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 September 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 November 10, 2006
----- --------------------------------
Common Stock, $.001 par value 12,193,278
Intelli-Check, Inc.
Index
Part I Financial Information Page
-----
Item 1. Financial Statements
Balance Sheets - September 30, 2006 (Unaudited)
and December 31, 2005 1
Statements of Operations for the three and nine months ended
September 30, 2006 and 2005 (Unaudited) 2
Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (Unaudited) 3
Statements of Stockholders' Equity for the nine months ended
September 30, 2006 (Unaudited) 4
Notes to Financial Statements 5-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
Part II Other Information
Item 1. Legal Proceedings 18-19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 20
Exhibits
10.1 Letter of Understanding with Edwin Winiarz, dated November 10,
2006
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
September 30, December 31,
2006 2005
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 392,318 $ 528,250
Marketable securities and short-term investments 3,997,379 5,263,308
Accounts receivable, net of allowance of $28,467
as of December 31, 2005 357,803 408,542
Inventory 119,470 125,981
Other current assets 475,174 419,279
------------ ------------
Total current assets 5,342,144 6,745,360
PROPERTY AND EQUIPMENT, net 90,547 92,246
PATENT COSTS, net 31,722 36,379
OTHER ASSETS 34,916 34,916
------------ ------------
Total assets $ 5,499,329 $ 6,908,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 369,475 $ 371,521
Accrued expenses 329,686 389,742
Deferred revenue 798,757 694,958
------------ ------------
Total current liabilities 1,497,918 1,456,221
OTHER LIABILITIES 115,968 62,995
------------ ------------
Total liabilities 1,613,886 1,519,216
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized;
12,174,078 and 12,058,240 shares issued and outstanding, respectively 12,174 12,058
Deferred compensation -- (263,460)
Additional paid-in capital 45,515,312 44,748,969
Accumulated deficit (41,642,043) (39,107,882)
------------ ------------
Total stockholders' equity 3,885,443 5,389,685
------------ ------------
Total liabilities and stockholders' equity $ 5,499,329 $ 6,908,901
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES $ 771,774 $ 430,083 $ 2,025,442 $ 1,723,882
COST OF REVENUES (308,520) (176,634) (711,197) (395,298)
----------- ----------- ----------- -----------
Gross profit 463,254 253,449 1,314,245 1,328,584
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling 347,725 307,976 1,142,793 935,381
General and administrative 594,802 519,139 2,133,244 2,280,630
Research and development 229,421 238,531 742,146 712,253
----------- ----------- ----------- -----------
Total operating expenses 1,171,948 1,065,646 4,018,183 3,928,264
----------- ----------- ----------- -----------
Loss from operations (708,694) (812,197) (2,703,938) (2,599,680)
Interest income 57,304 46,885 169,777 82,922
----------- ----------- ----------- -----------
Net loss (651,390) (765,312) (2,534,161) (2,516,758)
Accretion of convertible
redeemable preferred stock costs -- -- -- (160,722)
Dividend on convertible
redeemable preferred stock -- -- -- (36,822)
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders $ (651,390) $ (765,312) $(2,534,161) $(2,714,302)
=========== =========== =========== ===========
PER SHARE INFORMATION
Net loss per common share -
Basic and diluted $ (.05) $ (.07) $ (.21) $ (.25)
=========== =========== =========== ===========
Weighted average common shares
used in computing per share
amounts -
Basic and diluted 12,156,215 11,473,588 12,129,612 10,908,623
=========== =========== =========== ===========
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2006 September 30, 2005
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,534,161) $(2,516,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 26,858 41,356
Noncash stock based compensation expense 567,356 223,450
Amortization of deferred compensation 129,756 75,124
Recovery of amortization of deferred compensation (53,317) --
Changes in assets and liabilities:
Decrease in accounts receivable 50,739 132,544
Decrease in inventory 6,511 143,538
(Increase) in other current assets (55,895) (64,457)
(Decrease) in accounts payable and accrued expenses (62,102) (266,868)
Increase in deferred revenue 103,799 254,868
Increase(decrease) in other liabilities 52,973 (35,001)
----------- -----------
Net cash used in operating activities (1,767,483) (2,012,204)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and short term investments (4,822,061) (6,288,113)
Sales of marketable securities and short term investments 6,087,990 4,417,391
Purchases of property and equipment (20,502) (12,095)
----------- -----------
Net cash provided by (used in) investing activities 1,245,427 (1,882,817)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock from exercise of
stock options 386,124 129,700
Net proceeds for issuance of common stock from secondary offering -- 4,423,342
Payment of dividend to preferred stockholder -- (97,315)
----------- -----------
Net cash provided by financing activities 386,124 4,455,727
----------- -----------
(Decrease) increase in cash and cash equivalents (135,932) 560,706
CASH AND CASH EQUIVALENTS, beginning of period 528,250 1,750,485
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 392,318 $ 2,311,191
=========== ===========
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 Nine Months Ended September 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 -- -- 517,000 -- -- 517,000
Exercise of options 106,750 107 386,017 -- -- 386,124
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 -- -- -- -- (2,534,161) (2,534,161)
---------- ------- ----------- ---------- ------------ -----------
BALANCE, September 30, 2006 12,174,078 $12,174 $45,515,312 $ -- $(41,642,043) $ 3,885,443
========== ======= =========== ========== ============ ===========
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 September 30, 2006 and the results of its
operations for the nine and three months ended September 30, 2006 and 2005,
stockholders' equity for the nine months ended September 30, 2006 and cash flows
for the nine months ended September 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 nine month period ended September 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.
