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, 2002
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
incorporation or organization) Identification No.)
246 Crossways Park West, Woodbury, New York 11797
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (516) 992-1900
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at September 30, 2002
----- -------------------------------------
Common Stock, $.001 par value 8,792,728
Intelli-Check, Inc.
INDEX
Part I Financial Information Page
------
Item 1. Financial Statements
Balance Sheets -September 30, 2002 (Unaudited)
and December 31, 2001 1
Statements of Operations for the three and nine months ended
September 30, 2002 (Unaudited) and September 30, 2001 (Unaudited) 2
Statements of Cash Flows for the nine months ended September 30, 2002
(Unaudited) and September 30, 2001 (Unaudited) 3
Notes to Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12-13
Part II Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 15
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 16
Intelli-Check, Inc.
Balance Sheets
ASSETS
September 30, December 31,
2002 2001
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,501,684 $ 4,061,235
Accounts receivable 103,840 25,536
Inventory 1,909,880 2,168,688
Other current assets 835,301 370,880
------------- -------------
Total current assets 5,350,705 6,626,339
CERTIFICATE OF DEPOSIT 272,276 268,494
PROPERTY AND EQUIPMENT, net 361,126 466,576
ACQUIRED SOFTWARE, net 265,556 426,806
GOODWILL 181,447 181,447
PATENT COSTS, net 267,518 289,425
OTHER INTANGIBLES, net 103,507 164,132
------------- -------------
Total assets $ 6,802,135 $ 8,423,219
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 338,953 $ 254,171
Accrued expenses 736,533 842,501
Current portion of deferred revenue 372,972 200,953
Current portion of capital lease obligations 23,286 25,421
------------- -------------
Total current liabilities 1,471,744 1,323,046
------------- -------------
CAPITAL LEASE OBLIGATIONS 2,860 17,317
------------- -------------
DEFERRED REVENUE 75,441 53,324
------------- -------------
Total liabilities 1,550,045 1,393,687
------------- -------------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock - $.01 par value;
250,000 shares authorized; 0 shares issued and outstanding - -
Common stock-$.001 par value; 20,000,000 shares
authorized; 8,792,728 and 8,470,762 shares issued and
outstanding, respectively 8,792 8,470
Additional paid-in capital 21,563,434 19,331,004
Deferred compensation (219,014) (189,000)
Accumulated deficit (16,101,122) (12,120,942)
------------- -------------
Total stockholders' equity 5,252,090 7,029,532
------------- -------------
Total liabilities and stockholders' equity $ 6,802,135 $ 8,423,219
============= =============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
-------------- -------------- --------------- ----------------
REVENUE $ 231,819 $ 280,266 $ 773,553 $ 755,113
COST OF REVENUE 105,630 154,437 352,342 413,696
-------------- -------------- --------------- ---------------
Gross profit 126,189 125,829 421,211 341,417
-------------- -------------- --------------- ---------------
OPERATING EXPENSES
Selling 314,573 156,707 1,190,850 531,560
General and administrative 760,486 617,698 2,675,750 1,694,412
Research and development 285,578 288,049 911,073 902,857
-------------- -------------- --------------- ---------------
Total operating expenses 1,360,637 1,062,454 4,777,673 3,128,829
-------------- -------------- --------------- ---------------
Loss from operations (1,234,448) (936,625) (4,356,462) (2,787,412)
--------------- --------------- ---------------- ---------------
OTHER INCOME (EXPENSES):
Interest income 11,688 25,280 43,943 121,062
Interest expense (1,134) (1,774) (4,004) (8,337)
Other income - - 336,344 -
-------------- -------------- ---------------- ---------------
10,554 23,506 376,283 112,725
Net loss $ (1,223,894) $ (913,119) $ ($3,980,179) $ (2,674,687)
=============== ============== ================ ===============
PER SHARE INFORMATION:
Net loss $ (1,223,894) $ (913,119) $ (3,980,179) $ (2,674,687)
Dividend on warrant modification - (55,000) - (140,000)
-------------- -------------- ---------------- ---------------
Net loss attributable to common
shareholders $ (1,223,894) $ (968,119) $ (3,980,179) $ (2,814,687)
=============== =============== ================ ===============
Net loss per common share
Basic and diluted $ (.14) $ (0.12) $ (0.46) $ (0.36)
Common shares used in
computing per share amounts
Basic and diluted 8,791,488 7,863,382 8,640,541 7,820,442
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,980,179) $(2,674,687)
Adjustments to reconcile net loss to cash used
In operating activities:
Depreciation and amortization 339,305 86,542
Amortization of deferred compensation 683,566 -
Stock options issued for services - 842
Changes in assets and liabilities-
(Increase) in certificate of deposit (3,782) (16,456)
(Increase) in accounts receivable (78,304) (47,084)
Decrease in inventory 258,808 196,112
Decrease (Increase) in other current assets (464,421) 169,090
Increase in accounts payable and accrued expenses 23,927 222,764
(Decrease) Increase in deferred revenue 194,136 (300,227)
---------------- ----------------
Net cash used in operating activities (3,026,944) (2,363,104)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (35,187) (47,594)
Net cash used in investing activities (35,187) (47,594)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,589,226 660,375
Purchase of treasury stock (70,054) (52,600)
Repayment of capital lease obligation (16,592) (37,299)
---------------- ----------------
Net cash provided by financing activities 1,502,580 570,476
