Attached files
file | filename |
---|---|
EX-23.1 - INNOVATIVE CARD TECHNOLOGIES INC | v186613_ex23-1.htm |
EX-23.2 - INNOVATIVE CARD TECHNOLOGIES INC | v186613_ex23-2.htm |
File
Number 333-166814
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1 TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
INNOVATIVE
CARD TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
3670
|
90-0249676
|
||
(State
or other jurisdiction of incorporation or
organization)
|
(Primary
Standard Industrial
Classification
Code No.)
|
(I.R.S.
Employer Identification
No.)
|
633 West
Fifth Street, Suite 2600
Los
Angeles, CA 90071
(310)
312-0700
(Address
and telephone number of principal executive offices)
Richard
Nathan
Innovative
Card Technologies, Inc.
633 West
Fifth Street, Suite 2600
Los
Angeles, CA 90071
(310)
312-0700
(Name,
address and telephone number of agent for service)
Copy
of all communications to:
Richard
Friedman, Esq.
David
Manno, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32 nd
Floor
New York,
NY 10006
(212)
930-9700
(212)
930-9725 (fax)
Approximate
date of commencement of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, please
check the following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated
filer
o Accelerated
filer
o Non-accelerated
filer
Title of each class of securities
to be registered
|
Amount to be
Registered
|
Proposed Maximum
Offering Price Per
Security (3)
|
Proposed Maximum
Aggregate Offering
Price
|
Amount of
Registration Fee
|
||||||||||||
Common
Stock, $.001 par value per share
|
6,290,352
|
(1)
|
$
|
0.225
|
$
|
1,415,329.20
|
$
|
100.91
|
||||||||
Common
Stock , $.001 par value per share
|
1,674,515
|
(2)
|
0.225
|
376,765.00
|
26.86
|
|||||||||||
Total
|
7,964,867
|
$
|
1,792,095.00
|
$
|
127.78
|
(4)*
|
(1)
Represents the registration for resale by the selling stockholders of shares of
common stock, $0.001 par value per share (“Common Stock”) of Innovative Card
Technologies, Inc., that are issuable upon exercise of warrants issued to the
selling stockholders.
(2) Represents
the registration for resale by the selling stockholders of shares of Common
Stock of Innovative Card Technologies, Inc., issuable as payment of
interest on convertible debentures issued to the selling
stockholders.
(3)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, using the average of the high
and low prices as reported on the Over-the-Counter Bulletin Board on May 11,
2010, which was $0.225 per share.
(4)
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the amount of
registration fees does not include the $44.70 previously paid to the Securities
and Exchange Commission relating to 700,000 shares of Common Stock previously
registered pursuant to Registration Statement No. 333-151256. All of the
foregoing shares remain unsold at the close of business on May 13,
2010.
*
Previously paid.
Note
regarding Combined Prospectus and Registration:
This
Registration Statement on Form S-1 contains a combined prospectus pursuant to
Rule 429 of Regulation C of the Securities Act with respect to the following
previously filed Registration Statement:
Registration
Statement on Form S-3, filed May 29, 2008, as amended, SEC File No.
333-151256.
PRELIMINARY PROSPECTUS, SUBJECT TO
COMPLETION, DATED MAY
28, 2010
8,664,867
Shares of Common Stock
This
prospectus relates to the resale by the selling stockholders of up to 8,664,867
shares of common stock, par value $0.001 per share (“Common Stock”), of
Innovative Card Technologies, Inc., for sale from time to time by the selling
stockholders.
Our
Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“INVC”. The closing price of our Common Stock on May 27, 2010 was
$0.23.
The
selling stockholders may sell Common Stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions.
We will
not receive any of the proceeds from the sale of Common Stock by the selling
stockholders. We will pay the expenses of registering these shares.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 6.
We
may amend or supplement this prospectus from time to time by filing amendments
or supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
The
date of this prospectus is ______, 2010.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of the prospectus. Any representation to the contrary is a criminal
offense.
TABLE
OF CONTENTS
Page
|
|
Prospectus
Summary
|
4
|
Risk
Factors
|
6
|
Use
of Proceeds
|
11
|
Selling
Stockholders
|
11
|
Plan
of Distribution
|
16
|
Description
of Securities
|
17
|
Description
of Business
|
17
|
Description
of Property
|
20
|
Legal
Proceedings
|
20
|
Market
Price of and Dividends on the Registrant’s Common Equity and Related
Stockholder Matters
|
20
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
33
|
Directors
and Executive Officers
|
33
|
Executive
Compensation
|
34
|
Security
Ownership of Certain Beneficial Owners and Management
|
37
|
Certain
Relationships and Related Transactions and Director
Independence
|
38
|
Legal
Matters
|
38
|
Experts
|
38
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
38
|
Additional
Information
|
39
|
Unaudited
Financial Statements
|
F-1
|
Audited
Financial Statements
|
F-11
|
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "RISK FACTORS" section, the
financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms "InCard", "Company", "we," "us," or "our"
refer to Innovative Card Technologies, Inc. and our wholly owned subsidiary PSA
Co.
We
develop and market secure products for payment, identification, physical and
logical access applications. Our main focus is on developing One-Time-Password
(“OTP”) solutions. An OTP is a password that is only valid for a
single login session or transaction. OTPs avoid a number of shortcomings that
are associated with traditional (static) passwords. The most important
shortcoming that is addressed by OTPs is that, in contrast to static passwords,
they are not vulnerable to replay attacks. This means that, if a potential
intruder manages to record an OTP that was already used to log into a service or
to conduct a transaction, he will not be able to abuse it since it will be no
longer valid.
Currently,
our main OTP product is the ICT DisplayCard. The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTPat the push of a
button. . During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for authentication. InCard does
not provide the backend authentication server, but rather will integrate our
product into authentication systems provided by other companies including
distributors and other resellers. The ICT DisplayCard’s authentication works
like tokens issued by Verisign, VASCO, RSA, and ActivIdentity, but in a more
convenient, wallet-sized card.
The ICT
DisplayCard can be used for both the enterprise and the on-line banking markets.
The enterprise market, which is served by authentication companies such as
VASCO, ActivIdentity, Verisign, and RSA, have the opportunity to
offer the ICT DisplayCard as an alternative for end users to replace existing
tokens. We also offer the ICT DisplayCard to financial institutions to increase
the security of on-line banking transactions. In addition to the security
authentication function, our ICT DisplayCard can be specified to have payment
functionality, enabling credit and debit card issuers to enhance anti-fraud
protection.
In
December of 2009, InCard introduced the ICard, our new OTP
product. The new card sells for significantly less than our ICT
DisplayCard and is intended to service a wider market that our prior
product. The ICard is a time-based solution that changes its OTP
every 60 seconds.
Our
primary focus is and will continue to be the further development, sale and
marketing of OTP solutions. We anticipate we will expand our
current product offering with other innovative OTP
products. During the fiscal year ended December 31, 2009, we
continued to expand our ICT DisplayCard sales and marketing
efforts. During 2009, we achieved the following significant
milestones:
·
|
Commenced
volume manufacturing of our ICT
DisplayCard
|
·
|
Continued
planning the expansion of our supply
chain
|
·
|
Introduced
the ICard, our next generation OTP
product
|
·
|
Realized
sales growth of 45%
|
Our
corporate offices are located at 633 West Fifth Street, Suite 2600, Los Angeles,
California 90071. Our telephone number is (310) 312-0700. Our website address is
http://www.incardtech.com. The contents of our website are not incorporated into
this filing. Further, our reference to this website is intended to be inactive
textual reference only.
About
This Offering
This
prospectus relates to a total of 8,664,867 shares of common stock of Innovative
Card Technologies, Inc.
4
January
2008 Financing
On
January 8, 2008, we entered into a securities purchase agreement (the “January
2008 Purchase Agreement”) with 13 institutional and accredited investors (the
“January 2008 Purchasers”). Pursuant to the January 2008 Purchase Agreement, the
January 2008 Purchasers purchased $3,500,000 principal amount of our 8% Senior
Secured Convertible Debenture (“January 2008 Debenture”). Upon issuance, the
January 2008 Debenture (i) bore interest at 8% per year, paid quarterly in cash
or registered common stock (valued at the lower of the conversion price or 90%
of the volume weighted average price of the twenty prior consecutive trading
days), at our discretion; (ii) had a maturity of January 8, 2011, (iii) was
convertible at the holder’s option into shares of our common stock at $2.50 per
share, (iv) was secured by all of our and our subsidiary’s assets including
inventory, receivables, unencumbered equipment and intellectual property under
the terms of a security agreement, and (v) had a forced conversion feature which
allowed us to force the conversion of the January 2008 Debenture if our common
stock traded above $5.00 for 20 consecutive trading days and certain other
conditions were met. We also issued to the January 2008 Purchasers five-year
warrants to purchase 700,000 shares of our common stock at an exercise price of
$2.75 per share (the “January 2008 Warrants”).
Waiver,
Amendment and Exchange Agreement
On
September 30, 2009, we entered into a Waiver, Amendment and Exchange Agreement
(the “Amendment Agreement”) with the persons identified as holders on the
signature pages thereto (the “Holders”). Pursuant to the Amendment Agreement,
the January 2008 Purchasers agreed to waive all existing events of default under
the January 2008 Debentures and to waive any late fees, increased interest and
liquidated damages that accrued prior to September 30, 2009.
Pursuant
to the Amendment Agreement, the Company also agreed to issue to the January 2008
Purchasers, in exchange for their January 2008 Debentures and January 2008
Warrants, Amended and Exchanged Original Issuance Discount Debentures (“Amended
Debentures”), with a principal amount equal to each Holder’s current January
2008 Debenture plus interest through April 2, 2010 and Amended and Exchanged
Warrants (“Amended Warrants”) in an amount equal to each Holder’s current
January 2008 Warrant. The Amended Debentures (i) bear interest at 8%
per year commencing on April 1, 2010, paid quarterly, commencing July 1, 2010,
in cash or, subject to certain conditions, registered shares of our common
stock; (ii) have a maturity of January 8, 2011, (iii) are convertible at the
Holder’s option into shares of our common stock at an initial conversion price
of $1.00 per share, (iv) are secured by all of our and our subsidiaries’ assets,
including inventory, receivables, unencumbered equipment and intellectual
property, and (v) have a forced conversion feature which allows the Company to
force the conversion of the Amended Debentures if our common stock trades above
$1.00 for 10 consecutive trading days. Such a forced conversion may
be limited by contractual restrictions on the amount of our common stock which
the Holder may own and certain other conditions. Each Amended Warrant has
a term of 5 years from the initial issuance date which is January 8, 2008 and an
exercise price of $0.25 per share. The Amended Warrants also provide for the
issuance of a replacement warrant in the event they are exercised for cash (the
“Amended Replacement Warrants”). The Amended Warrants and Amended Replacement
Warrants may be exercised on a cashless basis if there is not an effective
registration statement for the underlying shares of common
stock.
Pursuant
to the Amendment Agreement, we issued an aggregate of $3,975,974 of our Amended
Debentures and Amended Warrants to purchase 700,000 common shares in
exchange for the January 2008 Debentures and January 2008 Warrants.
Pursuant
to the Amendment Agreement, in addition to the exchange of the January 2008
Debentures and January 2008 Warrants, we also exchanged certain outstanding
obligations owed to creditors of the Company in an aggregate amount of $672,243
in exchange for debentures in the face amount of $699,354 (which includes
interest through April 2, 2010) and 135,533 warrants to purchase shares of our
common stock (the “September 2009 Amendment Agreement Warrants”). The September
2009 Amendment Agreement Warrants have the same terms as the Amended Warrants,
including a provision for the issuance of replacement warrants in the event they
are exercised for cash (the “September 2009 Amendment Agreement Replacement
Warrants”) .
Debenture
and Warrant Purchase Agreement
On
September 30, 2009, we entered into a Debenture and Warrant Purchase Agreement
(the “September 2009 Purchase Agreement”) with the purchasers named therein.
Pursuant to the September 2009 Purchase Agreement, the Company sold an
additional $1,173,416 face amount of debentures with a conversion price of $0.25
and otherwise with the same terms as the Amended Debentures and warrants to
purchase 2,254,643 shares of common stock with the same terms as the Amended
Warrants (the “September 2009 Purchase Agreement Warrants”), including a
provision for the issuance of replacement warrants in the event they are
exercised for cash (the “September 2009 Purchase Agreement Replacement
Warrants”, and together with the Amended Replacement Warrants and the September
2009 Amendment Agreement Replacement Warrants, the “Replacement
Warrants”). The debentures were sold for a purchase price of
$1,127,321 and the face amount of the debentures includes interest through April
2, 2010. As a condition to the closing, the investors required any January 2008
Purchasers not participating in the September 2009 Purchase Agreement to further
amend their Amended Debentures and Amended Warrants to remove the anti-dilution
provisions in each document relating to subsequent equity issuances, including
the September 2009 Purchase Agreement. All other terms and conditions
are identical to the Amended Debentures and Amended
Warrants. As a result, the conversion price of Amended
Debentures in the principal amount of $3,336,287 was reduced to $0.25.
5
The
8,664,867 shares of common stock included in this prospectus include (i) 700,000
shares issuable upon exercise of the Amended Warrants, (ii) 135,533 shares
issuable upon exercise of the September 2009 Amendment Agreement Warrants, (iii)
2,254,643 shares issuable upon exercise of the September 2009 Purchase Agreement
Warrants, and (iv) 3,090,176 shares issuable upon exercise of the Replacement
Warrants.
This
prospectus also includes:
|
·
|
75,000 shares issuable upon
exercise of warrants issued on June 17, 2008, for services, to Jose
Castenada, with an exercise price of
$0.25.
|
|
·
|
275,000 shares issuable upon
exercise of warrants issued on June 17, 2008, for services, to David
Castenada, with an exercise price of
$0.25
|
|
·
|
60,000 shares issuable upon
exercise of warrants issued on April 4, 2008, for services, to Jose
Castenada, with an exercise price of
$0.25.
|
|
·
|
400,000 shares issuable upon
exercise of warrants issued on September 9, 2009, to High Tide, LLC, with
an exercise price of $0.25, in connection with the sale to High Tide, LLC
of a note in the principal amount of
$100,000.
|
|
·
|
1,674,515 potential shares
issuable as payment of interest due on convertible debentures through the
maturity date, calculated using an estimated share price of
$0.20.
|
Shares
of Common Stock outstanding before the offering
|
30,558,562
(as of March 31, 2010)
|
|
Shares
of Common Stock offered by Selling Stockholders
|
Up
to 8,664,867 shares
|
|
Shares
of Common Stock outstanding after the offering
|
39,223,429
(assuming the exercise of all the warrants the underlying shares of which
are included in this prospectus, and the issuance of 1,674,515 share as
interest)
|
|
Over-the-Counter
Bulletin Board symbol
|
INVC.OB
|
|
Risk
factors
|
The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on page 6.
|
Risk
Factors
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of our
stock could go down. As a result, you could lose all or a part of your
investment.
Risk
Related to Our Business and Operations
There
is serious doubt regarding our ability to continue as a going
concern.
We
have a history of recurring losses from operations and have an accumulated
deficit of $38,772,663 as of March 31, 2010. Sales of our products are not
expected to generate positive cash flow until the fourth quarter of
2010. As a result, there is substantial doubt about our ability to
continue as a going concern. Our plan regarding these matters is to
raise additional debt and/or equity financing to allow us the ability to cover
our current cash flow requirements and meet our obligations as they become
due. There can be no assurances that financing will be available or
if available, that such financing will be available under favorable terms. In
the event that we are unable to generate adequate revenues to cover expenses and
cannot obtain additional financing in the near future, we may seek protection
under bankruptcy laws.
6
Our
auditors have added an explanatory paragraph to their opinion on our financial
statements for the year ended December 31, 2009 because of concerns about our
ability to continue as a going concern. These concerns arise from the fact that
we have not yet established an ongoing source of revenues sufficient to cover
our operating costs. As a result, we must raise additional capital in
order to continue to operate our business. If we fail to generate positive cash
flows or obtain additional financing when required, we will have to modify,
delay or abandon some or all of our business and expansion plans.
We
are an early stage company with an unproven business strategy.
Our
business prospects are difficult to predict because of our limited operating
history, early stage of development and unproven business strategy. We are
primarily focused on developing OTP solutions and products. We made
our first significant commercial sale of our ICT DisplayCard in 2008. Although
we believe that our current product and those under development have significant
profit potential, we may not attain profitable operations and may not succeed in
realizing our business objectives.
We
will require additional capital which we may be unable to obtain.
We
believe that our current cash, combined with anticipated revenue collections,
will be enough to fund our operations until July, 2010. We currently
do not have any sources of additional financing and cannot assure you that such
funding will be available. If we are unable to raise additional
capital we may be forced to file for bankruptcy.
We
depend on a limited number of suppliers for our current product.
We obtain
the battery for our current product from Solicore, Inc., our single source
supplier, on a purchase order basis. In the event of a disruption or
discontinuation in supply, we may not be able to obtain batteries on a timely
basis, which would disrupt our operations, delay production and impair our
ability to manufacture and sell our products.
We obtain
the display for our current product from SmartDisplayer, our single source
supplier, under a written agreement. In the event of a disruption or
discontinuation in supply, we may not be able to obtain displays on a timely
basis, which would disrupt our operations, delay production and impair our
ability to manufacture and sell our ICT DisplayCard.
