SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 2002
----- ---------------------------------
Common Stock, $.001 par value 8,791,398
Intelli-Check, Inc.
Index
Part I Financial Information Page
Item 1. Financial Statements
Balance Sheets -June 30, 2002 (Unaudited)
and December 31, 2001 1
Statements of Operations for the three and six month periods
ended June 30, 2002 (Unaudited) and June 30, 2001 (Unaudited) 2
Statements of Cash Flows for the six months ended June 30, 2002
(Unaudited) and June 30, 2001 (Unaudited) 3
Notes to Financial Statements (Unaudited) 4 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6 - 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II Other Information
Item 1. Legal Matters 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Certifications 12
Intelli-Check, Inc.
Balance Sheets
ASSETS
June 30, December 31,
2002 2001
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,551,897 $ 4,061,235
Accounts receivable 105,600 25,536
Inventory 1,998,605 2,168,688
Other current assets 838,113 370,880
------------ ------------
Total current assets 6,494,215 6,626,339
CERTIFICATE OF DEPOSIT 271,240 268,494
PROPERTY AND EQUIPMENT, net 434,597 466,576
ACQUIRED SOFTWARE, net 355,140 426,806
GOODWILL 181,447 181,447
PATENT COSTS, net 274,820 289,425
OTHER INTANGIBLES, net 123,715 164,132
------------ ------------
Total assets $ 8,135,174 $ 8,423,219
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 479,519 $ 254,171
Accrued expenses 789,325 842,501
Deferred revenue 356,407 200,953
Current portion of capital lease obligations 23,695 25,421
------------ ------------
Total current liabilities 1,648,946 1,323,046
------------ ------------
CAPITAL LEASE OBLIGATIONS 8,781 17,317
------------ ------------
OTHER LIABILITIES 47,751 53,324
------------ ------------
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; 8,791,398 and 8,470,762 shares issued and
outstanding, respectively 8,791 8,470
Additional paid-in capital 21,559,007 19,331,004
Deferred compensation (260,875) (189,000)
Accumulated deficit (14,877,227) (12,120,942)
------------ ------------
Total stockholders' equity 6,429,696 7,029,532
------------ ------------
Total liabilities and stockholders' equity $ 8,135,174 $ 8,423,219
============ ============
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
REVENUE $ 287,336 $ 270,211 $ 541,734 $ 474,846
COST OF REVENUE 116,329 141,464 246,712 259,259
---------- ---------- ----------- -----------
Gross profit 171,007 128,747 295,022 215,587
---------- ---------- ----------- -----------
OPERATING EXPENSES
Selling 418,842 158,710 838,974 368,910
General and administrative 789,449 600,380 1,947,628 1,082,256
Research and development 308,291 290,043 630,435 615,209
---------- ---------- ----------- -----------
Total Operating Expenses 1,516,582 1,049,133 3,417,037 2,066,375
---------- ---------- ----------- -----------
Loss from operations (1,345,575) (920,386) (3,122,015) (1,850,788)
OTHER INCOME (EXPENSES):
Interest income 14,926 40,695 32,256 95,782
Interest expense (1,375) (3,002) (2,870) (6,562)
Other income -- -- 336,344 --
---------- ---------- ----------- -----------
13,551 37,693 365,730 89,220
========== ========== =========== ===========
Net loss $(1,332,024) $ (882,693) $(2,756,285) $(1,761,569)
PER SHARE INFORMATION:
Net loss per common share -
Net loss $(1,332,024) $(882,693) $(2,756,285) $(1,761,569)
Dividend on warrant modification -- -- -- (85,000)
---------- ---------- ----------- -----------
Net loss attributable to common
shareholders $(1,332,024) $(882,693) $(2,756,285) $(1,846,569)
========== ========== =========== ===========
Basic and diluted $ (.15) $ (.11) $ (.32) $ (.24)
Common shares used in
Computing per share amounts -
Basic and diluted 8,596,464 7,826,220 8,657,710 7,827,067
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Six months ended Six months ended
June 30, 2002 June 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,756,285) $ (1,761,568)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 197,560 56,296
Amortization of deferred compensation 641,707 --
Stock options issued for services -- 842
Changes in assets and liabilities-
(Increase) in certificate of deposit, restricted (2,746) (13,591)
(Increase) in accounts receivable (80,064) (31,903)
Decrease in inventory 170,083 108,145
(Increase) Decrease in other current assets (467,233) 276,253
Increase in accounts payable and accrued expenses 152,744 109,970
Increase (Decrease) in deferred revenue 174,882 (186,189)
Increase in other liabilities (5,573) --
------------- -------------
Net cash used in operating activities (1,974,925) (1,441,745)
------------- -------------
CASH FLOWS FROM INVESTING ACTITIVIES:
Purchases of property and equipment (38,894) (20,795)
------------- -------------
Net cash used in investing activities (38,894) (20,795)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,584,807 453,675
Repayment of capital lease obligation (10,262) (24,289)
Treasury Stock Purchased (70,064) (52,600)
------------- -------------
Net cash provided by financing activities 1,504,481 376,786
------------- -------------
Net (decrease) in cash (509,338) (1,085,754)
CASH AND CASH EQUIVALENTS, beginning of period 4,061,235 4,091,689
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 3,551,897 $ 3,005,935
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,870 $ 6,562
============= =============
See accompanying notes to financial statements
3
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 related to the financial statements as of
June 30, 2002, and the three and six months ended June 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 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.
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 June 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 has
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, 2002 and June 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Liquidity
We currently anticipate that our current available cash resources combined with
the expected revenues from the sale of the units in inventory will be sufficient
to meet our anticipated working capital and capital expenditure requirements for
4
at least the next twelve months. Should sales of our product fall below our
expectations during the next 12 months, the Company would be required to raise
capital to fund its operations. There can be no assurances should the Company
need to raise capital that we would be successful. The impact on the Company
could be adverse if we are not able to ship products as projected or raise
capital as discussed above. 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.
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 summarized the equivalent number of common shares assuming
the related securities that were outstanding as of June 30, 2002 and 2001 had
been converted.
2002 2001
---- ----
Stock options 1,005,500 1,410,559
Warrants 17,500 363,350
--------- ---------
Total dilutive securities assuming the
Company was in an income position 1,023,000 1,773,909
========= =========
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 June 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.
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. Accordingly, we originally
5
recorded $1,333,000 as deferred compensation for these services during the
period ended March 31, 2002 of which $487,000 was recognized in the first
quarter of 2002 for the above options. As of June 30, 2002, the value recorded
for these options was reduced to $715,808 as a result of the decline in the fair
market value of such options.
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.
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 June 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 June 30, 2002 we had an
accumulated deficit of approximately $14,900,000. 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 military ID's,
driver licenses and state issued ID cards, 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
aged-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,"
6
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, a large
petroleum company, a large tobacco company, a State Port Authority, State Motor
Vehicle Bureaus, military establishments and high profile buildings. Some of
these sales were made as part of a test 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 recent meeting of the
Western Governor's Association.
During 2001, the Company developed additional software products that
utilize its patented software technology. 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 2
licensing agreements and is in discussions with additional companies to license
our software to be utilized within other existing systems. The revenue received
from such licensing agreements has not been significant through the period ended
June 30, 2002.
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. Please see Note 1 to the accompanying unaudited
financial statements for a detailed description of these accounting policies.
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, 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.
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 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 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.
7
(b) Results of Operations
Comparison of the six months ended June 30, 2002 to the six months ended
June 30, 2001.