---------------- ----------------
Net (decrease) in cash (1,559,551) (1,840,222)
CASH AND CASH EQUIVALENTS, beginning of period 4,061,235 4,091,689
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 2,501,684 $ 2,251,467
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,004 $ 8,337
================ ================
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Notes to Financial Statements
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation
The financial information provided herein was prepared from the books and
records of the Company without audit. The information furnished reflects
adjustments all of which are normal and recurring, which, in the opinion of the
Company, are necessary for a fair presentation of the balance sheets, statement
of operations, and statements of cash flows, as of the dates and for the periods
presented. All amounts included herein relate to the financial statements as of
September 30, 2002, and for the three and nine months ended September 30, 2001
and 2002. The interim results presented are not necessarily indicative of
results for any subsequent quarter or for the year ending December 31, 2002. The
Notes to Financial Statements included in the Company's 2001 Annual Report on
Form 10-K should be read in conjunction with these financial statements.
Revenue Recognition
The Company sells its products directly through its sales force and
through distributors. Revenue from direct sales of the Company's product is
recognized upon shipment to the customer. The Company's products require
continuing service or post contract customer support and performance by the
Company, and 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. Currently,
with respect to sales to distributors and sales of the Company's IDentiScan
products, the Company does 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.
During the third quarter, the Company recognized sales from licensing
of its patented software to customers. The Company's licensed software requires
continuing service or post contract customer support and performance by the
Company, and 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.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standard Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
all business combinations initiated after September 30, 2001 to be accounted for
using the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The Company
adopted SFAS 142 effective January 1, 2002. Pursuant to the adoption the
Company has evaluated its goodwill to identify additional separately
identifiable intangibles; no adjustment was warranted. Intangible assets that
will continue to be classified as goodwill will no longer be amortized. This
resulted in the exclusion of approximately $2,500 in amortization expense for
each of the quarters ended March 31, June 30 and September 30, 2002. In
accordance with SFAS 142, purchased goodwill, will be evaluated periodically for
impairment. Based on the results of the Company's transitional impairment
testing, there has been no material impact on the Company's results of
operations and its financial condition related to its purchased goodwill.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 will be effective for financial statements of fiscal years beginning
after December 15, 2001. The Company has adopted SFAS 144 effective January 1,
2002, which did not have an effect on its results of operations and its
financial condition.
4
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities, ("SFAS 146")." SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS 146 will be applied to exit or disposal activities after December
31, 2002 and is not expected to have a material effect on the Company's
financial position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Liquidity
The Company anticipates that its current available cash resources combined
with the expected revenues from the sale of the units in inventory and licensing
of its technology will be sufficient to meet its anticipated working capital and
capital expenditure requirements for at least the next twelve months. Should
sales of its products fall below expectations during the next 12 months, the
Company would be required to raise capital to fund its operations. The Company
is currently working with its investment bankers to secure additional capital in
the event that sales are insufficient to meet its working capital needs. Should
the Company need to raise capital, there can be no assurances that it would be
successful. These requirements are expected to include the purchase of
additional inventory to run its patented software, product development, sales
and marketing, working capital requirements and other general corporate
purposes. The impact on the Company could be adverse if it is not able to ship
products as projected or raise capital as discussed above. In addition, the
Company may need to raise additional funds to respond to business contingencies
which may include the need to fund more rapid expansion, fund additional
marketing expenditures, develop new markets for its ID-Check technology, enhance
our operating infrastructure, respond to competitive pressures, or acquire
complementary businesses or necessary technologies.
Note 2. Net Loss Per Common Share
Basic and diluted net loss per common share was computed by dividing the
net loss attributable to common shareholders by the weighted average number of
shares of common stock. In accordance with the requirements of Statement of
Financial Accounting Standards No. 128, common stock equivalents have been
excluded from the calculation as their inclusion would be antidilutive.