Our
dependence upon outside suppliers exposes us to risks, including:
|
·
|
the possibility that our
suppliers will experience major disruptions in production, which is
exacerbated by the fact that we are a major customer of our
suppliers;
|
|
·
|
the solvency of our suppliers and
the potential that our suppliers will be solely dependent upon
us;
|
|
·
|
the potential inability of our
suppliers to obtain required components or
products;
|
|
·
|
reduced control over pricing,
quality and timely delivery, due to the difficulties in switching to
alternative suppliers;
|
|
·
|
potential delays and expense of
seeking alternative sources of suppliers;
and
|
|
·
|
increases in prices of key
components.
|
We
may not be able to develop our products due to inadequate
resources.
Our
business strategy is to develop and market new OTP solutions and products. We
believe that our revenue growth and profitability, if any, will substantially
depend upon our ability to:
|
·
|
mass produce the ICT DisplayCard
at significantly lower cost;
|
|
·
|
continue to fund research and
development endeavors; and
|
|
·
|
develop, introduce and
commercialize new products.
|
If we are
not able to devote adequate resources to our new product development efforts, we
may be unable to develop new products, which would adversely affect our revenue
growth and profitability.
7
We
depend on key personnel.
We rely
to a substantial extent on the management, marketing and product development
skills of our key employees and consultants, particularly Richard Nathan, our
President and Chief Executive Officer, Craig Nelson, who supervises the
manufacturing and testing of the InCard DisplayCard, and Mark Poidomani, our
chief technology officer, to formulate and implement our business plan. Our
success depends to a significant extent upon our ability to retain and attract
key personnel. Competition for employees can be intense in the payment card
industry, and the process of locating key personnel with the right combination
of skills is often lengthy. The loss of any key personnel may significantly
delay or prevent the achievement of product development and could have a
material adverse effect on us.
Our
products might not achieve market acceptance.
The
commercial success of our products will depend upon the adoption of our products
by payment card providers. In order to be successful, our products must meet the
technical and cost requirements for card enhancements within the payment card
industry. Market acceptance will depend on many factors, including:
|
·
|
our ability to convince
prospective strategic partners and customers to adopt our
products;
|
|
·
|
the willingness and ability of
prospective strategic partners and customers to adopt our products;
and
|
|
·
|
our ability to sell and service
sufficient quantities of our
products.
|
Because
of these and other factors, our products may not achieve market acceptance. If
our products do not achieve market acceptance, demand for our products will not
develop as expected and it is highly unlikely that we will become
profitable.
We
rely substantially on third-party manufacturers.
To be
successful, we must manufacture, or contract for the manufacture of, our
products in compliance with industry standards and on a timely basis. As
discussed in the risk factor above, we are working in cooperation with other
companies that have specialized technical expertise related to the manufacturing
of our ICT DisplayCard. We also currently use a limited number of sources for
most of the supplies and services that we use in the manufacturing processes.
Our manufacturing strategy presents the following risks:
|
·
|
delays in the quantities needed
for product development could delay commercialization of our products in
development;
|
|
·
|
if we need to change to other
commercial manufacturers, any new manufacturer would have to be educated
in, or develop substantially equivalent processes necessary for, the
production of our products;
|
|
·
|
if market demand for our products
increases suddenly, our current manufacturers might not be able to fulfill
our commercial needs, which would require us to seek new manufacturing
arrangements and may result in substantial delays in meeting market
demand; and
|
|
·
|
we may not have intellectual
property rights, or may have to share intellectual property rights, to any
improvements in the manufacturing processes or new manufacturing processes
for our products.
|
Any of
these factors could delay commercialization of our products under development,
entail higher costs and result in our being unable to effectively manufacture
our products.
Some
of our competitors have significantly greater resources than us.
We
believe that the principal competitive factors that affect the market for tokens
include convenience, price, quality/reliability, ease of use, and distribution
cost. We cannot assure you that we will be able to maintain our competitive
position against current and potential competitors, especially those with
significant marketing, service, support, technical and other competitive
resources.
Our
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than we do, and as a result, may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of products, or to deliver competitive products at a lower end-user price.
Our inability to successfully compete will materially and adversely affect our
business.
Risks
Related to our Securities
Our
common shares were delisted from the NASDAQ Capital Market.
On
February 20, 2009, our common shares were delisted from the NASDAQ Capital
Market. As a result, our shares now trade on the Over-the-Counter
Bulletin Board and on the Pinksheets. Historically, the volume and
liquidity of these markets has been significantly less than on the NASDAQ
Capital Market. In addition, shares traded in these markets are
unlikely to be followed by market analysts and there may be few market makers
for our common stock. Also, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the price of our common
stock. Any of these factors could adversely affect the liquidity and
trading price of our common stock and could result in large fluctuations in
market price.
8
Our
common stock is subject to the penny stock regulations and
restrictions.
Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a
"penny stock," for purposes relevant to us, as any equity security that has a
minimum bid price of less than $5.00 per share, subject to a limited number of
exceptions which are not available to us. It is likely that our shares will be
considered to be penny stocks for the immediately foreseeable future. This
classification severely and adversely affects any market liquidity for our
common stock.
For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person's account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's account
for transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transaction is suitable for that person and
that that person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market which
sets forth:
|
·
|
the basis on which the broker or
dealer made the suitability determination,
and
|
|
·
|
that the broker or dealer
received a signed, written agreement from the investor prior to the
transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions’ payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Because
of these regulations, broker-dealers may not wish to engage in transactions with
penny stocks. Accordingly, investors may encounter difficulties in
their attempt to sell shares of our common stock. These additional
sales practice and disclosure requirements could impede the sale of our common
stock. In addition, the liquidity for our common stock may decrease, with a
corresponding decrease in the price of our common stock. Our shares, in all
probability, will be subject to such penny stock rules for the foreseeable
future and our shareholders will, in all likelihood, find it difficult to sell
their common stock.
The
market for penny stocks has experienced numerous frauds and abuses.
We
believe that the market for penny stocks has suffered from patterns of fraud and
abuse. Such patterns include:
|
·
|
Control of the market for the
security by one or a few broker-dealers that are often related to the
promoter or issuer;
|
|
·
|
Manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases;
|
|
·
|
“Boiler room" practices involving
high pressure sales tactics and unrealistic price projections by
inexperienced sales persons;
|
|
·
|
Excessive and undisclosed bid-ask
differentials and markups by selling broker-dealers;
and
|
|
·
|
Wholesale dumping of the same
securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the inevitable collapse of
those prices with consequent investor
losses.
|
As
a result, many investors have the perception that penny stocks are too risky or
involve a high degree of fraud. These factors will make the
development of an active market for our common shares more difficult which
further affects the liquidity of our common stock.
We
do not pay any dividends.
We plan
to use all of our earnings; to the extent we have earnings, to fund our
operations. We do not plan to pay any cash dividends in the foreseeable
future. Therefore, any return on your investment will be derived from
an increase in the price of our stock, which may or may not occur.
9
Sales
of our common stock in the public market may depress our stock
price.
As of
March 31, 2010, we had 30,558,562 shares of common stock outstanding. On a fully
diluted basis, including shares issuable upon exercise of warrants and stock
options and convertible debentures, we have 62,131,062 shares outstanding or
issuable, as of March 31, 2010. On September 30, 2009, we
completed the restructuring of our 8% Senior Secured Convertible
Debentures. As a result, the conversion price of the debentures as
well as substantially all our outstanding warrants was adjusted to
$0.25. All of these shares can be traded pursuant to prospectus or
via Rule 144 of the Securities Act of 1933. If our stockholders sell
substantial amounts of common stock in the public market, or the market
perceives that such sales may occur, the market price of our common stock could
fall, which could result in a significant loss on any investment you make in our
common stock. The sale of a large number of shares could impair our ability to
raise needed capital by depressing the price of our common
stock.
We
may be subject to securities litigation as the price of our common stock has
drastically decreased over the past twelve months.
During
the past two years, the price of our common stock has decreased from $1.27 on
June 30, 2008 to $0.23 as of May 27, 2010. Although management feels that at all
times it has acted in the best interest of the company’s shareholders, such
declines in stock price have historically increased the probability of becoming
the subject of a securities class action law suit. If we were to
become the target of such litigation, we will have to spend considerable time
and resources in defending such litigation. This would result in
management diverting its focus from the development and sale of our
products. Additionally, such litigation is extremely costly and will
deplete our assets.
We
may raise additional capital through a securities offering that could dilute
your ownership interest and voting rights.
Our
certificate of incorporation currently authorizes our board of directors to
issue up to 75,000,000 shares of common stock and 5,000,000 shares of preferred
stock. As of March 31, 2010, after taking into consideration our outstanding
common and preferred shares and our contingently issuable shares, our board of
directors will be entitled to issue up to 12,868,938 additional common shares
and 5,000,000 preferred shares. The power of the board of directors to issue
these shares or securities convertible into these shares is generally not
subject to stockholder approval.
We will
require additional working capital to fund our business. If we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, these securities may have rights, preferences or privileges senior
to those of the holders of our common stock. The issuance of additional common
stock or securities convertible into common stock will also have the effect of
diluting the proportionate equity interest and voting power of holders of our
common stock.
Our
incorporation documents and Delaware law may inhibit a takeover that
stockholders consider favorable and could also limit the market price of your
stock, which may inhibit an attempt by our stockholders to change our direction
or management.
Our
amended and restated certificate of incorporation and bylaws contain provisions
that could delay or prevent a change in control of our company. Some of these
provisions:
|
·
|
authorize our board of directors
to determine the rights, preferences, privileges and restrictions granted
to, or imposed upon, the preferred stock and to fix the number of shares
constituting any series and the designation of such series without further
action by our stockholders;
|
|
·
|
prohibit stockholders from
calling special meetings;
|
|
·
|
prohibit cumulative voting in the
election of directors, which would otherwise allow less than a majority of
stockholders to elect director
candidates;
|
|
·
|
establish advance notice
requirements for submitting nominations for election to the board of
directors and for proposing matters that can be acted upon by stockholders
at a meeting; and
|
|
·
|
prohibit stockholder action by
written consent, requiring all stockholder actions to be taken at a
meeting of our stockholders.
|
In
addition, we are governed by the provisions of Section 203 of the Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us, which may prevent or frustrate any attempt by our
stockholders to change our management or the direction in which we are heading.
These and other provisions in our amended and restated certificate of
incorporation and bylaws and under Delaware law could reduce the price that
investors might be willing to pay for shares of our common stock in the future
and result in the market price being lower than it would be without these
provisions.
10
New
rules, including those contained in and issued under the Sarbanes-Oxley Act of
2002, may make it difficult for us to retain or attract qualified officers and
directors.
We may be
unable to attract and retain qualified officers, directors and members of board
committees required to provide for our effective management as a result of the
recent and currently proposed changes in the rules and regulations that govern
publicly held companies, including, but not limited to, certifications from
executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the Securities and Exchange Commission (the “SEC”). Further,
certain of these recent and proposed changes heighten the requirements for board
or committee membership, particularly with respect to an individual’s
independence from the corporation and level of experience in finance and
accounting matters. We may have difficulty attracting and retaining directors
with the requisite qualifications. If we are unable to attract and retain
qualified officers and directors, the management of our business could be
adversely affected.
Our
management has concluded that, as of March 31, 2010, our disclosure controls and
procedures were not effective.
Our
management, with the participation of our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of March 31, 2010. Based on such evaluation which
disclosed numerous material weaknesses, our CEO and CFO have concluded that, as
of March 31, 2010, the Company’s disclosure controls and procedures were not
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act and were not effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including the Company’s CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. If we fail to implement
new or improved disclosure controls, investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the
value of our common stock.
We
have identified numerous material weaknesses in our internal control over
financial reporting.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules
requiring public companies to include a report of management on internal control
over financial reporting in their Annual Reports on Form 10-K. Our Annual Report
for the year ending December 31, 2009 was required to contain an assessment by
management of the effectiveness of a company’s internal control over financial
reporting. Our non-affiliated market capitalization qualified us as a “Smaller
Reporting Company” effective in 2009. As a result, we were required to include
our management’s report on internal control over financial reporting in our
Annual Report for the year ended December 31, 2009, but were not required to
include our auditors’ attestation report on our internal control over financial
reporting. As of December 31, 2009, our internal controls over
financial reporting were not effective and we have identified a number of
material weaknesses in our internal control over financial reporting. While we
intend to remedy these weaknesses during the current fiscal year, we may be
unable to do so. If we fail to implement required new or improved controls there
may be an adverse reaction in the financial markets due to a loss of confidence
in the reliability of our financial statements, which could cause the market
price of our common stock to decline.
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of shares of the Common Stock
offered by the selling stockholders.
SELLING
STOCKHOLDERS
The
selling stockholders may transfer, in transactions exempt from the registration
requirements of the Securities Act of 1933, some or all of their shares since
the date on which the information in the table below is presented. Information
about the selling stockholders may change from time to time. Any changed
information will be set forth in prospectus supplements or post effective
amendments, as required.
11
No
selling stockholder has, or within the past three years has had, any position,
office or other material relationship with us or any of our predecessors or
affiliates other than as a result of ownership of our securities.
Name of Selling
Stockholder
|
Beneficial Ownership
Before the Offering
(1)
|
Shares of Common
Stock Included in
Prospectus
|
Beneficial Ownership
After the Offering
|
Percentage of
Ownership After
Completion of
Offering (2)
|
||||||||||||
Alpha
Capital Anstalt (3)
|
1,604,960
|
(4)
|
968,679
|
(5)
|
2,060,045
|
4.99
|
%
|
|||||||||
Bristol
Investment Fund (6)
|
1,604,960
|
(7)
|
1,188,312
|
(8)
|
2,060,045
|
4.99
|
%
|
|||||||||
Charles
B. Runnels Family Trust DTD 10-14-93 Charles B. Runnels & Amy Jo
Runnels TTEES (9)
|
795,672
|
(10)
|
174,065
|
(11)
|
737,100
|
1.85
|
%
|
|||||||||
Donald
W. Killian III (12)
|
655,741
|
(13)
|
198,965
|
(14)
|
578,599
|
1.45
|
%
|
|||||||||
Epsom
Investment Services, N.V. (15)
|
131,950
|
(16)
|
74,580
|
(17)
|
111,950
|
*
|
||||||||||
Gemini
Master Fund, Ltd. (18)
|
1,604,960
|
(19)
|
400,058
|
(20)
|
1,416,896
|
3.59
|
%
|
|||||||||
G.
Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD
1-11-2000 (21)
|
1,392,007
|
(22)
|
649,990
|
(23)
|
1,109,865
|
2.75
|
%
|
|||||||||
High
Tide, LLC (24)
|
1,604,960
|
(25)
|
1,142,596
|
(26)
|
1,199,085
|
2.97
|
%
|
|||||||||
IRA
FBO J. Steven Emerson R/O Pershing (27)
|
1,604,960
|
(28)
|
1,010,256
|
(29)
|
2,060,045
|
4.99
|
%
|
|||||||||
John
B. Davies (30)
|
1,604,960
|
(31)
|
497,418
|
(32)
|
1,446,503
|
3.56
|
%
|
|||||||||
Jonathan
& Nancy Glaser Family Trust DTD 12/16/98 Jonathan M. Glaser and Nancy
E. Glaser TTEES (33)
|
674,552
|
(34)
|
377,473
|
(35)
|
574,552
|
1.44
|
%
|
|||||||||
MM
& B Holdings, a California General Partnership (36)
|
1,604,960
|
(37)
|
597,054
|
(38)
|
1,735,950
|
4.24
|
%
|
|||||||||
Emerson
Partners (39)
|
154,089
|
(40)
|
108,038
|
(41)
|
104,089
|
*
|
||||||||||
J.
Steven Emerson (42)
|
154,089
|
(40)
|
108,038
|
(41)
|
104,089
|
*
|
||||||||||
David
Castaneda
|
355,126
|
(43)
|
331,180
|
(44)
|
54,126
|
*
|
||||||||||
Jose
Castaneda
|
331,333
|
(45)
|
167,607
|
(46)
|
187,260
|
*
|
||||||||||
nCryptone,
S.A. (47)
|
778,999
|
(48)
|
454,482
|
(49)
|
652,539
|
1.64
|
%
|
|||||||||
IRA
FBO J. Steven Emerson ROTH Pershing (50)
|
308,178
|
(51)
|
216,076
|
(52)
|
208,178
|
*
|
*
Indicates less than one percent.
(1)
Beneficial ownership is determined in accordance with the rules and regulations
of the SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, securities that are currently
convertible or exercisable into shares of our common stock, or convertible or
exercisable into shares of our common stock within 60 days of the date hereof
are deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except as
indicated in the footnotes to the following table, each stockholder named in the
table has sole voting and investment power with respect to the shares set forth
opposite such stockholder’s name. The percentage of beneficial ownership is
based on 30,558,562 shares of common stock outstanding as of March 31,
2010.
12
(2)
Assumes that all shares will be resold by the selling stockholders after this
offering.
(3)
Konrad Ackerman has voting and investment control of the securities to be
offered for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
(4) The
selling shareholder owns 279,461 shares of common stock, debentures convertible
into 2,554,328 shares at a conversion price of $0.25 and warrants to purchase
385,714 shares with an exercise price of $0.25. The debentures and warrants may
not be converted or exercised, as applicable, to the extent that such conversion
or exercise would cause the selling shareholder to own more than 4.99% of the
Company’s outstanding shares of common stock. The number of shares deemed
beneficially owned is limited accordingly.
(5)
Represents (i) 100,000 shares issuable upon exercise of Amended Warrants, (ii)
285,714 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 385,714 shares issuable upon exercise of Replacement Warrants,
and (iv) 197,251 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(6) Paul
Kessler has voting and investment control of the securities to be offered for
resale. The selling stockholder has informed us that it is not a broker-dealer
or an affiliate of a broker-dealer.