Recently Issued Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN
48"), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the Company recognize in the financial
statements the impact of a tax position that is more likely than not to be
sustained upon examination based on the technical merits of the position. The
provisions of FIN 48 will be effective as of the beginning of the Company's 2007
fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on the financial statements.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements ("SAB 108"). SAB 108 requires that registrants quantify
errors using both a balance sheet and income statement approach and evaluate
whether either approach results in a misstated amount that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 will
be effective for the Company in the fourth quarter of 2006 and is not expected
to have a material impact on the Company's financial statements.
5
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements ("FAS 157"). FAS 157 establishes a single authoritative definition
of fair value, sets out a framework for measuring fair value, and expands on
required disclosures about fair value measurement. FAS 157 will be effective for
the Company on January 1, 2008 and will be applied prospectively. The provisions
of FAS 157 are not expected to have a material impact on the Company's financial
statements.
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 September 30,
2006 and December 31, 2005, cash equivalents included money market funds and
other liquid short-term debt instruments (with maturities at date of purchase of
three months or less) of $361,374 and $467,991, respectively.
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 one year
with a weighted average interest rate of 4.91%. The carrying value of the
marketable securities as of September 30, 2006 approximated their fair market
value. Marketable Securities and Short Term Investments include corporate and
government bonds and certificates of deposits.
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 and Deferred Revenue
The Company sells its products directly through its sales force and
through distributors. Revenue from direct sales of our products is recognized
when shipped to the customer and title has passed. The Company's products
require continuing service or post contract customer support and performance by
it; 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,
the Company does 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, the Company recognizes sales from licensing of its patented
software to customers. The Company's licensed software requires continuing
service or post contract customer support and performance by it; 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.
6
Royalties from the licensing of the Company's 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 that we
purchased in 1999 and 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 have written off the total value of the ID-Check terminals and
as of June 30, 2006, we ceased marketing and offering them for sale. A portion
of the remaining units in inventory will be held to support existing customers.
Business Concentrations and Credit Risk
The Company recorded revenues for two of its customers which accounted for
approximately 43% of total revenues for the nine months ended September 30,
2006. As a result, the balance due from these customers was 53% of accounts
receivable as of September 30, 2006, of which the total amount due was collected
as of November 6, 2006.
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 No. 25, which generally resulted in no compensation expense
recorded in the financial statements related to the issuance of equity awards to
employees. SFAS No. 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 nine months ended September 30, 2005.
7
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net loss attributable to common stockholders, as reported ($765,312) ($2,714,302)
Add:
Total stock based employee compensation expense determined
under fair value based method for all awards 1,011,171 2,097,915
----------- -----------
Net loss, pro forma ($1,776,483) ($4,812,217)
Basic and diluted loss per share, as reported ($0.07) ($0.25)
Basic and diluted loss per share, pro forma ($0.15) ($0.44)
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, second and third 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 return of
4.2% to 5.3%.
Beginning with our 2006 fiscal year, with the adoption of SFAS No. 123(R),
we included stock based compensation in operating expenses for the cost of stock
options. Stock based compensation expense for the three and nine months ended
September 30, 2006 was $156,000 and $517,000, respectfully.
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)
(collectively, the "Plans") 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 Plans during the periods indicated below
is as follows:
Weighted Average Aggregate Intrinsic
Number Of Options(1) Exercise Price Value
-------------------- ---------------- -------------------
Outstanding at January 1, 2006 2,764,955 $6.77
Granted 115,550 5.94
Forfeited and expired (249,000) 8.56
Exercised (131,750) 3.50
--------- -----
Outstanding at September 30, 2006 2,499,775 $6.68 $1,659,000
========= ===== ==========
(1) Included in the table are 789,425 non-plan options, of which all options
are fully vested.