The following table summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of September 30, 2002
and 2001 had been exercised:
2002 2001
----- ----
Stock options 893,000 1,559,809
Warrants 16,250 218,475
----------- ----------
Total dilutive securities 909,250 1,778,284
=========== ==========
Note 3. Distributor Agreement Termination
Effective January 30, 2002, the Company mutually agreed with Sensormatic
Electronics Corporation not to renew its non-exclusive Master Distributor
agreement which was due to expire on March 31, 2002. The Company received
$412,000 and additionally Sensormatic agreed to return to the Company all units
previously purchased and unsold in their inventory as settlement of its
obligations under the agreement. The Company recognized $336,344 recorded in
other income, net of refurbishment costs during the quarter ended March 31,
2002.
Note 4. Supplier Agreement
During 2001, the Company agreed to provide the manufacturer of its ID-Check
unit with advance deposits totaling $600,000 towards the fulfillment of its
obligation on its purchase order. The Company satisfied its obligation and paid
such amount, which is included in other current assets on the Company's balance
sheet as of September 30, 2002. It was further agreed that should the Company
decide not to purchase the required units under the purchase order, all of the
materials purchased by the manufacturer to secure the production of units would
be shipped to the Company and the balance of the obligation would cease.
5
In addition, the manufacturer of the Company's ID-Check unit has notified
the Company that effective July 9, 2003, it will terminate the Development and
Supply agreement dated July 9, 1999 due to the discontinuation of manufacturing
the IDC-1400 model, but will fulfill its obligation remaining with respect to
the outstanding purchase order. The Company is in the process of evaluating a
more technologically advanced platform to run its patented software.
Note 5. Compensation Agreements
On February 1, 2002, the Company entered into a new three-year employment
contract with its Chairman and Chief Executive Officer, the agreement provides
for an annual base salary of $250,000. In addition, the Company granted the
Chairman and Chief Executive Officer an option to purchase 350,000 shares of
common stock exercisable at $12.10 per share of which 125,000 options are
immediately exercisable and 225,000 options become exercisable at a rate of
75,000 per year on December 31, 2002, 2003 and 2004.
During the period ended March 31, 2002, the Company granted options to
purchase 135,000 shares of common stock at $12.10 per share to consultants under
various agreements. The fair market value of each option was estimated on the
date of grant using the Black-Scholes option pricing model and it is being
re-measured each reporting period throughout the date the services are provided
under the agreement. Accordingly, the Company originally recorded $1,333,000 as
deferred compensation for these services during the period ended March 31, 2002.
As of June 30, 2002, the value recorded for these options was reduced to
$713,582 as a result of the decline in the fair market value of such options.
As of September 30, 2002, the fair market value of such options remained the
same. Total amortization for the nine months ended September 30, 2002 for these
options amounted to $505,474.
Note 6. Investment Banking Relationship
Effective March 28, 2002, the Company entered into an agreement with KPMG
Corporate Finance LLC to act as an exclusive financial advisor to the Company.
The fee for such services was $100,000 of which $50,000 was paid as of March 31,
2002 and the balance paid by June 30, 2002. This amount was expensed in the
second quarter of 2002 as services were rendered. Should KPMG secure funding
from a private placement of the Company's securities, the Company will also pay
3.5% of proceeds received from such funding. Additionally, other fees are
required to be paid as a result of any acquisition by the Company and merger of
or sale of the Company.
Note 7. Legal Matters
On May 3, 2002, the Company settled the lawsuit initiated by its former
Chief Technology Officer in October 2001. All claims and counter claims have
been settled by mutual agreement on non-monetary terms and a stipulation to
dismiss with prejudice has been submitted to the Court.
On July 26, 2002, the Company filed a motion to dismiss the lawsuit
originally commenced on October 18, 2001 on behalf of short sellers of the
Company's stock, which was later amended to an individual action. The Company's
motion to dismiss has been fully briefed by both sides and is awaiting the
Court's decision.
With respect to the demand for arbitration brought by Early Bird Capital,
Inc. in January 2002, discovery is substantially complete and the arbitration is
scheduled for December 2002. Early Bird Capital has demanded a monetary
judgment of $968,000, which if it is awarded, would have a material adverse
effect on the Company. The Company believes it has meritorious defenses.
However, there can be no assurance that the Company will prevail.