(7) The
selling shareholder owns debentures convertible into 3,400,548 shares at a
conversion price of $0.25 and warrants to purchase 462,857 shares with an
exercise price of $0.25. The debentures and warrants may not be converted or
exercised, as applicable, to the extent that such conversion or exercise would
cause the selling shareholder to own more than 4.99% of the Company’s
outstanding shares of common stock. The number of shares deemed beneficially
owned is limited accordingly.
(8)
Represents (i) 120,000 shares issuable upon exercise of Amended Warrants, (ii)
342,857 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 462,857 shares issuable upon exercise of Replacement Warrants,
and (iv) 262,598 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(9) G.
Tyler Runnels has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is an affiliate of a
broker-dealer. The selling stockholder bought the securities to be resold in the
ordinary course of business, and at the time of the purchase of the securities
had no agreements or understandings, directly or indirectly, with any person to
distribute the securities.
(10)
Includes 737,102 shares issuable upon conversion of debentures with an exercise
price of $0.25 and 58,572 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(11)
Represents (i) 30,000 shares issuable upon exercise of Amended Warrants, (ii)
28,572 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 58,572 shares issuable upon exercise of Replacement Warrants,
and (iv) 56,921 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(12) The
selling stockholder has informed us that he is not a broker-dealer or an
affiliate of a broker-dealer. The selling stockholder served as a director of
InCard from December 2006 to July 2007.
(13)
Includes 578,599 shares issuable upon conversion of debentures with a conversion
price of $0.25 and 77,142 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(14)
Represents (i) 20,000 shares issuable upon exercise of Amended Warrants, (ii)
57,142 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 77,142 shares issuable upon exercise of Replacement Warrants,
and (iv) 44,681 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(15)
David Craven and Steven Drayton have voting and investment control of the
securities to be offered for resale. The selling stockholder has informed us
that it is not a broker-dealer or an affiliate of a broker-dealer.
(16)
Includes 111,950 shares issuable upon conversion of debentures with a conversion
price of $1.00 and 20,000 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(17)
Represents (i) 20,000 shares issuable upon exercise of Amended Warrants, (ii)
20,000 shares issuable upon exercise of Replacement Warrants, and (iii) 34,580
potential shares issuable as payment of interest due on convertible debentures
through the maturity date, calculated using an estimated share price of
$0.20.
(18)
Steven Winters has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
13
(19) The
selling shareholder owns 1,231,178 shares of common stock, debentures
convertible into 185,718 shares at a conversion price of $0.25 and warrants to
purchase 192,858 shares with an exercise price of $0.25. The debentures and
warrants may not be converted or exercised, as applicable, to the extent that
such conversion or exercise would cause the selling shareholder to own more than
4.99% of the Company’s outstanding shares of common stock. The number of shares
deemed beneficially owned is limited accordingly.
(20)
Represents (i) 50,000 shares issuable upon exercise of Amended Warrants, (ii)
142,858 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 192,858 shares issuable upon exercise of Replacement Warrants,
and (iv) 14,342 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(21) G.
Tyler Runnels has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is an affiliate of a
broker-dealer. The selling stockholder bought the securities to be resold in the
ordinary course of business, and at the time of the purchase of the securities
had no agreements or understandings, directly or indirectly, with any person to
distribute the securities.
(22)
Includes 1,109,865 shares issuable upon conversion of debentures with a
conversion price of $0.25 and 282,142 shares issuable upon exercise of warrants
with an exercise price of $0.25.
(23)
Represents (i) 25,000 shares issuable upon exercise of Amended Warrants, (ii)
257,142 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 282,142 shares issuable upon exercise of Replacement Warrants,
and (iv) 85,706 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(24) G.
Tyler Runnels has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is an affiliate of a
broker-dealer. The selling stockholder bought the securities to be resold in the
ordinary course of business, and at the time of the purchase of the securities
had no agreements or understandings, directly or indirectly, with any person to
distribute the securities.
(25) The
selling shareholder owns debentures convertible into 1,199,086 shares at a
conversion price of $0.25 and warrants to purchase 725,000 shares with an
exercise price of $0.25. The debentures and warrants may not be converted or
exercised, as applicable, to the extent that such conversion or exercise would
cause the selling shareholder to own more than 4.99% of the Company’s
outstanding shares of common stock. The number of shares deemed beneficially
owned is limited accordingly.
(26)
Represents (i) 25,000 shares issuable upon exercise of Amended Warrants, (ii)
300,000 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 325,000 shares issuable upon exercise of Replacement Warrants,
(iv) 400,000 shares issuable upon exercise of additional warrants held by the
selling shareholder with an exercise price of $0.25, and (v) 92,596 potential
shares issuable as payment of interest due on convertible debentures through the
maturity date, calculated using an estimated share price of $0.20.
(27) J.
Steven Emerson has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
(28) The
selling shareholder owns 200,000 shares of common stock, debentures convertible
into 2,722,741 shares at a conversion price of $0.25 and warrants to purchase
400,000 shares with an exercise price of $0.25. The debentures and warrants may
not be converted or exercised, as applicable, to the extent that such conversion
or exercise would cause the selling shareholder to own more than 4.99% of the
Company’s outstanding shares of common stock. The number of shares deemed
beneficially owned is limited accordingly.
(29)
Represents (i) 100,000 shares issuable upon exercise of Amended Warrants, (ii)
300,000 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 400,000 shares issuable upon exercise of Replacement Warrants,
and (iv) 210,256 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(30) The
selling stockholder has informed us that he is not a broker-dealer or an
affiliate of a broker-dealer.
(31) The
selling shareholder owns debentures convertible into 1,446,503 shares at a
conversion price of $0.25 and warrants to purchase 192,858 shares with an
exercise price of $0.25. The debentures and warrants may not be converted or
exercised, as applicable, to the extent that such conversion or exercise would
cause the selling shareholder to own more than 4.99% of the Company’s
outstanding shares of common stock. The number of shares deemed beneficially
owned is limited accordingly.
(32)
Represents (i) 50,000 shares issuable upon exercise of Amended Warrants, (ii)
142,858 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 192,858 shares issuable upon exercise of Replacement Warrants,
and (iv) 197,251 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(33)
Jonathan Glaser has voting and investment control of the securities to be
offering for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
14
(34)
Includes 574,553 shares issuable upon conversion of debentures with a conversion
price of $1.00 and 100,000 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(35)
Represents (i) 100,000 shares issuable upon exercise of Amended Warrants, (ii)
100,000 shares issuable upon exercise of Replacement Warrants, and (iii) 177,473
potential shares issuable as payment of interest due on convertible debentures
through the maturity date, calculated using an estimated share price of
$0.20.
(36)
Cristina Agra-Hughes has voting and investment control of the securities to be
offered for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
(37) The
selling shareholder owns debentures convertible into 1,735,950 shares at a
conversion price of $0.25 and warrants to purchase 231,500 shares with an
exercise price of $0.25. The debentures and warrants may not be converted or
exercised, as applicable, to the extent that such conversion or exercise would
cause the selling shareholder to own more than 4.99% of the Company’s
outstanding shares of common stock. The number of shares deemed beneficially
owned is limited accordingly.
(38)
Represents (i) 60,000 shares issuable upon exercise of Amended Warrants, (ii)
171,500 shares issuable upon exercise of September 2009 Purchase Agreement
Warrants, (iii) 231,500 shares issuable upon exercise of Replacement Warrants,
and (iv) 134,054 potential shares issuable as payment of interest due on
convertible debentures through the maturity date, calculated using an estimated
share price of $0.20.
(39) J.
Steven Emerson has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
(40)
Includes 104,089 shares issuable upon conversion of debentures with a conversion
price of $0.25 and 50,000 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(41)
Represents (i) 50,000 shares issuable upon exercise of September 2009 Purchase
Agreement Warrants, (ii) 50,000 shares issuable upon exercise of Replacement
Warrants, and (iii) 8,038 potential shares issuable as payment of interest due
on convertible debentures through the maturity date, calculated using an
estimated share price of $0.20.
(42) The
selling stockholder has informed us that he is not a broker-dealer or an
affiliate of a broker-dealer.
(43)
Includes 54,126 shares issuable upon conversion of debentures with a conversion
price of $0.25 and 301,000 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(44)
Represents (i) 26,000 shares issuable upon exercise of September 2009 Purchase
Agreement Warrants, (ii) 26,000 shares issuable upon exercise of Replacement
Warrants, (iii) 275,000 shares issuable upon exercise of additional warrants
held by the selling shareholder with an exercise price of $0.25, and (iv) 4,180
potential shares issuable as payment of interest due on convertible debentures
through the maturity date, calculated using an estimated share price of
$0.20.
(45)
Includes 187,260 shares issuable upon conversion of debentures with a conversion
price of $0.25 and 144,073 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(46)
Represents (i) 9,073 shares issuable upon exercise of September 2009 Amendment
Agreement Warrants, (ii) 9,073 shares issuable upon exercise of Replacement
Warrants, (iii) 135,000 shares issuable upon exercise of additional warrants
held by the selling shareholder with an exercise price of $0.25, and (iv) 14,461
potential shares issuable as payment of interest due on convertible debentures
through the maturity date, calculated using an estimated share price of
$0.20.
(47)
nCryptone SA is a wholly owned subsidiary of Prosodie SA.
(48) The
selling shareholder owns debentures convertible into 652,539 shares at a
conversion price of $1.00 and warrants to purchase 126,460 shares with an
exercise price of $0.25.
(49)
Represents (i) 126,460 shares issuable upon exercise of September 2009 Amendment
Agreement Warrants, (ii) 126,460 shares issuable upon exercise of Replacement
Warrants, and (iii) 201,562 potential shares issuable as payment of interest due
on convertible debentures through the maturity date, calculated using an
estimated share price of $0.20.
(50) J.
Steven Emerson has voting and investment control of the securities to be offered
for resale. The selling stockholder has informed us that it is not a
broker-dealer or an affiliate of a broker-dealer.
15
(51)
Includes 208,178 shares issuable upon conversion of debentures with a conversion
price of $0.25 and 100,000 shares issuable upon exercise of warrants with an
exercise price of $0.25.
(52)
Represents (i) 100,000 shares issuable upon exercise of September 2009 Purchase
Agreement Warrants, (ii) 100,000 shares issuable upon exercise of Replacement
Warrants, and (iii) 16,076 potential shares issuable as payment of interest due
on convertible debentures through the maturity date, calculated using an
estimated share price of $0.20.
PLAN
OF DISTRIBUTION
We are
registering shares of our common stock for resale by the selling
stockholders identified in the section above entitled "Selling Stockholders." We
will receive none of the proceeds from the sale of these shares by the selling
stockholders. The common stock may be sold from time to time to
purchasers:
·
|
on any national securities
exchange or quotation service on which the securities may be listed or
quoted at the time of sale;
or
|
·
|
Through underwriters,
broker-dealers or agents who may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or the
purchasers of the common
stock.
|
The
selling stockholders may use any one or more of the following methods when
selling shares:
·
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
·
|
a block trade in which the
broker-dealer so engaged will attempt to sell such shares as agent, but
may position and resell a portion of the block as principal to facilitate
the transaction;
|
·
|
purchases by a broker-dealer as
principal and resale by such broker-dealer for its own account pursuant to
this prospectus;
|
·
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
·
|
privately negotiated
transactions;
|
·
|
settlement of short
sales;
|
·
|
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
|
·
|
a combination of any such methods
of sale;
|
·
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise; or
|
·
|
any other method permitted
pursuant to applicable law.
|
Neither
the selling stockholders nor InCard can presently estimate the amount of
compensation in the form of discounts, concessions or commissions that
underwriters, broker-dealers or agents may receive from the selling stockholders
or the purchasers of the common stock. We know of no existing arrangements
between the selling stockholders, broker-dealers, underwriters or agents
relating to the sale or distribution of the shares.
The
selling stockholders may also enter into hedging transactions, and persons with
whom they effect such transactions, including broker-dealers, may engage in
short sales of our common shares. Our selling stockholders may also engage in
short sales and short sales against the box, and in options, swaps, derivatives
and other transactions in our securities, and may sell and deliver the shares
covered by this prospectus in connection with such transactions or in settlement
of securities loans. These transactions may be entered into with broker-dealers
or other financial institutions that may resell those shares pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933, as amended, in connection with the
sales and distributions contemplated under this prospectus, and may have civil
liability under Sections 11 and 12 of the Securities Act for any omissions or
misstatements in this prospectus and the registration statement of which it is a
part. Additionally, any profits which our selling stockholders may receive might
be deemed to be underwriting compensation under the Securities Act. Because the
selling stockholders may be deemed to be an underwriter under Section 2(11) of
the Securities Act, the selling stockholders will be subject to the prospectus
delivery requirements of the Securities Act.
16
The
resale shares will be sold only through registered or licensed broker-dealers if
required under applicable state securities laws. In addition, in certain states,
the resale shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
We will
bear all expenses relating to the sale of our common shares under this
prospectus, except that the selling stockholders will pay any applicable
underwriting commissions and expenses, brokerage fees and transfer taxes, as
well as the fees and disbursements of counsel to and experts for the selling
stockholders. We have agreed to indemnify some of the selling stockholders
against certain losses, claims, obligations, damages and liabilities, including
liabilities under the Securities Act.
Any
common shares offered under this prospectus that qualify for sale pursuant to
Rule 144 of the Securities Act may also be sold under Rule 144 rather than
pursuant to this prospectus.
Under
applicable rules and regulations under the Exchange Act of 1934, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
DESCRIPTION
OF SECURITIES
The
securities offered by the selling stockholders are shares of our common stock,
par value $0.001 (“Common Stock”). We are authorized to issue 75,000,000 shares
of Common Stock, and 5,000,000 shares of undesignated preferred stock, par value
$0.001 per share (“Preferred Stock”). As of March 31, 2010, there were issued
and outstanding 30,558,562 shares of Common Stock and 0 shares of Preferred
Stock.
The
holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. The holders of Common Stock are entitled to
receive any dividends that may be declared from time to time by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of Common Stock are entitled
to share in all assets remaining after payment of liabilities, The Common Stock
has no preemptive or conversion rights or other subscription rights. All
outstanding shares of common stock are fully paid and
nonassessable.
The
holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than fifty percent of the shares of Common Stock voting for
election of directors may elect all the directors if they choose to do so. In
this event, the holders of the remaining shares aggregating less than fifty
percent will not be able to elect directors. Except as otherwise required by
Delaware law, and subject to the rights of the holders of preferred stock then
outstanding, all stockholder action is taken by the vote of a majority of the
issued and outstanding shares of Common Stock present at a meeting of
stockholders at which a quorum consisting of a majority of the issued and
outstanding shares of Common Stock is present in person or proxy.
DESCRIPTION
OF BUSINESS
Our
Business
We
develop and market secure products for payment, identification, physical and
logical access applications. Our main focus is on developing One-Time-Passcode
(“OTP”) solutions. An OTP is a password that is only valid for a
single login session or transaction. OTPs avoid a number of shortcomings that
are associated with traditional (static) passwords. The most important
shortcoming that is addressed by OTPs is that, in contrast to static passwords,
they are not vulnerable to replay attacks. This means that, if a potential
intruder manages to record an OTP that was already used to log into a service or
to conduct a transaction, he will not be able to abuse it since it will be no
longer valid.
Currently,
our main OTP product is the ICT DisplayCard. The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTPat the push of a
button. . During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for authentication. InCard does
not provide the backend authentication server, but rather will integrate our
product into authentication systems provided by other companies including
distributors and other resellers. The ICT DisplayCard’s authentication works
like tokens issued by Verisign, VASCO, RSA, and ActivIdentity, but in a more
convenient, wallet-sized card.
17
The ICT
DisplayCard can be used for both the enterprise and the on-line banking markets.
The enterprise market, which is served by authentication companies such as
VASCO, ActivIdentity, Verisign, and RSA, have the opportunity to
offer the ICT DisplayCard as an alternative for end users to replace existing
tokens. We also offer the ICT DisplayCard to financial institutions to increase
the security of on-line banking transactions. In addition to the security
authentication function, our ICT DisplayCard can be specified to have payment
functionality, enabling credit and debit card issuers to enhance anti-fraud
protection.
In
December of 2009, InCard introduced the ICard, our new OTP
product. The new card sells for significantly less than our ICT
DisplayCard and is intended to service a wider market that our prior
product. The ICard is a time-based solution that changes its OTP
every 60 seconds.
Our
primary focus is and will continue to be the further development, sale and
marketing of OTP solutions. We anticipate we will expand our
current product offering with other innovative OTP
products. During the fiscal year ended December 31, 2009, we
continued to expand our ICT DisplayCard sales and marketing
efforts. During 2009, we achieved the following significant
milestones:
·
|
Commenced volume manufacturing of
our ICT DisplayCard
|
·
|
Continued planning the expansion
of our supply chain
|
·
|
Introduced the ICard, our next
generation OTP product
|
·
|
Realized sales growth of
45%
|
Industry
Background
The
growth in electronic banking and electronic commerce, and the increasing use and
reliance by business, government and educational institutions upon proprietary
or confidential information that is remotely accessible by many users over
different networks, has made information security a paramount concern.
Enterprises are seeking solutions that will continue to allow them to expand
access to data and financial assets while maintaining network security, and
firms such as VASCO, RSA, VeriSign, and ActivIdentity are providing solutions
for these enterprises. We believe that the tokens provided to end users by these
and other network security firms are generally inconvenient as these tokens have
to be carried outside of a wallet or placed on a keychain or in a pocket. Our
ICT DisplayCard and our ICard offer the same functionality as a token, but in a
form factor that can be carried in a wallet. We believe the increased
convenience offered by our device will provide the end user with a better
experience and greater convenience.
