1,253,668 for the six months ended June 30, 2006.
Revenues for the period ended June 30, 2006 consisted of revenues from
distributors of $666,835, revenues from direct sales to customers of $572,024
and royalty payments of $14,809. Sales bookings, which represent shipments of
products and contracted services, increased by 4.6% from $1,516,871 for the six
months ended June 30, 2005 to $1,587,130 for the six months ended June 30, 2006.
We are optimistic that sales opportunities should continue to increase as a
result of our recent successes 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 June 30, 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 $835,000.
Gross profit decreased by 20.8%, or $224,144, from $1,075,135 for the six
months ended June 30, 2005 to $850,991 for the six months ended June 30, 2006.
Our gross profit as a percentage of revenues amounted to 67.9% for the six
months ended June 30, 2006 compared to 83.1% for the six months ended June 30,
2005. In 2005, the gross profit percentage was favorably impacted as a result of
a large "software only" sale to a significant retailer, which typically has
higher margins than equipment or bundled sales. Even though we did not have a
large "software only" sale in 2006, our gross profit percentage was still
generally favorable relative to prior periods resulting from a higher revenue
mix of our licensing products over our bundled sales of hardware and software
products which have a lower gross profit percentage
Operating expenses, which consist of selling, general and administrative
and research and development expenses, decreased 1% from $2,862,618 for the six
months ended June 30, 2005 to $2,846,235 for the six months ended June 30, 2006.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 26.7% from $627,405 for the six months ended June 30, 2005
to $795,068 for the six months ended June 30, 2006 primarily due to an increase
in salaries, commissions, travel expense and employee costs of approximately
$98,000 and an increase in non cash expenses from the granting of stock options
totaling approximately $70,000. 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 12.7% from $1,761,491 for the six months ended June 30, 2005
to $1,538,442 for the six months ended June 30, 2006, primarily as a result of a
decrease in expenses relating to investor relations fees of approximately
$50,000, a decrease in legal fees of approximately $296,000 relating to
decreased activity on our patent infringement litigation, a decrease in rent
expense of approximately $25,000 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
$41,000, an increase in non-cash expenses from the granting of stock options
totaling approximately $80,000 and an increase in board of directors fees and
expenses of approximately $16,000. Research and development expenses, which
consist primarily of salaries and related costs for the development of our
products, increased 8.2% from $473,722 for the six months ended June 30, 2005 to
$512,725 for the six months ended June 30, 2006, primarily as a result of
increases in employee salaries and related expenses of approximately $70,000,
which were partially offset by an decrease in consulting expenses for product
development of approximately $26,000. 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.
13
Interest income increased from $36,037 for the six months ended June 30,
2005 to $112,473 for the six months ended June 30, 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
income taxes.
As a result of the factors noted above, our net loss for the six months
ended June 30, 2006 of $1,882,771, which included $503,605 of non-cash expenses,
increased from $1,751,446, which included $319,543 of non-cash expenses for the
six months ended June 30, 2005.
Comparison of the three months ended June 30, 2006 to the three months
ended June 30, 2005.
Revenues decreased by 28%, or $279,146, from $996,967 for the three months
ended June 30, 2005 to $717,821 for the three months ended June 30, 2006.
Revenues for the period ended June 30, 2006 consisted of revenues from
distributors of $372,471, revenues from direct sales to customers of $338,617
and royalty payments of $6,733. Sales bookings, which represent shipments of
products and contracted services, decreased by 25.7% from $1,145,211 for the
three months ended June 30, 2005 to $850,699 for the three months ended June 30,
2006. Revenues and sales bookings decreases for the 2006 period as compared to
those reported for the 2005 period resulted from the fact that a large direct
software only sale to a significant retailer was made during the second quarter
of 2005. Revenues and sales bookings for the 2006 period were in line with the
mix of sales for periods prior to 2005 and therefore, we deferred more of the
sales bookings for the 2006 period as compared to 2005, which will be recognized
in future periods in accordance with our revenue recognition policy. We are
optimistic that sales opportunities should continue to increase as a result of
our recent successes in the retail market, the positive results of certain of
our recent marketing tests and new opportunities that have developed as a result
of new agreements, as well as our introduction of additional products in 2005
and 2006, together with legislative efforts to improve identity management and
security and control sales of age restricted products to under-age purchasers.
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.
Gross profit decreased by 43.7%, or $384,941, from $880,935 for the three months
ended June 30, 2005 to $495,994 for the three months ended June 30, 2006. Our
gross profit as a percentage of revenues amounted to 69.1% for the three months
ended June 30, 2006 compared to 88.4% for the three months ended June 30, 2005.
In 2005, the gross profit percentage was favorably impacted as a result of a
large software only sale to a significant retailer. Even though we did not have
a large software sale in 2006, our gross profit percentage was generally
favorable relative to prior periods resulting from a higher revenue mix of our
licensing products over our bundled sales of hardware and software products
which have a lower gross profit percentage.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 37.6% from $1,082,781 for the
three months ended June 30, 2005 to $1,489,923 for the three months ended June
30, 2006. Selling expenses, which consist primarily of salaries and related
costs for marketing, increased 35.4% from $306,603 for the three months ended
June 30, 2005 to $415,151 for the three months ended June 30, 2006 primarily due
to an increase in salaries, commissions and employee costs of approximately
$28,000 and an increase in non cash expenses from the granting of stock options
totaling approximately $90,000. 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 53.0% from $536,386 for the three months ended June 30, 2005
to $820,752 for the three months ended June 30, 2006, primarily as a result of
an increase in non-cash expenses from the granting of stock options totaling
approximately $103,000, an increase in legal fees of approximately $203,000
relating to our patent infringement litigation, which were partially offset by a
decrease in investor relations expenses of approximately $26,000 and a reduction
in rent expense of approximately $13,000. Research and development expenses,
which consist primarily of salaries and related costs for the development and
testing of our products, increased 5.9% from $239,792 for the three months ended
June 30, 2005 to $254,020 for the three months ended June 30, 2006, primarily as
a result of increases in salaries and related expenses of approximately $17,000.