Note 8. Subsequent Event
Effective on October 1, 2002, the Company extended until April 4, 2003 all
unexercised rights under its rights offering, which were due to expire on
October 4, 2002. Each non-transferable right entitles the stockholder to
purchase one share of common stock at an exercise price of $8.50. As of
September 30, 2002, of the original rights issued, the Company received proceeds
of $2,440,894 through the exercise of 287,164 rights.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Overview
Our company was formed in 1994 to address a growing need for a reliable
document and age verification system to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. Our
sales through September 30, 2000 had been minimal since through 1998 we had
previously produced only a limited pre-production run of our product for testing
and market acceptance. In late 1999, we received a limited number of ID-Check
terminals, which were then available for sale. Shortly thereafter, these
terminals were returned to the manufacturer to be upgraded to contain an
advanced imager/scanner, which allows our software to currently read the
encoding on over 50 jurisdictions as opposed to 32 jurisdictions on the original
scanner. During the fourth quarter of 2000, we experienced a material increase
in sales as a result of product availability and establishing marketing and
distributor agreements with resellers. During 2001 and through the quarter
ended September 30, 2002, sales were limited due to the refocus of our marketing
efforts towards the larger customers in the retail market, in which the sales
cycle normally requires an extended time frame involving multiple meetings,
presentations and a test period, which has been further extended by the rapid
slowing of the economy, whereby decisions for capital expenditures have been
delayed. However, after the tragic events that occurred on September 11, 2001,
there has been a significant increase in awareness for our technology to help
improve security across many industries, including airlines, rail transportation
and high profile buildings and facilities. We have also begun to market to
various government and state agencies, which have long sales cycles including
extended test periods. Since inception, we have incurred significant losses and
negative cash flow from operating activities, and as of September 30, 2002 we
had an accumulated deficit of approximately $16,100,000. We will continue to
fund operating and capital expenditures from proceeds that the company received
from its initial public offering ("IPO") as well as the exercise of warrants,
options and rights. 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.
The Company's unique ability to verify the validity of driver licenses,
state issued ID cards and military ID's, that contain magnetic stripes or bar
codes that conform to AAMVA/ANSI/ISO standards, enables the Company to target
three distinct markets. The original target market was focused on resellers of
age-restricted products, such as alcohol and tobacco, whereby the proliferation
of high-tech fake IDs exposed merchants to fines and penalties for the
inadvertent sale of these products to underage purchasers. "Identity Theft,"
the fastest growing crime in America, has additionally exposed industry to huge
economic losses through various frauds that utilize fake IDs to support these
transactions, which the Company's technology can help prevent. The tragic
events that occurred on September 11, 2001 has created increased awareness of
the Company's technology in security applications involving access control. As
a result of its applicability in these markets, the Company has already sold its
products to some of the largest companies in the gaming industry, several large
petroleum companies, a large tobacco company, a State Port Authority, State
Motor Vehicle Bureaus, military establishments, multiple airports and nuclear
power facilities and high profile buildings. Some of these sales were made as
result of tests of the Company's technology. Additionally, the Company has
completed or has ongoing tests at some of the largest military bases in the
U.S., two commercial airports, State Motor Vehicle Bureaus, a major railroad, a
major credit card issuing company at a major mass merchandiser and a major
grocery chain. In addition, our ID-Check unit has played a key role in a
program organized by Mothers Against Drunk Driving (MADD) to deter the use of
fake ID's used for the purchase of alcoholic beverages and as a key component of
the Security system deployed at the meetings of the Western Governors'
Association in July 2002 and the Southern Governors' Association in September
2002.
During 2001, the Company developed additional software products that
utilize its patented software technology. On October 28, 2002, the Company's
intellectual property portfolio was further strengthened by the issuance of U.S.
Patent No. 6,463,416 B1. C-Link runs on a personal computer and was created to
work in conjunction with the ID-Check unit that allows a user to instantly view
the encoded data for further verification, to analyze the data and to generate
various reports where permitted by law. The Company also has developed software
containing its patented technology that can be integrated onto a Windows
platform that will enable a user of the software to perform all the functions of
the ID-Check terminal. To date, the Company has executed 3 licensing agreements
and is in discussions with additional companies to license its software to be
utilized within other existing systems. The revenue received from such
7
licensing agreements has not been significant through the period ended September
30, 2002.
On December 18, 2001, the Company acquired substantially all of the assets
of the IDentiScan Company, LLC, which was accounted for under the purchase
method. The aggregate purchase price totaled $1,032,947 which consisted of
59,774 of the Company's restricted common stock valued at $980,000 and
transaction costs of $52,947, plus additional incentives upon meeting specific
objectives over the next three years. If one year from closing, the aggregate
current market price of the shares issued at closing is less than $750,000, the
Company has the option to either pay in cash or common stock an amount
equivalent to the short fall.