Internet
and Enterprise Security
|
With
the advent of personal computers and distributed information systems in
the form of wide area networks, intranets, local area networks and the
Internet, as well as other direct electronic links, many organizations
have implemented applications to enable their work force and third
parties, including vendors, suppliers and customers, to access and
exchange data and perform electronic transactions. As a result of the
increased number of users having direct and remote access to such
enterprise applications, data and financial assets have become
increasingly vulnerable to unauthorized access and
misuse.
|
|
Individual
User Security
|
In
addition to the need for enterprise-wide security, the proliferation of
personal computers, personal digital assistants and mobile telephones in
both the home and office settings, combined with widespread access to the
Internet, have created significant opportunities for electronic commerce
by individual users such as electronic bill payment, home banking and home
shopping.
|
Fueled by
well-publicized incidents, including misappropriation of credit card information
and theft of sensitive personal data, there is a growing perception among many
consumers of risks involved in transmitting information via the Internet. These
incidents and this perception may hamper the development of consumer-based
electronic commerce. Because of these factors, data security firms such as
VASCO, RSA, VeriSign, and ActivIdentity, have seen increasing demand for their
security solutions. Electronic commerce will benefit from the implementation of
improved security measures that accurately identify users and reliably encrypt
data transmissions over the Internet. To address these security concerns, in
2005 many banks in European countries began to issue EMV-compliant smart cards
(credit cards with a micro-chip).
18
Manufacturing
& Production
Although
we are developing manufacturing processes, we currently outsource a majority of
our manufacturing. We rely on OEMs, and the ability to produce the
ICT DisplayCard is limited by our supply chain partners and the component
parts we are able to procure. In the future, we hope to develop OTP
solutions and products which we will manufacture internally and outsource to
multiple supply chain partners.
The
electronics and the EPS display of the ICT DisplayCard is presently being
manufactured in Taiwan by a single supplier, SmartDisplayer,
LTD. A European company, NagraID laminates the finished
polymer surfaces including the artwork and other printing that provide the
card’s cosmetic finish. The battery, presently available from only one supplier,
Solicore, Inc. powers the card’s circuitry and display. InCard performs
final testing and quality assurance testing on the finished cards prior to
shipping to our customers, as well as providing custom authentication seeding
for those requiring it.
We
estimate that with our current suppliers and increased, minimal investment in
the company’s manufacturing infrastructure, we have the capacity to produce more
than one million ICT DisplayCards per month, and 10 million ICards per
month. We believe that our present capacity will meet our anticipated
demand well into 2010. In the event that we receive greater interest or orders
than our projections, our current OEMs and new supply chain partners that are
currently being qualified, have indicated to us that they will be able to
significantly increase capacity.
Our
Strategy Sales & Marketing
We
currently directly market our products as well as selling our products through
resellers and distributors who provide security technology such as tokens for
enterprise security and on-line banking applications. These resellers
are not obligated to sell our product and in fact the degree of success of these
resellers will depend on our ability to develop interest in our OTP products
with end-users and with companies that need or provide security solutions.
Presently, our sales cycle takes several months and generally requires
negotiation and completion of a pilot program before any order for our cards. We
are currently in the process of several pilot programs, at various stages, for
the ICT DisplayCard through several large commercial entities. If these pilot
programs are successful, we anticipate that the resellers will order commercial
quantities of cards in greater quantities. In the future, our
OTP products will be sold through a similar sales channel as well as on a direct
sales basis.
The
resellers for our ICT DisplayCard include Actividentity, Entrust,
Gemalto, and Verisign. These companies sell a complete security
solution, either by themselves or with other providers. Although some of these
resellers are required to make a deposit at the time an order is submitted, our
reseller agreements do not generally contain any minimum order
requirements. The extent to which these resellers market and sell our
products will depend on the reseller’s customer experience with our
products and our ability to provide a quality product, to deliver
quantities as needed by the reseller, and to offer competitive
pricing.
Research
& Development
We
conduct research and development activities both in-house and at outside
laboratories. We have purchased materials and components for our
products under development from a number of technology companies.
We have
spent $258,532 and $467,887 for research and development for the fiscal years
ended December 31, 2009 and 2008, respectively.
Intellectual
Property
We rely
on a combination of patent, trademark and trade secret laws as well as
confidentiality procedures and contractual provisions to protect our proprietary
technology. We currently own eleven U.S. patents and twenty five foreign patents
most of which relates to our prior products and not to our current
product. The company filed four patent applications in 2009 to
protect its products under development. We also have fifteen
foreign patent applications pending and three U.S. patents pending. The duration
of the U.S. patents generally is 20 years from the date the original application
was filed. At this time, we have limited patent protection on our ICT
DisplayCard technology.
We
currently have trademarks registered for InCard Technologies and the LensCard in
the United States. We intend to apply for additional intellectual property
protection as management sees necessary.
Competition
We are
aware of products that are being mass produced in the same form factor as our
current product. There are companies creating tokens and random
number generators for use in dual-factor authentication (as an item separate
from the transaction card). For example, RSA, Vasco, and VeriSign token devices
may be cost competitive to our technology but are not in a credit card form
factor. Smart Card, biometrics, and software programs can provide multi-factor
authentication competitive to our ICT DisplayCard.
We
believe that the principal competitive factors that affect the market for tokens
include convenience, price, quality/reliability, ease of use,
and cost. Although we believe that our ICT DisplayCard will be
able to compete favorably with respect to some of these factors, there can be no
assurances that we will be able to maintain our competitive position against
current and potential competitors, especially those with significant marketing,
service, support, technical and other competitive resources.
19
Some of
our present and potential competitors have significantly greater financial,
technical, marketing, purchasing and other resources than we do, and as a
result, may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of products, or to deliver competitive products
at a lower end-user price. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of our
prospective customers. It is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. Accordingly, we continue to
pursue our technological advantage and effective relationships to develop,
manufacture and sell our OTP products and solutions to the market.
Employees
We have 8
full time employees including our officers. We have 1 part time
employee and utilize the services of 1 outside consultant on a full time
basis.
DESCRIPTION
OF PROPERTY
We
currently lease our executive offices which are located at 633 West Fifth
Street, Suite 2600, Los Angeles, CA 90071. Our lease consists of
approximately 175 square feet and we pay $1,700 per month. Our lease is
renewable on an annual basis. In addition, several of our employees work
from satellite or home offices. We pay $2,949 per month to an
employee for the use of his office space. There is no affiliation between us or
any of our principals or agents and our landlord or any of their principals or
agents.
LEGAL
PROCEEDINGS
As of the
date of this prospectus, there are no material pending legal or governmental
proceedings relating to our company or properties to which we are a party, and
to our knowledge there are no material proceedings to which any of our
directors, executive officers or affiliates are a party adverse to us or which
have a material interest adverse to us.
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Until
February 20, 2009, our common stock was traded on the NASDAQ Capital Market
under the symbol "INVC" at which time our shares were delisted. After
February 20, 2009, our common shares have been quoted on the Over-the-Counter
Bulletin Board under the ticker symbol INVC.OB. The table below
sets forth the high and low sales prices for the periods shown. These prices are
based on inter-dealer bid and asked prices, without markup, markdown,
commissions, or adjustments and may not represent actual
transactions.
High
|
Low
|
|||||||
2007
|
||||||||
First
Quarter
|
$
|
6.20
|
$
|
4.26
|
||||
Second
Quarter
|
$
|
6.24
|
$
|
4.00
|
||||
Third
Quarter
|
$
|
4.90
|
$
|
1.93
|
||||
Fourth
Quarter
|
$
|
3.80
|
$
|
1.69
|
||||
2008
|
||||||||
First
Quarter
|
$
|
2.55
|
$
|
1.69
|
||||
Second
Quarter
|
$
|
2.55
|
$
|
1.01
|
||||
Third
Quarter
|
$
|
1.35
|
$
|
0.40
|
||||
Fourth
Quarter
|
$
|
0.44
|
$
|
0.06
|
||||
2009
|
||||||||
First
Quarter
|
$
|
0.188
|
0.05
|
|||||
Second
Quarter
|
$
|
0.24
|
0.07
|
|||||
Third
Quarter
|
$
|
0.44
|
0.05
|
|||||
Fourth
Quarter
|
$
|
0.50
|
0.14
|
|||||
2010
|
||||||||
First
Quarter
|
$
|
0.32
|
0.15
|
|||||
Second
Quarter (as of May 27, 2010)
|
$
|
0.28
|
0.17
|
20
Our
transfer agent is American Stock Transfer & Trust Company
www.amstock.com.
Holders
As of
March 31, 2010 our common stock was held by approximately 29 record
holders. We believe our number of beneficial shareholders may be
significantly higher as 30,062,299 shares are currently being held in street
name.
Dividends
We have
not paid any cash dividends to date and have no plans to do so in the immediate
future.
Equity
Compensation Plan Information
The
following table sets forth information with respect to our 2004 and 2007
Stock Plans as of December 31, 2009.
(a)
|
(b)
|
(c)
|
||||||||||
Number of Securities
to be Issued
upon Exercise of
Outstanding
Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
|
Number of Securities
Remaining Available or
Future Issuance under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
|
||||||||||
Equity
compensation plans approved by security holders
|
||||||||||||
2004 Stock Incentive Plan, as
amended
|
1,354,500
|
$
|
1.62
|
0
|
||||||||
2007
Equity Incentive Plan
|
4,705,177
|
0.33
|
0
|
|||||||||
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|||||||||
Total
|
6,059,677
|
$
|
0.62
|
0
|
2010 Equity Compensation
Plan
On
February 22, 2010, our Board and Compensation Committee approved the
2010 Equity Compensation Plan (“2010 Plan”). The 2010 Plan permits
the granting of up to 6,000,000 shares of common stock through the issuance of
Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock
Appreciation Rights, Restricted Stock Units, Performance Units, Performance
Shares and Other Stock Based Awards to our employees, directors and
consultants. We anticipate submitting the plan for shareholder
approval during the following 12 months. In the event the Plan is not
approved by our shareholders during this time, the 2010 Plan will be considered
a non-qualified plan
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) is provided in addition to the accompanying consolidated
financial statements and notes in order to assist the reader in understanding
our results of operations, financial condition, and cash flows. Our MD&A is
organized as follows:
|
·
|
Overview
— Discussion
of our business and plan of operations, overall analysis of financial and
other highlights affecting our business in order to provide context for
the remainder of MD&A.
|
|
·
|
Critical
Accounting Policies — Accounting policies that
we believe are important to understanding the assumptions and judgments
incorporated in our reported financial results and
forecasts.
|
21
|
·
|
Results of
Operations —
Analysis of our financial results comparing the three months ended
March 31, 2010 and 2009 and year ended December 31, 2009 and
2008.
|
|
·
|
Liquidity and
Capital Resources —
An analysis of changes in our balance sheets and cash flows, and
discussion of our financial condition including recent developments and
potential sources of
liquidity.
|
The
various sections of this MD&A contain a number of forward-looking
statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,”
“may,” and variations of such words and similar expressions are intended to
identify such forward-looking statements. In addition, any statements that refer
to projections of our future financial performance, our anticipated growth and
trends in our businesses, and other characterizations of future events or
circumstances are forward-looking statements. Such statements are based on our
current expectations and could be affected by the uncertainties and risk factors
described throughout this filing (see also “Risk Factors” of this
prospectus).
Overview
We
develop and market secure products for payment, identification, physical and
logical access applications. Our main focus is on developing One-Time-Password
(“OTP”) solutions. An OTP is a password that is only valid for a
single login session or transaction. OTPs avoid a number of shortcomings that
are associated with traditional (static) passwords. The most important
shortcoming that is addressed by OTPs is that, in contrast to static passwords,
they are not vulnerable to replay attacks. This means that, if a potential
intruder manages to record an OTP that was already used to log into a service or
to conduct a transaction, he will not be able to abuse it since it will be no
longer valid.
Currently,
our main OTP product is the ICT DisplayCard. The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTP (also referred to as a one-time
passcode). At the push of a button, the ICT DisplayCard displays, a
one-time passcode. During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for multi-factor authentication.
InCard does not provide the backend authentication server, but rather will
integrate the ICT DisplayCard into authentication systems provided by other
companies including distributors and other resellers of the ICT DisplayCard. The
ICT DisplayCard’s authentication works like tokens issued by VASCO, RSA, and
ActivIdentity, but in a more convenient, wallet-sized card.
Our
primary focus is and will continue to be the further development, sales and
marketing of OTP solutions. We anticipate we will expand our
current ICT DisplayCard product offering with other innovative OTP
products. Since 2002, we have continued to develop our power inlay
technology that is the basis of our ICT DisplayCard. To date we have
devoted a majority of our efforts to developing our ICard and our ICT
DisplayCard and accompanying technology, initiating marketing and raising
capital to fund our business. We have generated limited revenues.
Since
inception, we have been unprofitable. We incurred net losses of $5,883,055 and
$8,929,537 for 2009 and 2008, respectively. Additionally, we had net losses of
$412,562 and $10,906,269 for the three month periods ended March 31, 2010 and
2009, respectively. Sales of the ICT DisplayCard and newly introduced OTP
products, the Company’s main products, are not expected to generate positive
cash flow until the fourth quarter of 2010. As a result, there is
substantial doubt about the Company’s ability to continue as a going concern at
March 31, 2010.
Our continued existence is dependent upon our ability to generate sales from our
OTP products or, if we are unable to do so in sufficient quantity to cover our
expenses, to obtain additional financing. In 2008, we made our first significant
sale of ICT DisplayCards; however we anticipate that we will continue to incur
net losses due to our costs exceeding our revenues. Management cannot
yet predict when we will achieve an operating profit or net
income. Our capital requirements for the next 12 months consist of
the research and development of new OTP products, the acquisition of inventory,
retention and hiring of key personnel, and implementation of a sales force for
our products. These expenditures are anticipated to be significant. To date, our
operations have been funded primarily through equity and debt
financings.
We
believe that our current cash, combined with anticipated revenue collections,
will be adequate to fund our operations until July, 2010. If we are unable
to raise additional capital or make significant sales by that date, we may be
forced to curtail our operations or seek bankruptcy protection. We anticipate
that we will not be able to generate sales of the ICT DisplayCard and newly
introduced OTP products in quantities that will sustain a positive cash flow
until the fourth quarter of 2010.
Our
backlog, which consists of orders received but not yet shipped, totaled
approximately $1,163,000 at March 31, 2010.
22
Critical
Accounting Policies
Our
MD&A is based on our consolidated financial statements, which have been
prepared in accordance GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses for each period. The following
represents a summary of our critical accounting policies, defined as those
policies that we believe are the most important to the portrayal of our
financial condition and results of operations and that require management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently
uncertain.
Accounting
Standards Codification and GAAP Hierarchy — Effective for interim and annual
periods ending after September 15, 2009, the Accounting Standards Codification
and related disclosure requirements issued by the FASB became the single
official source of authoritative, nongovernmental GAAP. The ASC simplifies GAAP,
without change, by consolidating the numerous, predecessor accounting standards
and requirements into logically organized topics. All other literature not
included in the ASC is non-authoritative. We adopted the ASC as of July 1, 2009,
which did not have any impact on our results of operations, financial condition
or cash flows as it does not represent new accounting literature or
requirements. All references to pre-codified U.S. GAAP have
been removed from this prospectus.
Revenue
recognition.
We
recognize revenues in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue
Recognition”. Revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectability is reasonably assured. Revenue is not
recognized on product sales transacted on a test or pilot basis. Instead,
receipts from these types of transactions offset marketing expenses. Revenue
from royalties is recognized with the passage of time in accordance with the
underlying agreement. We recognize certain long-term contracts using the
completed-contract method in accordance with ASC 605.
We have
generated revenue from three sources: sale of the InCard DisplayCard, licensing
of the LensCard to various credit card issuers and selling the LightCard to a
credit card issuer. The LensCard is composed of a credit card with a small
magnifying lens embedded into the card. The LightCard is composed of a credit
card that when a button is pressed a small LED light is activated. We sell
time-based licenses to various credit card issuers for the LensCard. We
recognize royalties attributable to these time-based licenses as they are sold
to the credit card issuers’ customers. Royalty revenue is recognized when each
LensCard is sold by an issuer.
We
anticipate that the majority of our revenues in the coming year will come from
the InCard DisplayCard and newly introduced OTP products. We intend to sell
these items through resellers. We do not recognize revenue when we sell the
InCard DisplayCard in small quantities under a test or pilot program. Cash
receipts from these transactions are used to offset marketing
expenses.
The
revenue generated from the LensCard and LightCard is negligible, and we expect
that the sales of these products will have an immaterial impact on our results
of operations.
Deferred
revenue is recorded when the payments from a reseller are received by us prior
to the sale of an InCard DisplayCard to the resellers’ customer.
Accounts
receivable allowances.
Our
sales to date have been to large credit card issuers and we have been successful
in collecting for products and services. We perform a regular review of our
customer activity and associated credit risks and do not require collateral from
our customers. At March 31, 2010, based on our review of customer activity, we
recorded an allowance for doubtful accounts of $61,398.
Warranty
expense.
We
estimate the cost associated with meeting our warranty obligations for the sale
of our products. We generally warrant our products against defects over a period
of one to three years. The initial estimate and changes to the estimate are
charged to cost of goods sold at the time of sale of the product. The accrual is
based on a percentage of sales. This percentage was 10% through December 31,
2008, 3% for the period January 1 to September 30, 2009 and 2% effective October
1, 2009 (the changes in estimate based on historical trends).