8
The weighted-average remaining life of the options outstanding at
September 30, 2006 is 3.48 years. The per share weighted-average grant-date fair
value of the options granted during the nine month period ended September 30,
2006 was $3.16. As of September 30, 2006, unrecognized compensation expense
related to granted and non vested stock options amounted to approximately
$306,000.
As of September 30, 2006, the Company had 2,331,255 options exercisable
with a weighted average exercise price of $6.80. As of September 30, 2006, the
Company had 831,811 options available for future grant under the 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.
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 September 30, 2006 and 2005 had been converted:
2006 2005
--------- ---------
Stock options 2,499,755 2,788,149
Warrants 938,636 1,053,061
--------- ---------
Total 3,438,391 3,842,210
--------- ---------
Note 3. Investment Firm Relationships
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, with all future fees based upon the successful
consummation of a transaction.
Effective September 21, 2006, the Company agreed to continue its two (2)
year agreement with its public and investor relations firm and modified its
payment terms to provide monthly payments of $6,000 through September 21, 2007.
All other terms and conditions remained unchanged.
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, it would pay Mr. Mandelbaum two (2) years of base salary in twelve (12)
equal monthly installments. Effective January 1, 2007, the Board of Directors
increased Mr. Mandelbaum's annual base salary to $264,000. In addition, the
Company will grant Mr. Mandelbaum, on November 16, 2006, an option to purchase
25,000 shares of common stock at an exercise price equal to the closing price on
the date of grant.
9
On November 10, 2006, the Company entered into a letter of understanding
with its Chief Financial Officer, Mr. Winiarz, which provides for an annual base
salary of $175,000. This agreement will become effective on January 1, 2007. His
current employment contract terminates on December 31, 2006. In addition, the
Company will grant Mr. Winiarz, on November 16, 2006, an option to purchase
25,000 shares of common stock at an exercise price equal to the closing price on
the date of grant. The Company also agreed in the letter of understanding that
if it were to terminate Mr. Winiarz for any reason other than cause, it would
pay Mr. Winiarz two (2) years of 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,
the 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.
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 until February 13, 2007. Such
options were originally due to expire May 14, 2006. 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.
10
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. Therefore, we have 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 September 30,
2006, we had an accumulated deficit of approximately $41.6 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, now
part of Fidelity National, 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, Northrop Grumman and General Dynamics
(formally Anteon), integrators in the defense industry, and 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.
11
We have developed additional software products that utilize our patented
software technology. Our latest products include ID-Check(R) Portal, ID-Check(R)
POS, ID-Check(R) BHO, ID-Traveler and ID-Prove. ID-Check(R) Portal utilizes our
ID-Check technology together with an additional layer of security to prove an
individual's claimed identity. 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 the ID-Check(R) technology
as a "plug-in," to Internet Explorer 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.
A. Revenue Recognition and Deferred Revenue
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.
12
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
have written off the total value of the ID-Check terminals and as of June 30,
2006, we ceased marketing and offering them for sale. A portion of the remaining
units in inventory will be held to support existing customers.
C. Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123(R). 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. SFAS No. 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 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
September 30, 2006, due to the uncertainty of the realizability of those assets.
E. Commitments and Contingencies
We are currently involved in certain legal proceedings as discussed in
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 nine months ended September 30, 2006 to the nine months
ended September 30, 2005.
Revenues increased by 17.5%, or $301,560, from $1,723,882 for the nine
months ended September 30, 2005 to $2,025,442 for the nine months ended
September 30, 2006. Revenues for the period ended September 30, 2006 consisted
of revenues from distributors of $789,650, revenues from direct sales to
customers of $1,213,543 and royalty payments of $22,249. Sales bookings, which
represent shipments of products and contracted services, increased by 6.5% from
$2,003,719 for the nine months ended September 30, 2005 to $2,133,557 for the
nine months ended September 30, 2006. Sales increased and we continue to be
optimistic that sales opportunities should continue to increase as a result of
our recent successes in the retail market, continued sales to new customers, the
positive results of certain of our recent marketing tests and our introduction
of additional products in 2005 and 2006, as well as legislative efforts to
improve identity management and security and to 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 September 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 $1,169,000.