Critical Accounting Policies
The Company believes that there are several accounting policies that are
critical to understanding the Company's 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 and valuation of inventory.
These policies, and the Company's procedures related to these policies, are
described in detail below.
Revenue Recognition
The Company sells its product directly through its sales force and through
distributors. Revenue from direct sales of the Company's product is recognized
upon shipment to the customer. The Company's product requires continuing
service or post contract customer support and performance by the Company, and
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. Currently, with respect
to sales to distributors and sales of our IDentiScan products , the Company does
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.
During the third quarter, the Company recognized sales from licensing of
its technology to customers. The Company's licensing products require continuing
service or post contract customer support and performance by the Company, and
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.
Inventory Valuation
The Company's inventory consists primarily of terminals that run its
patented software. The inventory was originally received December 1999.
Shortly thereafter, it was returned to the manufacturer for upgrade and became
available for sale in the fourth quarter of 2000. The Company periodically
evaluates the current market value of its inventory, taking into account any
technological obsolescence that may occur due to changes in hardware technology
and the acceptance of the product in the marketplace. Even though the Company
has had limited sales to date, we believe that a sufficient market exists to
sell with margin the current inventory as well as the remaining units required
to be purchased from its manufacturer for which the Company has paid a deposit
of $600,000 which is recorded on the Company's balance sheet. The Company is in
the process of evaluating a more technologically advanced platform to run its
patented software. Should the Company select a new platform and not place the
order to purchase the additional units from its manufacturer under the open
purchase order, the Company would be required to expense the deposit of
$600,000.
(b) Results of Operations
Comparison of the nine months ended September 30, 2002 to the nine months
ended September 30, 2001.
Revenues increased $18,440 from $755,113 for the nine months ended
September 30, 2001 to $773,553 recorded for the nine months ended September 30,
2002. Revenues for the period ended September 30, 2002 consisted of revenues
from distributors of $365,260 and revenues from direct sales to customers of
8
$408,293. Sales, which represent shipments of products and contracted services,
increased 111% from $469,494 to $989,692 for the periods ended September 30,
2001 and 2002, respectively, primarily as a result of the inclusion of
IDentiScan, which continues to focus on the age verification market. The
refocus of our marketing efforts for Intelli-Check's patented technology to the
document verification and access control markets, which consists of the larger
retailers and Government agencies, in which the sales cycle requires an extended
time frame involving multiple meetings, presentations and a test period,
continues to impact our sales. In addition, during 2001 and continuing in 2002,
the sales cycle has been further extended by the rapid slowing of the economy,
resulting in decisions for capital expenditures being delayed. We feel
confident, based upon the results of certain tests and legislative efforts from
the Government to enhance security, that these facts should result in increased
sales opportunities.
Operating expenses, which consist of selling, general and
administrative and research and development expenses, increased 52.6% from
$3,128,829 for the nine months ended September 30, 2001 to $4,777,673 for the
nine months ended September 30, 2002. Selling expenses, which consist primarily
of salaries and related costs for marketing, increased 124% from $531,560 for
the nine months ended September 30, 2001 to $1,190,850 for the nine months ended
September 30, 2002 primarily due to increased salary costs, commissions and
related expenses from hiring additional sales personnel totaling approximately
$165,000, increased travel and convention expenses of approximately $134,000 and
hiring professional consultants to promote our product totaling approximately
$326,000. 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
57.9% from $1,694,412 for the nine months ended September 30, 2001 to $2,675,750
for the nine months ended September 30, 2002, primarily as a result of increased
salary costs and related expenses from salary increases and the hiring of
additional personnel relating to the acquisition of the IDentiScan assets in
December 2001 of approximately $104,000, increased fees for investment relations
consultants of approximately $628,000 primarily relating to the recognized
non-cash expense of the granting of options to this group, which was 64% of this
increase, increases in depreciation and amortization expenses of approximately
$240,000 from additional purchases of equipment and acquired intangible assets
from the acquisition of IDentiScan, increases in insurance costs of
approximately $26,000 due to increases in premiums and higher rent expense of
approximately $24,000 due to rent escalations and additional space from the
acquisition of IDentiScan partially offset by lower legal costs of approximately
$107,000 due to the settling of certain lawsuits. Research and development
expenses, which consist primarily of salaries and related costs for the
development of our products, amounted to $902,857 for the nine months ended
September 30, 2001 compared to $911,073 for the nine months ended September 30,
2002, which has not materially changed. We believe that we will require
additional investments in development and operating infrastructure as the
Company grows. Therefore, we expect that expenses will continue to increase in
line with increases in the growth of the business as we may increase
expenditures for advertising, brand promotion, public relations and other
marketing activities. We expect that we will incur incremental general and
administrative expenses as we grow the business. Research and development
expenses may also increase as we complete and introduce additional products
based upon our patented ID-Check technology.