Inventory.
Our
inventories are valued at the lower of cost or market. We use estimates and
judgments regarding the valuation of inventory to properly value inventory.
Inventory adjustments are made for the difference between the cost of the
inventory and the estimated market value and charged to cost of goods sold in
the period in which the facts that give rise to the adjustments become
known.
23
Research
and Development.
Costs of
research and development, principally the design and development of hardware and
software prior to the determination of technological feasibility, are expensed
as incurred.
Stock
Based Compensation.
We
account for our stock based compensation under ASC 718 “Compensation – Stock
Compensation” which was adopted in 2006, using the fair value based method.
Under this method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. This guidance establishes standards for the
accounting for transactions in which an entity exchanges it equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments.
Income
Taxes
We
utilize ASC Topic 740 “Income Taxes” which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Recently
Issued Accounting Pronouncements
24
In
June 2009, the FASB issued new accounting guidance which will require more
information about the transfer of financial assets where companies have
continuing exposure to the risks related to transferred financial assets. This
guidance is effective at the start of a company’s first fiscal year beginning
after November 15, 2009, or January 1, 2010 for companies reporting earnings on
a calendar-year basis. The adoption of this guidance did not have a material
impact on the Company’s financial position or results of
operations.
In
June 2009, the FASB issued new accounting guidance which will change how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. This guidance is effective at the
start of a company’s first fiscal year beginning after November 15, 2009, or
January 1, 2010 for companies reporting earnings on a calendar-year basis. The
adoption of this guidance did not have a material impact on the Company’s
financial position or results of operations.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
Results
of Operations—First Quarter of 2010 Compared to First Quarter of
2009
Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future.
Revenue
Revenues
totaled $741,079 and $534,223 for the three months ended March 31, 2010 and
2009, respectively.
|
Change in
|
|||||||||||||||
|
2010
|
|||||||||||||||
|
Three Months Ended March 31,
|
Versus 2009
|
||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
ReRRevenue
|
$
|
741,079
|
$
|
534,223
|
$
|
206,856
|
39
|
%
|
The
increase of $206,856 or 39% for the three months ended March 31, 2010 compared
to the same period in 2009 was attributable to an increase in customer
orders.
Cost
of Goods Sold
Cost
of Goods Sold totaled $669,614 and $586,960 or the three months ended March 31,
2010 and 2009, respectively.
|
Change in
|
|||||||||||||||
|
2010
|
|||||||||||||||
|
Three Months Ended March 31,
|
Versus 2009
|
||||||||||||||
2010
|
2009
|
$
|
%
|
|||||||||||||
Cos
Cost of Goods Sold
|
$
|
669,614
|
$
|
586,960
|
$
|
82,654
|
14
|
%
|
Cost
of goods consists of costs to manufacture, inventory write-offs and reserve
adjustment and warranty expense. The increase of $82,654 or 14% for
the three months ended March 31, 2010 compared to the same period in 2009 was
attributable to an increase of $179,237 for costs to manufacture, offset by
decreases of $64,607 for inventory write-offs and reserve adjustments and
$31,976 for warranty expense. The increase in cost to manufacture results
primarily from the increase in revenue during the 2010
period.
25
Operating
Expenses
Operating
expenses totaled $628,020 and $680,915 for the three months ended March 31, 2010
and 2009, respectively.
|
Change in
|
|||||||||||||||
|
2010
|
|||||||||||||||
|
Three Months Ended March 31,
|
Versus 2009
|
||||||||||||||
|
2010
|
2009
|
$
|
%
|
||||||||||||
Operating
Expenses
|
||||||||||||||||
Administrative
|
$
|
471,873
|
$
|
549,914
|
$
|
(78,041
|
)
|
(15
|
)%
|
|||||||
Consulting
Fees
|
-
|
15,593
|
(15,593
|
)
|
(100
|
)%
|
||||||||||
Professional
Fees
|
80,998
|
72,199
|
8,799
|
13
|
%
|
|||||||||||
Research
and development
|
75,149
|
43,209
|
31,940
|
74
|
%
|
|||||||||||
Total
expense
|
$
|
628,020
|
$
|
680,915
|
$
|
(52,895
|
)
|
(8
|
)%
|
Administrative
Expenses
Administrative
Expenses totaled $471,873 and $549,914 for the three months ended March 31, 2010
and 2009, respectively. The decrease of $78,041 or 15% for the three months
ended March 31, 2010 compared to the same period in 2009 was primarily
attributable to a decrease in share based compensation of $41,129 (resulting
from a decrease in issued and outstanding equity awards) and reductions in
insurance of $33,000, license and fees of $27,248 and overall decreases in other
administrative expenses, partially offset by an increase in cash based
compensation expense and related costs of $53,137. Administrative expenses
consist of travel, marketing, compensation, administrative fees and costs, and
depreciation expense.
Consulting
Fees
Consulting
fees totaled $0 and $15,593 for the three months ended March 31, 2010 and 2009,
respectively. The decrease of $15,593 or 100% for the three months ended March
31, 2010 compared to the same period in 2009 was attributable to the consultant
becoming an employee in late 2009. Consulting fees consists of payments made to
independent contractors for services.
Professional
Fees
Professional
Fees totaled $80,998 and $72,199 for the three months ended March 31, 2010 and
2009, respectively. The increase of $8,799 or 13% for the three months ended
March 31, 2010 compared to the same period in 2009 was attributable to an
overall higher cost of professional fees in the current period due to an
increase in professional services. An increase of $18,104 in accounting and
audit fees was partially offset by a decrease of $9,305 in legal fees.
Professional fees expense primarily consists of amounts related to services
provided by our outside counsel, auditors and other similar
providers.
Research
and Development
Research
and development expenses totaled $75,149 and $43,209 for the three months ended
March 31, 2010 and 2009, respectively. The increase of $31,940 or 74% for the
three months ended March 31, 2010 compared to the same period in 2009 was
attributable to an accrual reversal of approximately $30,000 in 2009 with no
comparable item in 2010. Research and development expense consists of costs
relating to further development of our OTP products and
solutions.
Other
Income (Expense)
Other
income (expense) totaled $143,993 of income for the three months ended March 31,
2010 and $10,172,617 of expense for the three months ended March 31,
2009.
|
Change in
|
|||||||||||||||
|
2010
|
|||||||||||||||
|
Three Months Ended March 31,
|
Versus 2009
|
||||||||||||||
|
2010
|
2009
|
$
|
%
|
||||||||||||
Other
income (expense):
|
||||||||||||||||
Change
in fair value of warrant and conversion liabilities
|
$
|
351,764
|
$
|
(103,267
|
)
|
$
|
455,031
|
441
|
%
|
|||||||
Gain
on extinguishment of debt
|
136,321
|
-
|
136,321
|
100
|
%
|
|||||||||||
Interest
income
|
18
|
29
|
(11
|
)
|
(38
|
)%
|
||||||||||
Interest
expense
|
(344,110
|
)
|
(10,069,379
|
)
|
9,725,269
|
97
|
%
|
|||||||||
Total
other income (expense)
|
$
|
143,993
|
$
|
(10,172,617
|
)
|
$
|
10,316,610
|
101
|
%
|
Change
in fair value of warrants
The
change in the fair value of our warrant and conversion liabilities resulted
primarily from the changes in our stock price, the conversion and exercise
prices of the instruments and the volatility of our common stock during the
reported periods. Refer to Note 4 to the financial statements for further
discussion on our warrant liabilities and the related 8% senior secured
convertible debentures.
26
The
securities were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation. The securities do not qualify for hedge accounting, and as such, all
future changes in the fair value of these securities will be recognized
currently in earnings until such time as the securities are exercised or
expire.
Gain
on extinguishment of debt
During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. Since the
conversion feature was accounted for as a liability, we have recorded a gain
upon conversion of debt in the amount of $136,321. Refer to Note 3 to the
financial statements for further discussion.
Interest
Income
Interest
income totaled $18 and $29 for the three months ended March 31, 2010 and 2009,
respectively. Interest income consists of earning on balances in interest
bearing accounts.
Interest
expense
Interest
expense totaled $344,110 and $10,069,379 for the three months ended March 31,
2010 and 2009, respectively. Interest expense for 2009 consists of interest
accrued on our convertible debentures of $303,857, other interest paid of
$1,885, amortization of debt discount of $6,671,835, amortization of debt issue
costs of $449,052 and a charge of $2,642,750 for the 30% increase in the
principal amount our convertible debentures as a result of the default described
above.
As a
result of the default on our debentures, the interest rate was increased from 8%
to 18% effective February 20, 2009 and the maturity date of the debentures was
accelerated. The Company fully amortized the remaining discount and deferred
debt issue costs during the quarter ended March 31, 2009.
Liquidity
and Capital Resources
Our
principal sources of operating capital since inception through March 31, 2010
have been equity and debt financings totaling approximately $31,431,000, and to
a lesser degree our revenues. Since inception, we have incurred significant
losses, and as of December 31, 2009 we had an accumulated deficit of
$38,360,101. Our accumulated deficit totaled $38,772,663 at March 31, 2010. Our
cash and cash equivalents balance at March 31, 2010 was $186,306, compared to
$266,498 for the same period of 2009.
Sales
of our products are not expected to generate positive cash flow until the fourth
quarter of 2010. As a result, there is substantial doubt about the Company’s
ability to continue as a going concern at March 31, 2010.
As of
May 10, 2010 we had approximately $74,000 in cash and cash equivalents. Combined
with anticipated revenue collections and planned expense reductions, the Company
believes this amount will last until July, 2010.
|
Change in
|
|||||||||||||||
|
2010
|
|||||||||||||||
|
Three Months Ended March 31,
|
Versus 2009
|
||||||||||||||
|
2010
|
2009
|
$
|
%
|
||||||||||||
At
March 31:
|
||||||||||||||||
Cash
& Cash Equivalents
|
$
|
186,306
|
$
|
266,498
|
$
|
(80,192
|
)
|
(30
|
)%
|
|||||||
Three
months ended March 31:
|
||||||||||||||||
Net
cash (used in) provided by operating activities
|
$
|
(64,709
|
)
|
$
|
189,853
|
$
|
(254,562
|
)
|
(134
|
)%
|
||||||
Net
cash provided by financing activities
|
5,250
|
-
|
5,250
|
100
|
%
|
Net
Cash (Used in) Provided by Operating Activities
We
used cash of $64,709 for our operating activities during the three months ended
March 31, 2010 and generated cash of $189,853 from our operating activities
during the three months ended March 31, 2009. The increase in cash used of
$254,562 or 134% for the three months ended March 31, 2010 compared to the same
period in 2009 was primarily attributable to a decrease in deferred revenue of
$595,318, a decrease in prepaids and other current assets of $24,732 and a
decrease in accrued interest of $300,034, partially offset by an increase in
cash provided by accounts receivable of $311,635 and a decrease in loss (after
adjustment for non-cash charges) of $371,671.
Net
Cash Provided by Financing Activities
We
received cash from our financing activities of $5,250 during the three months
ended March 31, 2010, from the exercise of employee stock options, with no cash
provided by financing activities during the three months ended March 31,
2009.
27
Listed
below are key financing transactions entered into by us in the last three
years:
|
·
|
On January 8, 2008, we entered
into a securities purchase agreement with 13 institutional and accredited
investors. Pursuant to the terms of the agreement, we sold $3.5 million of
our 8% Senior Secured Convertible Debenture. The debentures: (i) bear
interest at 8% per year, paid quarterly in cash or registered common
stock, at our discretion; (ii) have a maturity of January 8, 2011, (iii)
are convertible at the holder’s option into shares of our common stock at
$2.50 per share, (iv) are secured by all of our and our subsidiary’s
assets including inventory, receivables, unencumbered equipment and
intellectual property, and (v) have a forced conversion feature which
allows us to force the conversion of the debentures if our common stock
trades above $5.00 for 20 consecutive trading days and certain other
conditions are met. In connection with the sale of the debentures, we also
issued the purchasers five-year common stock purchase warrants to purchase
an aggregate of 700,000 shares of our common stock at an exercise price of
$2.75 per share. We used the net proceeds of the financing for our working
capital requirements and to pay down certain obligations. Both the
conversion price of the debentures and the warrants’ exercise price were
reset following the April 15, 2008 financing discussed
below.
|
|
·
|
On April 15, 2008, sold an
additional $5 million of our 8% Senior Secured Convertible Debenture to
EMC Corporation. As a result of market conditions, the conversion price of
the debenture is $2.48 per share. This resulted in a re-pricing of our
January 8, 2008 debentures. In connection with the sale of the additional
debentures, we issued EMC a five-year common stock purchase warrant to
purchase 1,008,064 shares of our common stock at an exercise price of
$2.728 per share. Similar to the conversion of the debentures, this
resulted in a re-pricing of the January 8, 2008 warrant exercise price to
$2.728 per share. We used the net proceeds of the financing for our
working capital requirements and to pay down certain
obligations.
|
|
·
|
On September 30, 2009 we sold
an additional $1,173,416 face value of our Amended Debentures (convertible
into 4,693,664 common shares) and 2,254,642 Amended Warrants. We received
cash proceeds of $1,127,321. The Amended Debentures (i) bear interest at
8% per year commencing on April 1, 2010, paid quarterly, commencing July
1, 2010, in cash or, subject to certain conditions, registered shares of
our common stock; (ii) have a maturity of January 8, 2011, (iii) are
convertible at the holders’ option into shares of our common stock at
$0.25 per share, (iv) are secured by all of our and our subsidiaries’
assets, including inventory, receivables, unencumbered equipment and
intellectual property, and (v) have a forced conversion feature which
allows us to force the conversion of the Amended Debentures if our common
stock trades above $1.00 for 10 consecutive trading days. Such a forced
conversion may be limited by contractual restrictions on the amount of our
common stock which the holder may own and certain other conditions. Each
Amended Warrant has a term of 5 years and an exercise price of $0.25 per
share. The Amended Warrants also provide for the issuance of a replacement
warrant in the event they are exercised for
cash.
|
Both
the conversion price of the Amended Debentures and the exercise price of the
Amended Warrants are subject to “full-ratchet” price protection in the event of
stock issuances below their respective conversion or exercise prices, except for
specified exempted issuances including grants of stock options and stock
issuances to officers, directors, employees and consultants.
Restructuring
and Sales of Our 8% Senior Secured Debentures
On
September 30, 2009, we completed the restructuring of our 8% Senior Secured
Convertible Debentures as well as certain warrants held by the debenture
holders. In connection with the restructuring, we sold an additional $1,173,416
face value of our Amended Debentures (convertible into 4,693,664 common shares)
and 2,254,642 Amended Warrants. The effect of these transactions is a
follows:
|
·
|
Cancellation of 8% Senior
Secured Convertible Debentures in the amount of $7,581,981 and warrants to
purchase 1,008,064
shares;
|
|
·
|
Issuance of Amended 8% Senior
Secured Convertible Debentures in the amount $1,339,041 ($1.00 conversion
price) and Amended Warrants to purchase 246,460 ($0.25 exercise price)
common shares. These debentures and warrants do not contain any
anti-dilution or repricing
provisions;
|
|
·
|
Issuance of Amended 8% Senior
Secured Convertible Debentures in the amount $4,509,703 ($0.25 conversion
price) and Amended Warrants 2,843,715 ($0.25 exercise price); These
debentures and warrants have anti-dilution and repricing
provisions;
|
|
·
|
Gross cash proceeds to the
Company in the amount of $1,127,321;
and
|
|
·
|
Conversion of past due
obligations to creditors and short term financing in the amount of
$672,243.
|
Future
Needs
Through
the date of this prospectus, our operations have been funded primarily through
equity and debt financings totaling approximately $31,431,000 since
inception.
28
We
believe that our current cash of approximately $74,000 as of May 10, 2010,
combined with anticipated revenue collections, will provide us with sufficient
resources to fund our operations until July, 2010.
If we
are able to successfully sell our products in substantial quantities during the
second and third quarters of 2010 we may be able to continue operations until or
through the third quarter of 2010. If we need additional capital, we do not have
any binding commitments for, or readily available sources of, additional
financing. Additional financing, whether through public or private equity or
debt financing, arrangements with stockholders or other sources, may not be
available, or if available, may be on terms unacceptable to us. If we issue
additional equity securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of our common
stock. Debt incurred by us would be senior to equity in the ability of debt
holders to make claims on our assets. The terms of any debt issued could impose
restrictions on our operations. If adequate funds are not available to satisfy
our capital requirements, our operations and liquidity could be materially
adversely affected.
Going
Concern
Our
independent registered public accountants have included a going concern
explanatory paragraph in their unqualified opinions on our 2009 and 2008
financial statements.
Results
of Operations—Year Ended December 31, 2009 Compared to Year Ended December 31,
2008
Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future due to the occurrence of
material recurring and nonrecurring events.
Revenue
Revenue
totaled $4,089,569 and $2,828,581 for 2009 and 2008, respectively.
Change in
|
||||||||||||||||
2009
|
||||||||||||||||
Versus 2008
|
||||||||||||||||
2009
|
2008
|
$
|
%
|
|||||||||||||
Revenue
|
$
|
4,089,569
|
$
|
2,828,581
|
$
|
1,260,988
|
45
|
%
|
The
increase in revenue of $1,260,988 or 45% in 2009 compared to 2008 was
attributable to increased sales of the InCard DisplayCard, primarily from the
partial fulfillment of our 2009 $3.7 million purchase order, although sales to
other customers increased by approximately $506,000 in 2009 as compared to 2008.
During October of 2009, the customer has informed us of its intent to cancel the
unshipped balance of the order, notwithstanding the fact that the order is
non-cancellable.