Revenues increased by $66,888 from $474,846 for the six months ended June
30, 2001 to $541,734 recorded for the six months ended June 30, 2002. Revenues
for the period ended June 30, 2002 consisted of revenues from distributors of
$249,594 and revenues from direct sales to customers of $292,140. Sales of
$723,701 and $562,133 for the periods ended June 30, 2002 and 2001,
respectively, were minimal due to the recent refocus of our marketing efforts
towards the larger retail market, in which the sales cycle requires an extended
time frame involving multiple meetings, presentations and a test period. 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 have also begun to market to various government
and state agencies, which have long sales cycles including extended test
periods.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 65.4% from $2,066,375 for the
six months ended June 30, 2001 to $3,417,037 for the six months ended June 30,
2002. Selling expenses, which consist primarily of salaries and related costs
for marketing, increased 127% from $368,910 for the six months ended June 30,
2001 to $838,974 for the six months ended June 30, 2002 primarily due to
increased salary costs and related expenses from hiring additional sales
personnel totaling approximately $117,000 increased travel and convention
expenses of approximately $105,000 and hiring professional consultants to
promote our product totaling approximately $256,000 partially offset by
decreases in advertising and marketing expenses totaling approximately $37,000.
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 80% from
$1,082,256 for the six months ended June 30, 2001 to $1,947,628 for the six
months ended June 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 division of approximately $84,000,
increased fees for investment relations consultants of approximately $643,000
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 $141,000 from additional purchases of equipment and acquired
intangible assets from the acquisition of IDentiScan. Research and development
expenses, which consist primarily of salaries and related costs for the
development of our products, amounted to $615,209 for the six months ended June
30, 2001 compared to $630,435 for the six months ended June 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 $6,562 for the six months ended June 30,
2001 to $2,870 for the six months ended June 30, 2002 as we have paid down
certain capital leases which had higher interest rates.
Interest income decreased from $95,782 for the six months ended June 30,
2001 to $32,256 for the six months ended June 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 six months ended June 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
$1,761,568 for the six months ended June 30, 2001 to $2,756,285 for the six
months ended June 30, 2002.
8
Comparison of the three months ended June 30, 2002 to the three months
ended June 30, 2001.
Revenues increased by $17,125 from $270,211 for the three months ended June
30, 2001 to $287,336 recorded for the three months ended June 30, 2002.
Revenues for the period ended June 30, 2002 consisted of revenues from
distributors of $108,055 and revenues from direct sales to customers of
$179,281. Sales of $339,178 and $219,731 for the periods ended June 30, 2002
and 2001, respectively, were minimal due to the recent refocus of our marketing
efforts towards the larger retail market, in which the sales cycle requires an
extended time frame involving multiple meetings, presentations and a test
period. 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 have also begun to market
to various government and state agencies, which have long sales cycles including
extended test periods.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 44.6% from $1,049,133 for the
three months ended June 30, 2001 to $1,516,582 for the three months ended June
30, 2002. Selling expenses, which consist primarily of salaries and related
costs for marketing, increased 164% from $158,710 for the three months ended
June 30, 2001 to $418,842 for the three months ended June 30, 2002 primarily due
to increased salary costs and related expenses from hiring additional sales
personnel totaling approximately $68,000 and increased travel and convention
expenses of approximately $56,000 and hiring professional consultants to promote
our product totaling approximately $113,000. 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 31.5% from $600,380 for the three
months ended June 30, 2001 to $789,449 for the three months ended June 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 $35,000, increased fees for investment
relations consultants of approximately $127,000 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 $71,000
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 $290,043 for the three months ended June 30, 2001
compared to $308,291 for the three months ended June 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 $3,002 for the three months ended June 30,
2001 to $1,375 for the three months ended June 30, 2002 as we have paid down
certain capital leases which had higher interest rates than those currently
prevailing.
Interest income decreased from $40,695 for the three months ended June 30,
2001 to $14,926 for the three months ended June 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
$882,693 for the three months ended June 30, 2001 to $1,332,024 for the three
months ended June 30, 2002.