13
Gross profit remained stable at $1,328,584 for the nine months ended
September 30, 2005 as compared to $1,314,245 reported for the nine months ended
September 30, 2006. Our gross profit as a percentage of revenues amounted to
64.9% for the nine months ended September 30, 2006 compared to 77.1% for the
nine months ended September 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 other 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 2.3% from $3,928,264 for the
nine months ended September 30, 2005 to $4,018,183 for the nine months ended
September 30, 2006. Selling expenses, which consist primarily of salaries and
related costs for marketing, increased 22.2% from $935,381 for the nine months
ended September 30, 2005 to $1,142,793 for the nine months ended September 30,
2006 primarily due to an increase in salaries, commissions, travel expense and
employee costs of approximately $30,000 and an increase in non cash expenses
from the granting of stock options totaling approximately $171,000. 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 6.5% from $2,280,630 for the
nine months ended September 30, 2005 to $2,133,244 for the nine months ended
September 30, 2006, primarily as a result of a decrease in expenses relating to
investor relations fees of approximately $55,000, a decrease in legal fees of
approximately $110,000 relating to decreased activity on our patent infringement
litigation, a decrease of certain non-recurring costs relating to equity raising
activities totaling approximately $186,000, a decrease in rent expense of
approximately $37,000 due to the reduction in rented space and a recovery of bad
debts of approximately $26,000, which were partially offset by increases in
employee costs and related expenses and travel of approximately $70,000, an
increase in non-cash expenses from the granting of stock options totaling
approximately $172,000 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 4.2% from $712,253 for the nine months ended September 30, 2005 to
$742,146 for the nine months ended September 30, 2006, primarily as a result of
increases in employee salaries and related expenses of approximately $48,000,
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 also increase as we integrate
additional products and technologies with our patented ID-Check technology.
Interest income increased from $82,922 for the nine months ended September
30, 2005 to $169,777 for the nine months ended September 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 received on
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 nine months
ended September 30, 2006 of $2,534,161, which included $670,653 of non-cash
expenses, did not materially change as compared to the $2,516,758, which
included $339,930 of non-cash expenses reported for the nine months ended
September 30, 2005.
14
Comparison of the three months ended September 30, 2006 to the three
months ended September 30, 2005.
Revenues increased by 79.4%, or $341,691, from $430,083 for the three
months ended September 30, 2005 to $771,774 for the three months ended September
30, 2006. Revenues for the period ended September 30, 2006 consisted of revenues
from distributors of $122,815, revenues from direct sales to customers of
$640,799 and royalty payments of $8,160. Sales bookings, which represent
shipments of products and contracted services, increased by 12.4% from $486,330
for the three months ended September 30, 2005 to $546,427 for the three months
ended September 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 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 increased by 82.8%, or $209,805, from $253,449 for the three
months ended September 30, 2005 to $463,254 for the three months ended September
30, 2006. Our gross profit as a percentage of revenues remained stable at 60.2%
for the three months ended September 30, 2006 compared to 58.9% for the three
months ended September 30, 2005.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 10.0% from $1,065,646 for the
three months ended September 30, 2005 to $1,171,948 for the three months ended
September 30, 2006. Selling expenses, which consist primarily of salaries and
related costs for marketing, increased 12.9% from $307,976 for the three months
ended September 30, 2005 to $347,725 for the three months ended September 30,
2006 primarily due to an increase in salaries, commissions and employee costs of
approximately $32,000 and an increase in non cash expenses from the granting and
vesting of stock options totaling approximately $46,000, which were partially
offset by a decrease in marketing expenses of approximately $15,000 and a
decrease in convention expenses of approximately $20,000. General and
administrative expenses, which consist primarily of salaries and related costs
for general corporate functions, including executive, accounting, facilities and
fees for legal and professional services increased 14.6% from $519,139 for the
three months ended September 30, 2005 to $594,802 for the three months ended
September 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 $187,000 relating to our patent infringement
litigation, which were partially offset by a decrease of certain non-recurring
costs relating to equity raising activities totaling approximately $186,000 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, decreased 3.8% from $238,531 for the
three months ended September 30, 2005 to $229,421 for the three months ended
September 30, 2006, primarily as a result of decreases in salaries and related
expenses of approximately $14,000. As the Company experiences sales growth, we
expect that we will incur additional operating expenses to support this growth.
Research and development expenses may increase as we integrate additional
products and technologies with our patented ID-Check technology.
Interest income increased from $46,885 for the three months ended
September 30, 2005 to $57,304 for the three months ended September 30, 2006,
which is a result of higher interest rates received on 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 September 30, 2006 of $651,390, which included $167,048 of non-cash
expenses, decreased from $765,312 for the three months ended September 30, 2005,
which included $20,387 of non-cash expenses.