Cost
of Goods Sold
Cost of
goods sold totaled $3,902,855 and $4,350,975 for 2009 and 2008,
respectively.
Change in
|
||||||||||||||||
2009
|
||||||||||||||||
Versus 2008
|
||||||||||||||||
2009
|
2008
|
$
|
%
|
|||||||||||||
Cost
of Goods Sold
|
$
|
3,902,855
|
$
|
4,350,975
|
$
|
(448,120
|
) |
(10
|
)%
|
29
Cost of
goods consists of costs to manufacture, inventory write-offs and reserve
adjustment and warranty expense. The decrease of $448,120, or 10%, in 2009 as
compared to 2008 was attributable to an increase of $1,091,187 for costs to
manufacture, offset by decreases of $1,405,913 for inventory write-offs and
reserve adjustments and $133,394 for warranty expense. The increase in cost to
manufacture results primarily from the increase in revenue during the 2009
period.
Operating
Expenses
Operating
expense totaled $2,739,326 and $8,728,451 for 2009 and 2008,
respectively.
Change in
|
||||||||||||||||
2009
|
||||||||||||||||
Versus 2008
|
||||||||||||||||
2009
|
2008
|
$
|
%
|
|||||||||||||
Operating
Expenses
|
||||||||||||||||
Administrative
|
$
|
1,919,036
|
$
|
5,462,582
|
$
|
(3,543,546
|
)
|
(65
|
)%
|
|||||||
Consulting
Fees
|
116,501
|
612,414
|
(495,913
|
)
|
(81
|
)%
|
||||||||||
Professional
Fees
|
445,257
|
734,680
|
(289,423
|
)
|
(39
|
)%
|
||||||||||
Research
and development
|
258,532
|
467,887
|
(209,355
|
)
|
(45
|
)%
|
||||||||||
Impairment
|
-
|
1,450,888
|
(1,450,888
|
)
|
(100.0
|
)%
|
||||||||||
Total
expense
|
$
|
2,739,326
|
$
|
8,728,451
|
$
|
(5,989,125
|
)
|
(69
|
)%
|
Administrative
Expenses
Administrative
expenses totaled $1,919,036 and $5,462,582 for 2009 and 2008, respectively. The
decrease of $3,543,546 or 65% from 2009 to 2008 was primarily attributable to a
decrease in share based compensation of $1,080,916 (resulting from a decrease in
issued and outstanding equity awards) and reductions in salaries of $478,552,
marketing and investor relations of $304,745, travel of $104,566, and
depreciation and amortization expense of $659,404. Administrative expenses
consist of travel, marketing, compensation, administrative fees, and
depreciation and amortization expense.
Consulting
fees totaled $116,501 and $612,414 for 2009 and 2008, respectively. The decrease
of $495,913, or 81%, from 2008 to 2009 was primarily attributable to the use of
fewer consultants in the current period. Consulting fee expense consists of
payments made to independent contractors that provided services to
us.
Professional
Fees
Professional
fees expense totaled $445,257 and $734,680 for 2009 and 2008, respectively. The
decrease of $289,423, or 39%, from 2008 to 2009 was primarily attributable to
decreased activity and overall lower cost of professional fees. A decrease in
legal fees of $372,535 was partially offset by an increase in audit and
accounting fees of $83,112. Professional fees expense primarily consists of
amounts related to services provided by our outside counsel, auditors and other
similar providers.
Research
and Development Expenses
Research
and development expenses totaled $258,532 and $467,887 for 2009 and 2008,
respectively. The decrease of $209,355, or 45%, from 2008 to 2009 was primarily
attributable to reduced consulting costs. Research and development expense
consists of costs relating to further development of our OTP products and
solutions.
Other
Income (Expense)
Other
income (expense) totaled approximately $ 3,330,443 of expense in 2009 and $
1,321,308 of income in 2008.
30
Change in
|
||||||||||||||||
2009
|
||||||||||||||||
Versus 2008
|
||||||||||||||||
2009
|
2008
|
$
|
%
|
|||||||||||||
Other
income (expense):
|
||||||||||||||||
Change
in fair value of warrant and conversion liabilities
|
$
|
(1,154,584
|
)
|
$
|
3,068,251
|
$
|
(4,222,835
|
)
|
(138
|
)%
|
||||||
Gain
on extinguishment of debt
|
9,553,684
|
-
|
9,553,684
|
100
|
%
|
|||||||||||
Other
income
|
606,815
|
-
|
606,815
|
100
|
%
|
|||||||||||
Other
expense
|
-
|
(129,795
|
)
|
129,795
|
(100
|
)%
|
||||||||||
Interest
income
|
82
|
26,857
|
(26,775
|
)
|
(99.7
|
%
|
||||||||||
Interest
expense
|
(12,336,440
|
)
|
(1,644,005
|
)
|
(10,692,435
|
)
|
(87
|
)%
|
||||||||
Total
other income (expense)
|
$
|
(3,330,443
|
)
|
$
|
1,321,308
|
$
|
(4,651,751
|
)
|
Change
in fair value of warrants and conversion liability
The
change in the fair value of our warrant and conversion liabilities resulted
primarily from the changes in our stock price, the conversion and exercise
prices of the instruments and the volatility of our common stock during the
reported periods. We had no warrant liability at January 1,
2008. Refer to Note 6 to the financial statements for further
discussion on our warrant liabilities and the related 8% senior secured
convertible debentures.
The
securities were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation. The securities do not qualify for hedge accounting, and as such, all
future changes in the fair value of these securities will be recognized
currently in earnings until such time as the securities are exercised or
expire.
Gain
on extinguishment of debt
We have
recorded an aggregate of $9,520,784 of gains on extinguishment of debt resulting
from the cancellation or restructuring of our 2008 convertible debentures and
the related common stock purchase warrants. Refer to Note 6 to the
financial statements for further discussion on the cancellation and
restructuring.
During
the fourth quarter of 2009, certain debenture holders converted an aggregate of
$86,416 of debentures into common stock. Since the conversion feature has been
accounted for as a liability, we have recorded a gain upon conversion of debt in
the amount of $32,900. Refer to Note 6 to the financial statements for further
discussion
Other
Income
Other
income consists of customer deposit forfeitures, net of vendor deposit
forfeitures.
Other
expense for 2008 consists of a loss recognized on a sublease.
Interest
Income
The
decrease in interest income is primarily attributable to a decrease in balances
in interest bearing accounts.
Interest
expense
Interest
expense totaled $12,336,440 and $1,644,005 for 2009 and 2008,
respectively. Interest expense for 2009 consists of
interest accrued on our convertible debentures of $1,337,356, other interest of
$48,132, amortization of debt discount of $7,859,150, amortization of debt issue
costs of $449,052 and a charge of $2,642,750 for the 30% increase in the
principal amount of our convertible debentures as a result of the default
described in Note 6 to the financial statements. Interest expense for
2008 consists of interest accrued on our convertible debentures of $604,730,
other interest of $19,621, amortization of debt discount of $941,206 and
amortization of debt issue costs of $78,448.
As a
result of the default on our debentures, the interest rate was increased from 8%
to 18% effective February 20, 2009 and the maturity date of the debentures was
accelerated. The Company fully amortized the remaining discount and deferred
debt issue costs during the quarter ended March 31, 2009.
31
Liquidity
and Capital Resources
Our
principal sources of operating capital since inception through December 31, 2009
have been equity and debt financings totaling approximately $31,431,000, and to
a lesser degree our revenues. Since inception, we have incurred
significant losses, and as of December 31, 2009 and 2008 we had an accumulated
deficit of $38,360,101 and 36,996,720, respectively.
Sales
of the ICT DisplayCard and newly introduced OTP products, the Company’s main
products, are not expected to generate positive cash flow until the fourth
quarter of 2010. As a result, there is substantial doubt about the Company’s
ability to continue as a going concern at December 31, 2009.
As of
December 31, 2009 we had approximately $246,000 in cash and cash
equivalents. Combined with anticipated revenue collections and planned expense
reductions, the Company believes this amount will last until or through July of
2010.
Change in
|
||||||||||||||||
2009
|
||||||||||||||||
Versus 2008
|
||||||||||||||||
2009
|
2008
|
$
|
%
|
|||||||||||||
At
December 31:
|
||||||||||||||||
Cash
& Cash Equivalents
|
$
|
245,765
|
$
|
76,645
|
$
|
169,120
|
220
|
%
|
||||||||
Year
ended December 31:
|
||||||||||||||||
Net
cash used in operating activities
|
$
|
(958,201
|
)
|
$
|
(8,216,304
|
)
|
$
|
7,258,103
|
88
|
%
|
||||||
Net
cash used in investing activities
|
-
|
(69,151
|
)
|
69,151
|
100
|
%
|
||||||||||
Net
cash provided by financing activities
|
1,127,321
|
8,022,500
|
(6,895,179
|
)
|
(86
|
)%
|
Net
Cash Provided by (Used in) Operating Activities
We used
$958,201 and $8,216,304 in cash for our operating activities during 2009 and
2008, respectively. The decrease in cash used of $7,258,103 was
primarily attributable to a decrease in payments for accounts payable and
accrued expenses of $2,072,173, a decrease in cash applied to inventory of
$1,496,209, an increase in accrued interest of $1,358,911 and a decrease in
loss (after adjustment for non-cash charges) of $2,858,465, all partially offset
by a decrease in collections on accounts receivable of $332,795.
Net
Cash Provided by Financing Activities
We
received $1,127,321 and $8,022,500 in cash from financing activities during 2009
and 2008, respectively. We also received $100,000 in bridge financing
in 2009, of which $50,000 was repaid in September and the balance repaid in
October.
32
None.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
directors are elected annually by our stockholders at the annual
meeting. Each director holds his office until his successor is
elected and qualified or his earlier resignation or removal. Our
executive officers are elected annually by our Board of
Directors. Each executive officer holds his office until they resign,
is removed by the Board, or their successor is elected and
qualified. Information regarding our directors and executive officers
is presented below.
Name
|
|
Positions with Company
|
|
Age
|
|
Director
Since
|
W.
Robert Ramsdell
|
Director
|
68
|
2007
|
|||
Richard
Nathan
|
Director,
Chief Executive Officer and Principal Financial Officer
|
68
|
2007
|
|||
Scott
V. Ogilvie
|
Director
|
55
|
2006
|
|||
Harry
L. Tredennick, III
|
Director
|
63
|
2007
|
|||
Joe
Zelayeta
|
Director
|
63
|
2009
|
|||
John
Ward III
|
Director
|
62
|
2010
|
W. Robert
Ramsdell has served as a director since June 2007. Mr. Ramsdell
has been engaged in private investments in micro cap companies since 1990.
From 1973 until his retirement in 1990, Mr. Ramsdell was senior partner,
director of research and office manager of Cantor Fitzgerald & Co. in
Los Angeles, engaged in the institutional equity business. Mr.
Ramsdell’s prior experience regarding investment banking and financial expertise
give him the qualifications and skill to serve as a director.
Richard J.
Nathan has served as a director since December 2007. During
this period, Mr. Nathan resigned from the board from September to November
2008. Mr. Nathan has served as our Chief Executive Officer and
Principal Financial Officer since November 17, 2008. Mr. Nathan
was a Vice President of operations at Commodore Corporation and Vice President
of worldwide operations at Atari Corporation. He founded JigSaw tek, Inc.
in May 2001, where he served as the Chief Executive Officer until 2005. The
company marketed high-end, integrated circuit packaging solutions using
proprietary, patent-pending embedded silicon technology. Since that time,
Mr. Nathan has pursued personal and professional interests and investments
in various technology industries. Mr. Nathan attended
Denver University and majored in physics. He also attended
Adelphi University and completed numerous graduate and undergraduate
courses in various science and business disciplines. He has authored or
co-authored eight U.S. patents. Mr. Nathan’s past business experience
in start-up and electronic technologies gives him the qualifications and skill
to serve as a director.
Scott V.
Ogilvie has served as a director since
December 2006. Mr. Ogilvie is President of AFIN
International, Inc. a private equity/business advisory firm, which he founded in
2006. Prior to December 31, 2009, he was CEO of Gulf Enterprises
International, Ltd, ("Gulf") a company that brings strategic partners, expertise
and investment capital to the Middle East and North Africa. He held this
position since August of 2006. Mr. Ogilvie previously served as Chief
Operating Officer of CIC Group, Inc., an investment manager, a position he has
held from 2001 to 2007. He began his career as a corporate and securities
lawyer with Hill, Farrer & Burrill, and has extensive public and private
corporate management and board experience in finance, real estate, and
technology companies. Mr. Ogilvie currently serves on the board of directors of
Neuralstem, Inc. (NYSE AMEX:CUR), GenSpera, Inc. (OTCBB:GNSZ) and Preferred
Voice Inc, (OTCBB:PRFV). We took into account his prior work in both
public and private organizations regarding corporate finance, securities and
compliance and international business development and believe Mr. Oglivie’s past
experience in these fields gives him the qualifications and skill to serve as a
director..
33
Harry L.
Tredennick III has served as a director since December 2007. Mr.
Tredennick serves as a technology analyst for Gilder Publishing. His area of
expertise is leading-edge components and he writes and speaks on topics related
to microprocessors, programmable logic, reconfigurable systems, and MEMS
(microelectromechanical systems). He has held this position since
August 2000. He has held engineering and research positions at Motorola and
IBM and was once Chief Scientist at Altera. Dr. Tredennick was named a
Fellow of the IEEE for his contributions to microprocessor design. He received
his Ph.D. in Electrical Engineering from the University of Texas, Austin. He
received his MSEE and BSEE in Electrical Engineering from
Texas Tech University, where he has been named a Distinguished
Engineering Graduate. We believe that Mr. Tredennick’s business
experience with regard to microprocessors and logic design, history of working
with startups, and experience with military authentication and
security applications are complementary to our future market opportunities and
accordingly, give him the qualifications and skill to serve as a
director.
Joe
Zelayeta has served as a director since October
2009. Since 2006, Mr. Zelayeta has been advising companies with
regard to merger and acquisition activities as well as technology
development. From 1981 to 2006, Mr. Zelayeta was employed by LSI
Logic Corporation as part of the executive management team in several senior
executive positions. Mr. Zelayeta was a member of the Board of
Directors of the Semiconductor Research Corporation (SRC) representing LSI Logic
as well as a member of the Technology Strategy Committee of the Semiconductor
Industry Association (SIA). Mr. Zelayeta has a BS in Chemistry from
the University of Nevada. We believe that Mr. Zelayeta’s past
business experience regarding innovative technologies give him the
qualifications and skill to serve as a director.
John Ward
III has served as a director of the Company since January 2010. Mr. Ward
previously held positions with the Company since 2004, including a directorship
from August 2004 through December of 2007. During that time, Mr. Ward
also served as the Company’s Chairman and Chief Executive Officer from August
2006 to September of 2007. He was previously the Chairman of
the Board and Chief Executive Officer of Doral Financial (NYSE:DRL), a consumer
finance and bank holding company, and the Chairman of the Board of Directors and
Chief Executive Officer of American Express Bank and President of Travelers
Cheque Group. Mr. Ward joined American Express following a 27-year career
at Chase Manhattan Bank, during which he held various senior posts in the United
States, Europe and Japan. His last position at Chase Manhattan Bank was
that of Chief Executive Officer of ChaseBankCard Services, which he held from
1993 until 1995. During the past 5 years, Mr. Ward served as a
director of Primus Guaranty, Ltd. (NYSE:PRS), and Industrial Enterprises of
America (Nasdaq: IEAM). He has also served on the board of
‘mktg,inc.’ (NasdaqCM: CMKG). In addition to Mr. Ward’s extensive
experience in the consumer credit market, his former experience with credit and
risk management as Senior Credit Policy Officer at Chase Manhattan Bank is
relevant to understanding the risks and opportunities that the Company faces in
its current business lines, as well as those it plans to pursue and give him the
qualifications and skill to serve as a director.
Family
Relationships
There are
no family relationships between any director, executive officer, or person
nominated or chosen by the registrant to become a director or executive
officer.
EXECUTIVE
COMPENSATION
The
following table sets forth information for our two most recently completed
fiscal years concerning the compensation of (i) the Principal Executive
Officer (“PEO”); and (ii) the individuals who earned over $100,000 in
salary and bonus during the last two most recently completed fiscal years
(together the “Named Executive Officers”).
Name & Principal
Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock
Awards
($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Richard
Nathan
|
2009
|
240,000 | 83,587 | - | 55,013 | (2), (7)(8) | - | - | - | 378,600 | ||||||||||||||||||||||||
Chief
Executive
|
2008
|
30,000 | - | - | 202,903 | (3), (4) | - | - | - | 232,903 | ||||||||||||||||||||||||
Officer/
(PEO)
|
||||||||||||||||||||||||||||||||||
Chief
Financial
|
||||||||||||||||||||||||||||||||||
Officer/
(PFO) (1)
|
||||||||||||||||||||||||||||||||||
Steven
Delcarson
|
2009
|
- | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Former
Chief Executive
|
2008
|
407,102 | - | - | 2,041,586 | (5) | - | - | - | 2,448,688 | ||||||||||||||||||||||||
Officer
|
||||||||||||||||||||||||||||||||||
Charles
Caporale
|
2009
|
- | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Former
Chief Financial
|
2008
|
204,167 | 408,317 | (6) | 612,484 | |||||||||||||||||||||||||||||
Officer
|
||||||||||||||||||||||||||||||||||
Nick
Leung
|
2009
|
- | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Former
Product Manager
|
2008
|
158,032 | - | - | - | - | - | - | 158,032 |
34
(1)
Mr. Nathan was appointed Chief Executive Officer and Chief Financial
Officer on November 17, 2008 when Mr. Delcarson’s contract
terminated.