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective on November 18, 1999, we financed
our operations primarily through several private placements of stock and debt
financings. We used the net proceeds of these financings for the primary
9
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 six months ended June 30, 2002 of
$1,974,925 resulted primarily from the net loss of $2,756,285 and an increase in
other current assets of $467,233 resulting primarily from a deposit made to our
manufacturer for additional inventory, which was primarily offset by an increase
in amortization of deferred compensation of $641,707 from the granting of stock
options to consultants, a decrease in inventory of $170,083, an increase in
accounts payable and accrued expenses of $152,744 and an increase in deferred
revenues of $174,882. Cash used in operating activities for the six months ended
June 30, 2001 of $1,441,745 was primarily attributable to the net loss of
$1,761,568, and a net decrease in deferred revenues of $186,189, which was
primarily offset by a decrease of inventory of $108,145, an increase in accounts
payable and accrued expenses of $109,970, and a net decrease in other current
assets of $276,253 primarily consisting of the related deferred costs of
revenues. Cash used in investing activities was $38,894 for the six months
ended June 30, 2002 and $20,795 for the six months ended June 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 $1,504,481 for the six months ended June 30, 2002 and
$376,786 for the six months ended June 30, 2001 and was primarily related to the
exercise of outstanding rights and stock options for the period ended June 30,
2002 and for the period ended June 30, 2001 was from the exercise of warrants
and stock options.
As of June 30, 2002, there were warrants outstanding 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 August 9, 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 will expire on October 4, 2002 unless further extended by the
Company, which is one year after the effective date of the registration
statement related to the shares of common stock underlying the rights. 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, 106,886 rights were also exercised through August
1, 2002 and the Company received proceeds of $908,531.
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 March 31, 2002, 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. We do not expect to purchase additional shares unless certain
conditions warrant it.
We currently anticipate that our current available cash resources combined
with the expected revenues from the sale of the units in inventory will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. Should sales of our product
fall below our expectations during the next 12 months, the Company would be
required to raise capital to fund its operations. There can be no assurances
should the Company need to raise capital 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.
10
Below is a table, which presents our contractual obligations and commitments at
June 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 $32,476 $23,695 $8,781 -- --
Operating Leases 2,254,616 255,828 745,696 530,363 722,729
Purchase commitments (1) -- -- -- -- --
Employment contracts 1,164,334 534,833 629,501 -- --
Total Contractual Cash Obligation $3,451,426 $814,356 $1,383,978 $530,363 $722,729
(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 June 30, 2002, we had a net operating loss carry forward of
approximately $13,900,000 which expires beginning in the year 2013. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
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.
Item 6. Exhibits and Reports on Form 8-K
On June 6, 2002, the Company filed a report on Form 8-K to disclose Changes
in Registrant's Certified Public Accountants.
11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date - August 9, 2002
Intelli-Check, Inc.
By: /s/ Frank Mandelbaum
---------------------------
Frank Mandelbaum
Chairman/CEO
By: /s/ Edwin Winiarz
------------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer/CFO
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Frank Mandelbaum, Chairman and Chief Executive Officer of Intelli-Check,
Inc. (the "Company"), do hereby certify in accordance with 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge
the foregoing Quarterly Report of the Company:
1. fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, 15 U.S.C. 78 m or 78o(d), and,
2. the information contained in the periodic report fairly presents, in all
material respects, the final condition and results of operations of the Company.
Date: August 9, 2002
/s/ Frank Mandelbaum
----------------------
Frank Mandelbaum
Chairman and Chief Executive Officer
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Edwin Winiarz, Senior Vice President, Treasurer and Chief Financial
Officer of Intelli-Check, Inc. (the "Company"), do hereby certify in accordance
with 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge the foregoing Quarterly Report of the Company:
1. fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, 15 U.S.C. 78 m or 78o(d), and,
2. the information contained in the periodic report fairly presents, in all
material respects, the final condition and results of operations of the Company.
Date: August 9, 2002
/s/ Edwin Winiarz
----------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer and Chief Financial Officer
12