Interest expense decreased from $8,337 for the nine months ended
September 30, 2001 to $4,004 for the nine months ended September 30, 2002 as we
have paid down certain capital leases which had higher interest rates.
Interest income decreased from $121,062 for the nine months ended
September 30, 2001 to $43,943 for the nine months ended September 30, 2002,
which is a result of a decrease in our cash and cash equivalents available for
investment and lower interest rates in effect during this period.
Other income for the nine months ended September 30, 2002 totaling $336,344
resulted from a settlement of certain obligations under a Master Licensing
agreement between the Company and Sensormatic Electronics Corporation, which was
due to expire on March 31, 2002. We received $412,000 and incurred $75,656 in
refurbishment costs during the quarter ended March 31, 2002.
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 increased from
$2,674,687 for the nine months ended September 30, 2001 to $3,980,179 for the
nine months ended September 30, 2002.
9
Comparison of the three months ended September 30, 2002 to the three months
ended September 30, 2001.
Revenues decreased by $48,447 from $280,266 for the three months ended
September 30, 2001 to $231,819 recorded for the three months ended September 30,
2002. Revenues for the period ended September 30, 2002 consisted of revenues
from distributors of $115,969 revenues from direct sales to customers of
$115,850. Sales, which represent shipments of products and contracted services,
increased 45% from $176,033 to $256,000 for the periods ended September 30, 2001
and 2002, respectively, primarily as a result of the inclusion of IDentiScan,
which continues to focus on the age verification market. The refocus of our
marketing efforts for Intelli-Check's patented technology to the document
verification and access control markets, which consists of the larger retailers
and Government agencies, in which the sales cycle requires an extended time
frame involving multiple meetings, presentations and a test period, continues to
impact our sales. In addition, during 2001 and continuing in 2002, the sales
cycle has been further extended by the rapid slowing of the economy, resulting
in decisions for capital expenditures being delayed. We feel confident, based
upon the results of certain tests and legislative efforts from the Government to
enhance security, that these facts should result in increased sales
opportunities.
Operating expenses, which consist of selling, general and
administrative and research and development expenses, increased 28.1% from
$1,062,454 for the three months ended September 30, 2001 to $1,360,637 for the
three months ended September 30, 2002. Selling expenses, which consist
primarily of salaries and related costs for marketing, increased 101% from
$156,707 for the three months ended September 30, 2001 to $314,573 for the three
months ended September 30, 2002 primarily due to increased salary costs and
related expenses from hiring additional sales personnel totaling approximately
$47,000 and increased travel and convention expenses of approximately $20,000,
increases in advertising expenses of approximately $20,000 and hiring
professional consultants to promote our product totaling approximately $51,000.
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 23.1% from
$617,698 for the three months ended September 30, 2001 to $760,486 for the three
months ended September 30, 2002, primarily as a result of increased salary
costs and related expenses from salary increases and hiring additional personnel
relating to the acquisition of the IDentiScan division of approximately $24,000,
increases in insurance and filing fees of approximately $30,000, increased fees
for investment relations consultants of approximately $36,000 primarily relating
to the recognized non-cash expense of the granting of options to this group and
increases in depreciation and amortization expenses of approximately $116,000
from additional purchases of equipment and acquired intangible assets from the
acquisition of IDentiScan partially offset by decreases in legal and accounting
expenses of $68,000 primarily as a result of lower fees relating to the
settlement of the patent lawsuit. Research and development expenses, which
consist primarily of salaries and related costs for the development and testing
of our products, amounted to $288,049 for the three months ended September 30,
2001 compared to $285,578 for the three months ended September 30, 2002, which
has not materially changed. We believe that we will require additional
investments in development and operating infrastructure as the Company grows.
Therefore, we expect that expenses will continue to increase in line with
increases in the growth of the business as we may increase expenditures for
advertising, brand promotion, public relations and other marketing activities.
We expect that we will incur incremental general and administrative expenses as
we grow of the business. Research and development expenses may also increase as
we complete and introduce additional products based upon our patented ID-Check
technology.
Interest expense decreased from $1,774 for the three months ended
September 30, 2001 to $1,134 for the three months ended September 30, 2002 as we
have paid down certain capital leases which had higher interest rates than those
currently prevailing.