(2) Mr.
Nathan was awarded an option grant on July 22, 2009 in the amount of 525000
shares. The grant was valued using the Black-Sholes option pricing model with
the following assumptions: (i) exercise price of $0.18 per share; (ii) fair
value of a share of common stock of $0.18; (iii) volatility of 122%; (iv)
dividend rate of 0%; (v) risk free interest rate of 0.50%; and (vi) estimated
life of 1.75 years.
(3) Mr.
Nathan was awarded an option grant on February 25, 2008 in the amount of 63,333
shares. The grant was valued using the Black-Sholes option pricing model with
the following assumptions: (i) exercise price of $1.95 per share; (ii) fair
value of a share of common stock of $1.95; (iii) volatility of 102%; (iv)
dividend rate of 0%; (v) risk free interest rate of 3.41%; and (vi) estimated
life of 10 years.
(4) Mr.
Nathan was awarded an option grant on November 17, 2008 in the amount of
1,000.000 shares. The grant was valued using the Black-Sholes option pricing
model with the following assumptions: (i) exercise price of $0.10 per share;
(ii) fair value of a share of common stock of $0.10; (iii) volatility of 102%;
(iv) dividend rate of 0%; (v) risk free interest rate of 2.32%; and (vi)
estimated life of 10 years.
(5) Mr.
Delcarson was awarded an option grant on March 27, 2008 in the amount of
1,000,000 shares. The grant was valued using the Black-Sholes option pricing
model with the following assumptions: (i) exercise price of $2.25 per share;
(ii) fair value of a share of common stock of $2.25; (iii) volatility of 102%;
(iv) dividend rate of 0%; (v) risk free interest rate of 2.815%; and (vi)
estimated life of 10 years. All of Mr. Delcarson’s awards were forfeited due to
termination of employment.
(6) Mr.
Caporale was awarded an option grant on March 27, 2008 in the amount of 200,000
shares. The grant was valued using the Black-Sholes option pricing model with
the following assumptions: (i) exercise price of $2.25 per share; (ii) fair
value of a share of common stock of $2.25; (iii) volatility of 102%; (iv)
dividend rate of 0%; (v) risk free interest rate of 2.815%; and (vi) estimated
life of 10 years. All of Mr. Caporale’s awards were forfeited due to termination
of employment.
(7) Mr.
Nathan’s total bonus for 2009 was $125,381. Mr. Nathan forwent $41,794 of his
bonus and allocated this amount to the employee bonus pool.
(8) Does
not include 100,000 options granted on July 22, 2009 as compensation for serving
on our board of directors. Please see the Director Compensation
table.
Employment
Agreements and Arrangements and Change-In-Control Arrangements
Employment
Agreement with Richard Nathan
On
February 20, 2009, we entered in into a written employment agreement with
Richard Nathan. Pursuant to the terms of the agreement, Mr. Nathan’s
annual compensation is $240,000. Also, as part of the agreement, we
granted Mr. Nathan a stock option to purchase 1,000,000 common shares at $0.10
per share. The option has a term of five years. The
agreement also provides for a bonus equal to: (i) 3% of increase in market
capitalization occurring during first year of employment; and (ii) 2% of
increase in market capitalization year after year for all periods
thereafter. Mr. Nathan’s employment under the agreement is
“At-Will.”
35
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information concerning unexercised options; stock that
has not vested; equity incentive; and awards for each Named Executive Officer
outstanding as of the end of the last completed fiscal year.
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock
That Have
Not
Vested (#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
|
||||||||||||||||||||||||
Richard
Nathan
|
36,945 | - | 26,388 | $ | 1.95 |
02/25/18
|
- | - | - | - | |||||||||||||||||||||||
Chief
Executive Officer and Chief Financial Officer
|
500,000 | - | 500,000 | $ | 0.10 |
11/17/18
|
- | - | - | - | |||||||||||||||||||||||
43,750 | - | 56,250 | $ | 0.18 |
07/22/19
|
- | - | - | - | ||||||||||||||||||||||||
- | 525,000 | $ | 0.18 |
07/23/19
|
- | - | - | - |
Director
Compensation
The
following table summarizes the compensation for our board of directors for the
fiscal year ended December 31, 2009:
Name
|
Fees
Earned or
Paid in
Cash ($)
|
Stock
Awards
($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Non-Qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||
Donald
Joyce
|
- | - | 10,027 | (1),(3) | - | - | - | 10,027 | ||||||||||||||||||||
Richard
Nathan
|
- | - | 6,684 | (1) | - | - | - | 6,684 | ||||||||||||||||||||
W.Robert
Ramsdell
|
- | - | 16,711 | (1) | - | - | - | 16,711 | ||||||||||||||||||||
Scott
Ogilvie
|
- | - | 13,369 | (1) | - | - | - | 13,369 | ||||||||||||||||||||
Harry
L. Tredennick
|
- | - | 8,355 | (1) | - | - | - | 8,355 | ||||||||||||||||||||
Joseph
Zelayeta
|
- | - | 16,661 | (2) | - | - | - | 16,661 |
(1) Mr.
Joyce, Mr. Nathan, Mr. Ramsdell, Mr. Ogilvie and Mr. Tredennick were awarded
option grants on July 22, 2009 in the amounts of 150,000 shares, 100,000 shares,
250,000 shares, 200,000 shares and 125,000 shares, respectively. The grants were
valued using the Black-Sholes option pricing model with the following
assumptions: (i) exercise price of $0.18 per share; (ii) fair value of a share
of common stock of $0.18; (iii) volatility of 122%; (iv) dividend
rate of 0%; (v) risk free interest rate of 0.5%; and (vi) estimated life of .625
years.
(2) Mr.
Zelayeta was awarded an option grant on October 13, 2009 in the amount of
100,000 shares. The grant was valued using the Black-Sholes option pricing model
with the following assumptions: (i) exercise price of $0.35 per share; (ii) fair
value of a share of common stock of $0.35; (iii) volatility of 161%;
(iv) dividend rate of 0%; (v) risk free interest rate of 0.335%; and (vi)
estimated life of .625 years.
(3) Mr.
Joyce resigned from the board on November 2, 2009. Upon that date, 93,750
unvested options were terminated. The 56,250 vested options could be
exercised up until January 31, 2010 at which time they terminated.
Director
Compensation Plan
On July
22, 2009, we amended our non-executive board compensation policy
(“Policy”). Pursuant to the terms of the Policy, non-employee
directors will be entitled to the following compensation for service on our
board of directors:
36
First
Year Grant . Upon joining the board, members will receive
options to purchase 100,000 common shares. The options shall vest as follows:
(i) 25,000 shall vest on the one month anniversary of joining the Board; and
(ii) 75,000 shall vest quarterly over a one year period commencing on the date
such Director joins the Board.
Annual
Grant . Starting on the first year anniversary of commencing
service as a board member, and each subsequent anniversary thereafter, each
eligible director will be granted options to purchase 50,000 shares of common
stock. These Annual Grants will vest quarterly during the year.
Committee
Grant . Each Director will receive options to purchase an
additional 25,000 shares for each committee on which he or she serves. These
Committee Grants will vest quarterly during the year.
Special
Committee Grants . From time to time, board members may
be requested by the board to provide extraordinary services by way of serving on
a special committee. These services may include such items as the
negotiation of key contracts, assistance with technology issues, or such other
items as the general board deems necessary and in the best interest of the
Company and its shareholders. In such instances, the board of
directors should have the flexibility to issue special committee
grants. The amount of such grants would vary commensurate with
the function and tasks of the special committee.
Measure
Date . For purposes of this plan, all current directors will
be considered first year directors and be eligible for the First Year
Grant. Irrespective on when a director joined the Board, all current
directors shall have as their anniversary date the date that this plan is
approved by the Board. All subsequent directors will have as their
measure date the date on which they accepted appointment to the
Board.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of March 31, 2010, information regarding
beneficial ownership of our capital stock by:
·
|
each person, or group of
affiliated persons, known by us to be the beneficial owner of 5% or more
of any class of our voting
securities;
|
·
|
each of our current directors and
nominees;
|
·
|
each of our current named
executive officers; and
|
·
|
all current directors and named
executive officers as a
group.
|
Beneficial
ownership is determined according to the rules of the SEC. Beneficial ownership
means that a person has or shares voting or investment power of a security and
includes any securities that person or group has the right to acquire within 60
days after the measurement date. This table is based on information supplied by
officers, directors and principal stockholders. Except as otherwise indicated,
we believe that each of the beneficial owners of the common stock listed below,
based on the information such beneficial owner has given to us, has sole
investment and voting power with respect to such beneficial owner’s shares,
except where community property laws may apply.
Common Stock
|
||||||||||||||||
Name and Address of Beneficial Owner(1)
|
Shares
|
Shares
Underlying
Convertible
Securities (2)
|
Total
|
Percent of
Class(2)
|
||||||||||||
Directors
and named executive officers
|
||||||||||||||||
W.
Robert Ramsdell
|
337,500 | 242,261 | 579,761 | 1.9 | % | |||||||||||
Richard
Nathan
|
150,000 | 603,749 | 753,749 | 2.4 | % | |||||||||||
Scott
Ogilvie
|
- | 219,250 | 219,250 | * | % | |||||||||||
Harry
L. Tredennick
|
- | 189,165 | 189,165 | * | % | |||||||||||
Joe
Zelayeta
|
- | 62,500 | 62,500 | * | % | |||||||||||
John
Ward III
|
- | 543,750 | 543,750 | 1.7 | % | |||||||||||
All
directors and executive officers as a group (6 persons)
|
487,500 | 1,860,675 | 2,348,175 | 7.2 | % | |||||||||||
Beneficial
Owners of 5% or more
|
||||||||||||||||
Alan
Finkelstein
|
2,433,947 | 400,625 | 2,834,572 | 9.1 | % |
37
*
|
Less
than one percent.
|
(1)
|
Except
as otherwise indicated, the persons named in this table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where
applicable and to the information contained in the footnotes to this
table. Unless otherwise indicated, the address of the beneficial owner is
c/o Innovative Card Technologies, Inc., 633 West Fifth Street,
Suite 2600, Los Angeles,
CA 90071.
|
(2)
|
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership
includes any shares as to which a shareholder has sole or shared voting
power or investment power, and also any shares which the shareholder has
the right to acquire within 60 days, including upon exercise of common
shares purchase options or warrant. There are 30,558,562 shares of common
stock issued and outstanding as of March 31,
2010.
|
Certain
Relationships and Related Transactions
Transactions
with Related Persons, Promoters and Certain Control Persons
None.
Independent
Directors
Our board
of directors has determined that Messrs, Ramsdell, Ogilvie, Tredennick and
Zelayeta are each “independent” as that term is defined by the NASDAQ
rules.
LEGAL
MATTERS
Sichenzia
Ross Friedman Ference LLP will pass upon the validity of the shares of our
common stock offered by us pursuant to this prospectus.
EXPERTS
Our
consolidated financial statements for the fiscal years ended December 31, 2009
and December 31, 2008, included in this prospectus, have been so included
in reliance on the consolidated reports of RBSM LLP and SingerLewak LLP,
respectively, independent registered public accounting firms, given upon
their authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION POSTION ON INDEMNIFICATION FOR SECURITIES ACT
LIABLITIES
The
Company’s certificate of incorporation and by-laws provide that the liability of
the directors and officers of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law and provides for
indemnification to the extent permitted by Delaware law.
The
Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director’s duty of loyalty to the corporation or its stockholders; acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; payments of unlawful dividends or unlawful stock
repurchases or redemptions, or any transaction from which the director derived
an improper personal benefit.
Section
145 of the Delaware General Corporation Law provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses including attorneys’ fees, judgments, fines and amounts paid in
settlement in connection with various actions, suits or proceedings, whether
civil, criminal, administrative or investigative other than an action by or in
the right of the corporation, a derivative action, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses including attorneys’ fees
incurred in connection with the defense or settlement of such actions, and the
statute requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation’s certificate of incorporation, bylaws, agreement, a
vote of stockholders or disinterested directors or otherwise.
38
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or controlling persons of the Company, pursuant
to the foregoing provisions, or otherwise, the Company has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
Federal
securities laws require us to file information with the Commission concerning
our business and operations. Accordingly, we file annual, quarterly, and special
reports, and other information with the Commission. You can inspect and copy
this information at the public reference facility maintained by the Commission
at 100 F Street, NE, Washington, D.C. 20549.
You can
get additional information about the operation of the Commission's public
reference facilities by calling the Commission at 1-800-SEC-0330. The Commission
also maintains a web site (http://www.sec.gov) at which you can read or download
our reports and other information.
We have
filed with the Commission a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the common stock being offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus does
not contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to
Innovative Card Technologies, Inc. and the common stock offered hereby,
reference is made to the registration statement, and such exhibits and
schedules. A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission at the addresses set forth above, and copies of all
or any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the Commission. In addition, the registration
statement may be accessed at the Commission’s web site.
39
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 186,306 | $ | 245,765 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $61,398 and $61,398,
respectively
|
399,582 | 699,854 | ||||||
Prepaids
and other current assets
|
56,983 | 76,130 | ||||||
Deposits
on raw materials held for production
|
70,448 | 165,138 | ||||||
Raw
materials held for production
|
114,416 | 134,754 | ||||||
Work
in progress inventory, net
|
138,729 | 107,212 | ||||||
Finished
goods inventory
|
38,053 | 34,421 | ||||||
Total
current assets
|
1,004,517 | 1,463,274 | ||||||
Property
and equipment, net
|
80,393 | 93,763 | ||||||
Deposits
|
3,720 | 3,720 | ||||||
Total
assets
|
$ | 1,088,630 | $ | 1,560,757 | ||||
Liabilities
and stockholders' deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 805,781 | $ | 912,271 | ||||
Accrued
interest
|
29,837 | 27,737 | ||||||
Warranty
reserve
|
299,821 | 289,135 | ||||||
Deferred
revenue
|
496,472 | 450,189 | ||||||
8%
convertible debentures, net of discount of $718,896 at March 31,
2010
|
4,702,188 | - | ||||||
Total
current liabilities
|
6,334,099 | 1,679,332 | ||||||
8%
convertible debentures, net of discount of $1,074,752 at December 31,
2009
|
- | 4,687,576 | ||||||
Warrant
liability
|
497,351 | 470,592 | ||||||
Derivative
liability
|
1,560,693 | 2,151,632 | ||||||
Total
liabilities
|
8,392,143 | 8,989,132 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 75,000,000 shares authorized, 30,558,562 and
28,840,920 shares issued and outstanding at March 31, 2010 and December
31, 2009, respectively
|
30,558 | 28,841 | ||||||
Additional
paid-in capital
|
31,438,592 | 30,902,885 | ||||||
Accumulated
deficit
|
(38,772,663 | ) | (38,360,101 | ) | ||||
Total
deficiency in stockholders' equity
|
(7,303,513 | ) | (7,428,375 | ) | ||||
Total
liabilities and deficiency in stockholders' equity
|
$ | 1,088,630 | $ | 1,560,757 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-1
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
2010
|
2009
|
|||||||
Revenues
|
$ | 741,079 | $ | 534,223 | ||||
Cost
of goods sold
|
669,614 | 586,960 | ||||||
Gross
profit/(loss)
|
71,465 | (52,737 | ) | |||||
Operating
expenses
|
||||||||
Administrative
|
471,873 | 549,914 | ||||||
Consulting
fees
|
- | 15,593 | ||||||
Professional
fees
|
80,998 | 72,199 | ||||||
Research
and development
|
75,149 | 43,209 | ||||||
Total
operating expense
|
628,020 | 680,915 | ||||||
Loss
from operations
|
(556,555 | ) | (733,652 | ) | ||||
Other
income (expense)
|
||||||||
Change
in fair value of warrant and conversion liability
|
351,764 | (103,267 | ) | |||||
Gain
on extinguishment of debt
|
136,321 | - | ||||||
Interest
income
|
18 | 29 | ||||||
Interest
expense
|
(344,110 | ) | (10,069,379 | ) | ||||
Total
other income (expense)
|
143,993 | (10,172,617 | ) | |||||
Loss
before provision for income taxes
|
(412,562 | ) | (10,906,269 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
(412,562 | ) | (10,906,269 | ) | ||||
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.38 | ) | ||
Weighted
average shares outstanding, basic and diluted
|
29,761,986 | 28,495,256 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-2
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (412,562 | ) | $ | (10,906,269 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
13,370 | 17,076 | ||||||
Change
in fair value of warrant liability
|
26,759 | 57,220 | ||||||
Change
in fair value of conversion liability
|
(378,523 | ) | 46,047 | |||||
Amortization
of debt discount
|
342,010 | 6,671,835 | ||||||
Amortization
of deferred debt issuance costs
|
- | 449,052 | ||||||
Debt
default penalty
|
- | 2,642,749 | ||||||
Stock
based compensation expense
|
104,545 | 144,083 | ||||||
Noncash
gain on extinguishment of debt
|
(136,321 | ) | - | |||||
Change
in provision for obsolete inventory
|
40,771 | 106,585 | ||||||
(Increase)
decrease in accounts receivable
|
300,272 | (11,363 | ) | |||||
(Increase)
decrease in prepaids and other current assets
|
19,147 | 43,879 | ||||||
(Increase)
decrease in deposits on raw materials held for
production
|
94,690 | (3,751 | ) | |||||
(Increase)
decrease in raw materials held for production
|
15,909 | (213,604 | ) | |||||
(Increase)
decrease in work in progress inventory
|
(67,859 | ) | 255,412 | |||||
(Increase)
decrease in finished goods inventory
|
(3,632 | ) | - | |||||
(Increase)
decrease in deposits
|
- | 5,052 | ||||||
Increase
(decrease) in accounts payable and accrued expenses
|
(82,354 | ) | (81,456 | ) | ||||
Increase
(decrease) in accrued interest
|
2,100 | 302,134 | ||||||
Increase
(decrease) in warranty reserve
|
10,686 | 40,787 | ||||||
Increase
(decrease) in deferred rent
|
- | (17,216 | ) | |||||
Increase
(decrease) in deferred revenue
|
46,283 | 641,601 | ||||||
Net
cash used in operating activities
|
(64,709 | ) | 189,853 | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from exercise of options/warrants
|
5,250 | - | ||||||
Net
cash provided by financing activities
|
5,250 | - | ||||||
Net
increase (decrease) in cash and cash equivalents
|
(59,459 | ) | 189,853 | |||||
Cash
and cash equivalents, beginning of period
|
245,765 | 76,645 | ||||||
Cash
and cash equivalents, end of period
|
$ | 186,306 | $ | 266,498 | ||||
Supplemental
Schedule of Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | - | $ | 1,885 | ||||
Non-Cash
Financial Activity:
|
||||||||
Debt
converted to common stock
|
$ | 341,244 | $ | - | ||||
Conversion
liability extinguished upon conversion of debt
|
212,416 | - | ||||||
Options
exercised by application of accrued compensation to exercise
price
|
24,137 | - |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-3
INNOVATIVE
CARD TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010
(Unaudited)
NOTE
1 - ORGANIZATION AND LINE OF BUSINESS
COMPANY
OVERVIEW
The
Company develops and markets secure powered cards for payment, identification,
physical and logical access applications. Our main focus is on developing
One-Time-Password (“OTP”) solutions. An OTP is a password that is
only valid for a single login session or transaction. OTPs avoid a number of
shortcomings that are associated with traditional (static) passwords. The most
important shortcoming that is addressed by OTPs is that, in contrast to static
passwords, they are not vulnerable to replay attacks. This means that, if a
potential intruder manages to record an OTP that was already used to log into a
service or to conduct a transaction, he will not be able to abuse it since it
will be no longer valid.