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.
14
Interest income increased from $20,003 for the three months ended June 30,
2005 to $56,200 for the three months ended June 30, 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 for the three months
ended June 30, 2006 of $937,729, which included $263,765 of non-cash expenses,
increased from $181,843, which included $73,141 of non-cash expenses, for the
three months ended June 30, 2005.
(c) Liquidity and Capital Resources
Cash used in operating activities for the six months ended June 30, 2006
of $949,879 resulted primarily from the net loss of $1,882,771 and the increase
of other current assets of $167,884 consisting of deferred cost of revenues,
which was offset by an increase of deferred revenue of $296,025, a decrease of
accounts receivable of $167,761, recognition of noncash stock based compensation
expense resulting primarily from the granting and exercise of stock options of
$411,356, and amortization of deferred compensation of $129,756. Cash used in
operating activities for the six months ended June 30, 2005 of $1,728,142
resulted primarily from the net loss of $1,751,446 and an increase in accounts
receivable of $586,383 resulting from a large sale in the second quarter of
2005, which was primarily offset by recognition of noncash stock based
compensation expense resulting from the extension and exercise of stock options
of $220,250 and an increase in deferred revenue of $171,435. Cash provided by
investing activities for the six months ended June 30, 2006 of $504,914 resulted
primarily from net sales exceeding purchases of marketable securities and short
term investments of $524,174. Cash provided by investing activities for the six
months ended June 30, 2005 of $2,598,337 resulted primarily from the sale of
marketable securities and short term investments of $2,708,796. Cash provided by
financing activities was $273,260 for the six months ended June 30, 2006 and
resulted from the proceeds of $273,260 from the issuance of common stock from
the exercise of stock options. Cash used in financing activities was $77,310 for
the six months ended June 30, 2005 and was primarily related to proceeds of
$129,700 from the issuance of common stock from the exercise of stock options,
which was partially offset by the payment of deferred financing costs of
$109,695 and the dividend payment of $97,315 to a preferred shareholder.
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 August 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 six months ended June 30, 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 June 30, 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.
15
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.
(d) Net Operating Loss Carry forwards
As of June 30, 2006 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $32.5 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 June 30, 2006:
Payments Due by Period
Less than
Total One Year 1-3 years 4-5 years After 5 years
---------- --------- --------- --------- -------------
Operating Leases $1,031,910 $ 204,389 $ 431,446 $ 396,075 --
Consulting Contracts 36,000 36,000 -- -- --
Employment contracts 81,042 81,042 -- -- --
---------- --------- --------- --------- ---
Total Contractual Cash Obligation $1,148,952 $ 321,431 $ 431,446 $ 396,075 $--
---------- --------- --------- --------- ---
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.
16
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.
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. On June 29, 2006, the Court held a pre-motion conference at our
request to discuss our proposed motion to disqualify defendants' counsel for a
conflict of interest. Pursuant to the Court's order, we served moving papers
upon defendants on July 14, 2006 and defendants served opposition to the motion
on around July 28, 2006. We served a reply to the opposition on August 11, 2006
and filed the motion with the Court. Also, on or about July 21, 2006, defendants
filed with the Court a motion for claim construction together with our
opposition to defendants' motion and defendants' reply to the opposition. The
Court has not scheduled a hearing date for either motion and there is no trial
date pending.
17
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal
or regulatory proceeding, or arbitration, the outcome of which is expected to
have a material adverse effect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In June 2006, we issued 2,884 shares of our restricted common stock to two
directors pursuant to our 2006 Equity Incentive Plan. The market price of the
shares issued was equal to $16,006 on the date of grant, based on the closing
sale price of such common stock on the American Stock Exchange, and were issued
in lieu of annual fees for each such director. We did not receive any cash in
connection with the grant. We issued the foregoing securities in reliance on
Section 4(2) of the Securities Act, based on the identity and number of persons.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held June 16, 2006.
A proposal to elect one (1) director to serve for a three-year term was
approved by the stockholders. The nominee received the following votes:
Name Votes For Votes Withheld
--------- ---------- --------------
Jeff Levy 10,883,709 234,947
The following persons continued in their positions as our directors:
Frank Mandelbaum, Ed Winiarz, Arthur Money, Guy Smith, Ashok Rao, and Jay
Maxwell.
Our stockholders ratified the appointment of Amper, Politziner &
Mattia, P.C. as the Company's independent public accountants for the year ended
December 31, 2006. This proposal received the following votes:
For Against Abstain
---------- ------- -------
11,085,094 33,562 0
Our stockholders ratified and approved our 2006 Equity Incentive Plan,
amending our 2004 Stock Option Plan. This proposal received the following votes:
For Against Abstain Not Voted
---------- ------- ------- ---------
3,748,706 641,989 4,001 6,723,960
18
Item 6. Exhibits
(a) The following exhibits are filed as part of the Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- -----------
10.1* 2006 Equity Incentive Plan
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 18 U.S.C. Section 1350 Certifications
* Incorporated by reference to Exhibit C to Intelli-Check's Proxy
Statement filed with the SEC on May 19, 2006
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date - August 14, 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
20