Interest income decreased from $25,280 for the three months ended
September 30, 2001 to $11,688 for the three months ended September 30, 2002,
which is a result of a decrease in our cash and cash equivalents available for
investment and lower interest rates in effect during this period.
We have incurred net losses to date; therefore we have paid nominal
taxes.
As a result of the factors noted above, our net loss increased from
$913,119 for the three months ended September 30, 2001 to $1,223,894 for the
three months ended September 30, 2002.
10
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective on November 18, 1999, we financed
our operations primarily through private placements of stock and debt
financings. We used the net proceeds of these financings for the primary
purpose of funding working capital and general corporate purposes and for the
purchase of hardware terminals. As a result of our IPO and the underwriters
exercise of its over allotment option, we received approximately $6,907,000 in
net proceeds after deducting underwriters commissions and offering expenses.
During 2000 and 2001, we received $6,657,548 from the issuance of common stock
from the exercise of warrants, rights and stock options. We funded the
purchase of hardware terminals for resale and working capital primarily from
these proceeds. We will continue to use these proceeds to fund working capital
until we reach profitability.
Cash used in operating activities for the nine months ended September
30, 2002 of $3,026,944 resulted primarily from the net loss of $3,980,179, an
increase in accounts receivable of $78,304 and an increase in other current
assets of $464,421 resulting primarily from a deposit made to our manufacturer
for additional inventory, which was primarily offset by an increase in
depreciation and amortization of $339,305 as a result of the acquisition of the
assets of IDentiScan, an increase in amortization of deferred compensation of
$683,566 from the granting of stock options to consultants, a decrease in
inventory of $258,808 and an increase in deferred revenues of $194,136. Cash
used in operating activities for the nine months ended September 30, 2001 of
$2,363,104 was primarily attributable to the net loss of $2,674,687, and a net
decrease in deferred revenues of $300,227, which was primarily offset by a
decrease of inventory of $196,112, an increase in accounts payable and accrued
expenses of $222,764, and a net decrease in other current assets of $169,090
primarily consisting of the related deferred costs of revenues offset by an
increase in deposits for additional inventory. Cash used in investing
activities was $35,187 for the nine months ended September 30, 2002 and $47,594
for the nine months ended September 30, 2001. Net cash used in investing
activities for both periods consisted primarily of capital expenditures for
computer equipment and furniture and fixtures. Cash provided by financing
activities was $1,502,580 for the nine months ended September 30, 2002 and
$570,476 for the nine months ended September 30, 2001 and was primarily related
to the exercise of outstanding rights and stock options for the period ended
September 30, 2002 and for the period ended September 30, 2001 was from the
exercise of warrants and stock options.
As of September 30, 2002, there were warrants outstanding relating to
prior financing to purchase 7,500 shares of our common stock at an exercise
price of $3.00, plus 10,000 underwriter's warrants that carry an exercise price
of $8.40. If certain conditions occur, we have the right to redeem the
outstanding warrants on not less than 20 days written notice for $0.01 per
warrant, except for the Underwriter's warrants. As of November 1, 2002, the
conditions for redeeming the warrants have not been met.
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of the Company's common stock for
every 10 outstanding shares of common stock continuously held from the record
date to the date of exercise, as well as common stock underlying vested stock
options and warrants, held of record on March 30, 2001, at an exercise price of
$8.50. The rights were to expire on October 4, 2002, which was one year after
the effective date of the registration statement related to the shares of common
stock underlying the rights. However, on October 1, 2002, the Company extended
the expiration date of all unexercised rights until April 4, 2003. As a result
of certain conditions being met, the Company has the right to redeem the
outstanding rights for $.01 per right. The Company reserved 970,076 shares of
common stock for future issuance under this rights offering. As of December 31,
2001, 180,198 of these rights were exercised and the Company received $1,531,683
before expenses. In addition, 106,966 rights were also exercised through
November 1, 2002 and the Company received proceeds of $909,211.
In March 2001, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of the our
common stock. As of December 31, 2001, we purchased 10,000 shares totaling
approximately $53,000 and subsequently retired these shares. During June 2002,
the Company purchased an additional 10,000 shares totaling approximately $71,000
and subsequently retired these shares. We do not expect to purchase additional
shares unless certain conditions warrant it.