15
(c) Liquidity and Capital Resources
Cash used in operating activities for the nine months ended September 30,
2006 of $1,767,483 resulted primarily from the net loss of $2,534,161, which was
offset by an increase of deferred revenue of $103,799, recognition of noncash
stock based compensation expense resulting primarily from the granting and
vesting of stock options of $567,356, and amortization of deferred compensation
of $129,756. Cash used in operating activities for the nine months ended
September 30, 2005 of $2,012,204 resulted primarily from the net loss of
$2,516,758 and a decrease in accounts payable and accrued expenses of $266,868
resulting from payment and reduction of our legal fees, which were primarily
offset by recognition of noncash stock based compensation expense resulting from
the extension and exercise of stock options of $223,450, an increase in deferred
revenue of $254,868 due to increased sales of our products, a decrease in
accounts receivable of $132,544, a decrease in inventory of $143,538. Cash
provided by investing activities for the nine months ended September 30, 2006 of
$1,245,427 resulted primarily from net sales exceeding purchases of marketable
securities and short term investments of $1,265,929. Cash used in investing
activities for the nine months ended September 30, 2005 of $1,882,817 resulted
primarily from the net result of the sales of and investment of marketable
securities and short term investments of $1,870,722. Cash provided by financing
activities was $386,124 for the nine months ended September 30, 2006 and
resulted from the proceeds received from the issuance of common stock from the
exercise of stock options. Cash provided by financing activities was $4,455,727
for the nine months ended September 30, 2005 and was primarily related to net
proceeds from the issuance of common stock from the exercise of stock options of
$129,700 and from proceeds of our secondary offering of $4,423,342, which was
partially offset by the payment of dividends to preferred stock holders 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, which originally was October 2, 2002, 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 November 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 nine months ended
September 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 September 30, 2006, we cumulatively purchased 40,200 shares for a
total of 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.
(d) Net Operating Loss Carry forwards
As of September 30, 2006 the Company had net operating loss carry forwards
(NOL's) for federal income tax purposes of approximately $33 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.
16
Contractual Obligations
Below is a table, which presents our contractual obligations and
commitments at September 30, 2006:
Payments Due by Period
Less than After
Total One Year 1-3 years 4-5 years 5 years
---------- --------- --------- --------- -------
Operating Leases $ 932,190 $208,559 $438,022 $285,609 --
Consulting Contracts 36,000 36,000 -- -- --
Purchase Commitment 354,500 354,500 -- -- --
Employment contracts 40,521 40,521 -- -- --
---------- -------- -------- -------- ---
Total Contractual Cash Obligation $1,363,211 $639,580 $438,022 $285,609 $--
---------- -------- -------- -------- ---
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
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, particularly statements
anticipating future growth in revenues, loss from operations and cash flow.
Words such as "anticipates," "estimates," "expects," "projects," "intends,"
"plans," "believes" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance identify
forward-looking statements. These forward-looking statements are based on
management's current expectations and beliefs about future events. As with any
projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and the Company is under no obligation to, and
expressly disclaims any obligation to, update or alter its forward-looking
statements whether as a result of such changes, new information, subsequent
events or otherwise.
Non-GAAP Financial Measures
This 10-Q contains disclosure of our "sales bookings" and "back log" 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" and "back log" may not be
comparable to similarly titled measures reported by other companies. "Sales
bookings" and "back log," 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.
17
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.
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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 5. Other Information
On November 10, 2006, the Board of Directors increased Mr. Mandelbaum's
annual base salary to $264,000 effective January 1, 2007. In addition, the
Company will grant Mr. Mandelbaum, on November 16, 2006, an option to purchase
25,000 shares of common stock at an exercise price equal to the closing price on
the date of grant.
On November 10, 2006, the Company entered into a letter of understanding
with its Chief Financial Officer, Mr. Winiarz, which provides for an annual base
salary of $175,000. This agreement will become effective on January 1, 2007. His
current employment contract terminates on December 31, 2006. In addition, the
Company will grant Mr. Winiarz, on November 16, 2006, an option to purchase
25,000 shares of common stock equal to the closing price on the date of grant
and Mr. Winiarz could be eligible to receive a bonus upon Intelli-Check
achieving certain financial targets. The Company agreed in the letter of
understanding, that if it were to terminate Mr. Winiarz for any reason other
than cause, it would pay Mr. Winiarz two (2) years of base salary in twelve (12)
equal monthly installments should briefly disclose change of control provisions.
Item 6. Exhibits
(a) The following exhibits are filed as part of the Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- -----------
10.1 Letter of Understanding with Edwin Winiarz
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
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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 - November 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
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