We anticipate that our current available cash resources combined with the
expected revenues from the sale of the units in inventory and licensing of our
technology will be sufficient to meet our anticipated working capital and
capital expenditure requirements for at least the next twelve months. Should
11
sales of our products fall below our expectations during the next 12 months, the
Company would be required to raise capital to fund its operations. The Company
is currently working with its investment bankers to secure additional capital in
the event that sales are insufficient to meet our working capital needs. Should
the Company need to raise capital, there can be no assurances that we would be
successful. These requirements are expected to include the purchase of
additional inventory to run our patented software, product development, sales
and marketing, working capital requirements and other general corporate
purposes. In addition, we 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 our ID-Check
technology, enhance our operating infrastructure, respond to competitive
pressures, or acquire complementary businesses or necessary technologies.
Below is a table, which presents our contractual obligations and
commitments at September 30, 2002:
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
ONE YEAR
Capital Lease Obligations $26,146 $23,286 $2,860 -- --
Operating Leases 2,198,928 224,406 736,404 557,501 680,617
Purchase commitments (1) -- -- -- -- --
Employment contracts 919,163 481,000 438,163 -- --
---------- -------- ---------- -------- --------
Total Contractual Cash Obligation $3,144,237 $728,692 $1,177,427 $557,501 $680,617
(1) The Company paid $600,000 through April 1, 2002 as a deposit
towards our commitment to purchase 2,850 additional units of our ID-Check
product.
(d) Net Operating Loss Carry Forwards
As of September 30, 2002, we had a net operating loss carry forward of
approximately $13,900,000 which expires beginning in the year 2018 through 2022.
The issuance of equity securities in the future, together with our recent
financings and our IPO, could result in an ownership change and, thus could
limit our use of our prior net operating losses. If we achieve profitable
operations, any significant limitation on the utilization of our net operating
losses would have the effect of increasing our tax liability and reducing net
income and available cash reserves. We are unable to determine the availability
of these net-operating losses since this availability is dependent upon
profitable operations, which we have not achieved in prior periods.
(e) Forward Looking Statements
The foregoing contains certain forward-looking statements. Due to the
fact that the Company could face intense competition in a business characterized
by rapidly changing technology and high capital requirements, actual results and
outcomes may differ materially from any such forward looking statements and, in
general are difficult to forecast.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
before the filing date of this quarterly report. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
12
other factors that could significantly affect internal controls subsequent to
their evaluation.
Part II Other Information
Item 1. Legal Matters
On May 3, 2002, the Company settled the lawsuit initiated by its former
Chief Technology Officer in October 2001. All claims and counter claims have
been settled by mutual agreement on non-monetary terms and a stipulation to
dismiss with prejudice has been submitted to the Court.
On July 26, 2002, the Company filed a motion to dismiss the lawsuit
originally commenced on October 18, 2001 on behalf of short sellers of the
Company's stock, which was later amended to an individual action. The Company's
motion to dismiss has been fully briefed by both sides and is awaiting the
Court's decision.
With respect to the demand for arbitration brought by Early Bird Capital,
Inc. in January 2002, discovery is substantially complete and the arbitration is
scheduled for December 2002. Early Bird Capital has demanded a monetary
judgment of $968,000, which if it is awarded, would have a material adverse
effect on the Company. The Company believes it has meritorious defenses.
However, there can be no assurance that the Company will prevail.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on July 15, 2002.
A proposal to elect three (3) directors to serve for a three-year term was
approved by the stockholders. The nominees received the following votes:
Name Votes For Votes Withheld
---- ---------- ---------------
Edwin Winiarz (three-year term) 7,504,565 168,439
Evelyn Berezin (three-year term) 7,504,345 168,659
Paul Cohen (three-year term) 7,672,604 400
In addition, stockholders ratified the appointment of Grant Thornton LLP as
the independent public accountants for the Company for the year ended December
31, 2002. This proposal received the following votes:
For Against Abstain
--- ------- -------
7,673,003 1 0
Item 6. Exhibits and Reports on Form 8-K
On September 6, 2002, the Company filed a report on Form 8-K to disclose
Changes in Registrant's Certified Public Accountants from Arthur Andersen LLP to
Grant Thornton LLP.
13
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 13, 2002 Intelli-Check, Inc.
(Registrant)
By: /s/ Frank Mandelbaum
----------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
-------------------
Edwin Winiarz
Senior Executive Vice President/CFO
Principal Accounting Officer
14
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Edwin Winiarz, certify that:
1. I have reviewed this Form 10-Q of Intelli-Check, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Edwin Winiarz
-------------------
Name: Edwin Winiarz
Title: Chief Financial Officer
15
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Frank Mandelbaum, certify that:
1. I have reviewed this Form 10-Q of Intelli-Check, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Frank Mandelbaum
----------------------
Name: Frank Mandelbaum
Title: Chief Executive Officer