Currently,
our main OTP product is the ICT DisplayCard. The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTP (also referred to as a one-time
passcode). At the push of a button, the ICT DisplayCard displays a
one-time passcode. During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for multi-factor authentication.
InCard does not provide the backend authentication server, but rather will
integrate the ICT DisplayCard into authentication systems provided by other
companies including distributors and other resellers of the ICT DisplayCard. The
ICT DisplayCard’s authentication works like tokens issued by VASCO, RSA, and
ActivIdentity, but in a more convenient, wallet-sized card. In December of 2009,
we introduced the ICard, our new low cost OTP product intended to serve the
masses.
Our
primary focus is and will continue to be the further development, sales and
marketing of OTP solutions. We anticipate we will expand our
current ICT DisplayCard product offering with other innovative OTP
products. Since 2002, we have continued to develop our power inlay
technology that is the basis of our ICT DisplayCard.
BASIS
OF PRESENTATION AND GOING CONCERN
The
accompanying unaudited condensed consolidated financial statements of Innovative
Card Technologies, Inc. (“ICTI”) include the amounts of its wholly-owned
subsidiary, PSA Co. (“PSAC”) which was incorporated in the State of Delaware on
August 27, 2003.
For
the three months ended March 31, 2010, the Company has incurred a net loss of
$412,562. As of March 31, 2010, we have negative working capital of $5,329,582,
an accumulated deficit of $38,772,663 and a stockholders’ deficiency of
$7,303,513. Sales of the ICT DisplayCard and newly introduced OTP products, the
Company’s main products, are not expected to generate positive cash flow until
the fourth quarter of 2010. As a result, there is substantial doubt about the
Company’s ability to continue as a going concern at March 31,
2010.
Management’s
plan regarding these matters is to increase sales, resulting in reduced losses
and raise additional debt and/or equity financing to cover operating costs as
well as its obligations as they become due.
There
can be no assurances that funds will be available to the Company when needed or,
if available, that such funds would be available under favorable terms. In the
event that the Company is unable to generate adequate revenues to cover expenses
and cannot obtain additional funds in the near future, the Company may seek
protection under bankruptcy laws.
F-4
The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business and does not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
As of
May 10, 2010 the Company has approximately $74,000 in cash. Combined with
anticipated revenue collections and planned expense reductions, the Company
believes this amount will be enough to fund our operations until July,
2010.
The
accompanying unaudited condensed consolidated financial statements as of March
31, 2010 and for the three months ended March 31, 2010 and 2009 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, including Form 10-Q and Regulation S-X. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. The Company believes that the disclosures provided are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the audited financial statements and explanatory
notes for the year ended December 31, 2009 as disclosed in the company's 10-K
for that year as filed with the SEC, as it may be amended.
The
results for the three months ended March 31, 2010 are not necessarily indicative
of the results to be expected for the pending full year ending December 31,
2010.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
unaudited condensed consolidated financial statements include the accounts of
Innovative Card Technologies and its wholly owned subsidiary, PSA Co. All
significant inter-company accounts and transactions are eliminated in
consolidation.
USE
OF ESTIMATES
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE
RECOGNITION
The
Company recognizes revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue
Recognition”. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. Revenue is not
recognized on product sales transacted on a test or pilot basis. Instead,
receipts from these types of transactions offset marketing expenses. Revenue
from royalties is recognized with the passage of time in accordance with the
underlying agreement.
F-5
MAJOR
SUPPLIERS
The
Company obtains the battery, a key component for the Company’s power inlay
technology, from a single source, Solicore, Inc., on a purchase order
basis. The Company believes that alternative sources for this component in the
event of a disruption or discontinuation in supply would not be available on a
timely basis, which could disrupt Company operations, delay production for up to
twelve months and impair the Company’s ability to manufacture and sell
products.
The
Company obtains the display, a key component for the Company’s ICT DisplayCard,
from a single source, SmartDisplayer, pursuant to the Company’s agreement with
SmartDisplayer. On November 10, 2007, the Company was required to make a deposit
on a purchase order to maintain its exclusivity. The Company was unable to make
the deposit and therefore does not have exclusivity with SmartDisplayer. The
Company believes that alternative sources for this component in the event of a
disruption or discontinuation in supply would not be available on a timely
basis, which could disrupt Company operations relating to the ICT DisplayCard,
delay production of the ICT DisplayCard for up to twelve months and impair the
Company’s ability to manufacture and sell the ICT DisplayCard.
The
Company assembles its ICT DisplayCard using a single source, NagraID, pursuant
to a written agreement. The Company believes that alternative sources for this
component in the event of a disruption or discontinuation in supply would not be
available on a timely basis, which could disrupt Company operations relating to
the ICT DisplayCard, delay production of the ICT DisplayCard for up to twelve
months and impair the Company’s ability to manufacture and sell the ICT
DisplayCard.
MAJOR
CUSTOMERS
Two
customers accounted for 99% of the Company’s revenues for the three months ended
March 31, 2010 and three customers accounted for 99% of the Company’s revenue
for the three months ended March 31, 2009.
Two
customers accounted for all of our accounts receivable at March 31, 2010.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value of financial instruments
Our
short-term financial instruments, including cash, accounts receivable, prepaid
expenses and other assets, accounts payable and accrued expenses, warranty
reserve and other liabilities, consist primarily of instruments without extended
maturities, the fair value of which, based on management’s estimates, reasonably
approximate their book value. The fair value of our convertible notes is based
on management estimates and reasonably approximates their book value based on
their current maturity. The fair value of the Company’s derivative instruments
is determined using option pricing models.
Fair
value measurements
We
have adopted accounting guidance pursuant to ASC 820 “Fair Value Measurements
and Disclosure”, which established a framework for measuring fair value and
expands disclosure about fair value measurements.
ASC
820 defines fair value as the amount that would be received for an asset or paid
to transfer a liability (i.e., an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC 820 also establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 820
describes the following three levels of inputs that may be
used:
F-6
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets and (liabilities) measured at fair value on a
recurring basis as of March 31, 2010:
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
186,306 | - | - | 186,306 | ||||||||||||
Total
Assets
|
186,306 | - | - | 186,306 | ||||||||||||
Liabilities
|
||||||||||||||||
Convertible
debentures
|
- | - | 4,702,188 | 4,702,188 | ||||||||||||
Warrant
Liability
|
- | - | 497,351 | 497,351 | ||||||||||||
Derivative
liabilities
|
- | - | 1,560,693 | 1,560,693 | ||||||||||||
Total
liabilities
|
- | - | 6,760,232 | 6,760,232 |
The
table below sets forth a summary of changes in the fair value of the Company’s
Level 3 financial liabilities (warrant derivative liability and conversion
derivative liability) for the three months ended March 31, 2010 and
2009.
2010
|
2009
|
|||||||
Balance
at beginning of year
|
$ | 2,622,224 | $ | 19,055 | ||||
Additions
to derivative instruments
|
- | 6,061 | ||||||
Change
in fair value of derivative liabilities
|
(351,764 | ) | 103,267 | |||||
Reclassification
to equity upon conversion of debentures
|
(212,416 | ) | - | |||||
Balance
at end of period
|
$ | 2,058,044 | $ | 128,383 |
LOSS
PER SHARE
The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and
diluted loss per share. Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive.
Common
equivalent shares are excluded from the computation of diluted loss per share if
their effect would be anti-dilutive. There were 31,572,500 common share
equivalents at March 31, 2010 and 15,097,653 at March 31, 2009. Common
equivalent shares were excluded from the calculation of diluted loss per share
for the three months ended March 31, 2010 and 2009 as their inclusion would
reduce diluted loss per share for those periods.
F-7
WARRANTY
RESERVE
The
Company generally warrants its products against defects over a period of one to
three years. An accrual for estimated future costs relating to products returned
under warrants is recorded as a charge to cost of sales when products are
shipped. The accrual is based on a percentage of sales. This percentage was 10%
through December 31, 2008, 3% for the period January 1 to September 30, 2009 and
2% effective October 1, 2009 (the changes in estimate based on historical
trends). Activity in the accrued warranty reserve liability for the three months
ended March 31, 2010 and 2009 is as follows:
2010
|
2009
|
|||||||
Balance
at beginning of year
|
$ | 289,135 | $ | 198,854 | ||||
Charged
to cost of sales
|
10,686 | 42,662 | ||||||
Deductions
|
- | (1,875 | ) | |||||
Balance
at end of period
|
$ | 299,821 | $ | 239,641 |
STOCK
BASED COMPENSATION
The
Company accounts for its stock based compensation under ASC 718 “Compensation –
Stock Compensation” which was adopted in 2006, using the fair value based
method. Under this method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. This guidance establishes standards for
the accounting for transactions in which an entity exchanges it equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
June 2009, the FASB issued new accounting guidance which will require more
information about the transfer of financial assets where companies have
continuing exposure to the risks related to transferred financial assets. This
guidance is effective at the start of a company’s first fiscal year beginning
after November 15, 2009, or January 1, 2010 for companies reporting earnings on
a calendar-year basis. The adoption of this guidance did not have a material
impact on the Company’s financial position or results of
operations.
In
June 2009, the FASB issued new accounting guidance which will change how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. This guidance is effective at the
start of a company’s first fiscal year beginning after November 15, 2009, or
January 1, 2010 for companies reporting earnings on a calendar-year basis. The
adoption of this guidance did not have a material impact on the Company’s
financial position or results of operations.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
F-8
NOTE
3 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES
During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. We recorded a
charge of $46,424 related to the change in fair value of the conversion feature
of the converted debentures through the dates of conversion. At the dates of
conversion, we extinguished a conversion feature liability in the amount of
$212,416. Since the conversion feature was accounted for as a
liability, we have recorded a gain upon conversion of debt in the amount of
$136,321.
NOTE
4 – DERIVATIVE LIABILITIES
During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. We recorded a
charge of $46,424 related to the change in fair value of the conversion feature
of the converted debentures through the dates of conversion. At the dates of
conversion, we extinguished a conversion feature liability in the amount of
$212,416. The fair value of the conversion feature was determined using the
Black-Scholes method based on the following weighted average
assumptions: (1) risk free interest rate of 0.32%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 138%; and (4) an expected life of the
conversion feature of 0.88 years.
At
March 31, 2010 we recalculated the fair value of the conversion feature of the
remaining debentures subject to derivative accounting and have determined that
the fair value at March 31, 2010 is $2,060,199. The fair value of the conversion
feature was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.363%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 115%; and (4) an expected life of the
conversion feature of 0.75 years. We recorded a credit of $424,947 during
2010 related to the change in fair value of the conversion feature of the
debentures.
At
March 31, 2010, we recalculated the fair value of our warrants subject to
derivative accounting and have determined that the fair value at March 31, 2010
is $497,351. The fair value of the warrant liability was determined using the
Black-Scholes method based on the following weighted average
assumptions: (1) risk free interest rate of 0.60%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 142%; and (4) an expected life of the
warrants of 1.1 years. We recorded a charge of $26,759 during 2010 related
to the change in fair value of the warrant liability.
NOTE
5 - STOCKHOLDER’S EQUITY
PREFERRED
STOCK
The
Company has 5,000,000 authorized shares of $0.001 par value preferred stock. The
preferred stock may be issued in series, from time to time, with such
designations, rights, preferences, and limitations as the Board of Directors may
determine by resolution.
COMMON
STOCK
The
Company has 75,000,000 authorized shares of $0.001 par value common
stock.
During
the first quarter of 2010 the Company issued 1,364,975 shares of common stock
upon conversion debentures in the amount of $341,244.
During
the first quarter of 2010 the Company issued 352,667 shares of common stock upon
the exercise of 352,667 employee stock options. We received $5,250 in cash
proceeds from the exercise of the options; the balance of the exercise price was
paid through the reduction of accrued compensation in the amount of
$24,137.
F-9
NOTE 6- STOCK OPTIONS AND
WARRANTS
On
February 22, 2010, our Board and Compensation Committee approved the 2010
Equity Compensation Plan (“2010 Plan”). The 2010 Plan permits the
granting of up to 6,000,000 shares of common stock through the issuance of
Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock
Appreciation Rights, Restricted Stock Units, Performance Units, Performance
Shares and Other Stock Based Awards to our employees, directors and
consultants. We anticipate submitting the plan for shareholder
approval during the following 12 months. In the event the Plan is not
approved by our shareholders during this time, the 2010 Plan will be considered
a non-qualified plan.
In
January 2010 the Company’s board of directors approved a stock option award to a
director in the amount of 100,000 shares of common stock with an exercise price
of $0.35 per share. The option vests over one year. The option expires after ten
years. The option had a grant date fair value of $9,702. The fair value of the
option was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.25%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
option of 0.625 years.
The
Company recorded $7,361 of compensation expense for consultant stock options
during the three months ended March 31, 2010, of which $1,591 is included in
professional fees and $5,770 is included in the administrative
expense category. During the three months ended March 31, 2009, the Company
recorded $1,840 of compensation expense for consultant stock options which is
included in the administrative expense category.
The
Company recorded $97,184 and $142,243 of compensation expense for employee stock
options during the three months ended March 31, 2010 and 2009, respectively,
which is included in the administrative expense category.
NOTE
7 - PROVISION FOR INCOME TAXES
Our
effective tax rate was estimated at 0% for the three months ended March 31,
2010 and 2009.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
LEASE
The
Company leases office space on a month-to-month basis.
Rent
expense was $12,997 and $12,447 for the three months ended March 31, 2010
and 2009, respectively.
LITIGATION
To
date, the Company has never been a party to and has never been involved with any
litigation. However, in the future, the Company, like any other business or
individual, may become subject to litigation some of which the Company can
control and other litigation that the Company cannot control. If the Company
were to become involved in any litigation, management would have to assess
whether or not such litigation would likely have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
F-10
INDEX TO
FINANCIAL STATEMENTS
Page
|
|
Report
of RBSM, LLP, Independent Registered Public Accounting
Firm
|
F-12
|
Report
of SingerLewak LLP, Independent Registered Public Accounting
Firm
|
F-13
|
Consolidated
Balance Sheets
|
F-14
|
Consolidated
Statements of Operations
|
F-15
|
Consolidated
Statements of Stockholder’s Equity (Deficit)
|
F-16
|
Consolidated
Statements of Cash Flows
|
F-17
|
Notes
to Consolidated Financial Statements
|
F-18
|
F-11
To the
Board of Directors and Shareholders of
Innovative
Card Technologies, Inc.
We have
audited the accompanying consolidated balance sheet of Innovative Card
Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2009, and
the related consolidated statements of operations, (deficiency in) stockholder’s
equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based upon our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Card
Technologies, Inc. and its subsidiaries as of December 31, 2009, and the results
of its consolidated operations and its cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the accompanying consolidated financial statements, the Company has suffered
recurring losses from operations and does not have sufficient cash or working
capital to meet anticipated requirements through 2010. This raises substantial
doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/
RBSM LLP
|
|
New
York, New York
|
|
March
31, 2010
|
F-12
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Innovative
Card Technologies, Inc.
We have
audited the accompanying consolidated balance sheet of Innovative Card
Technologies, Inc. and subsidiary (collectively, the “Company”) as of December
31, 2008, and the related consolidated statements of operations, stockholders’
equity/(deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express and opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Card
Technologies, Inc. and subsidiary as of December 31, 2008, and the results of
their operations and their cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has suffered recurring
losses from operations. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
SingerLewak LLP
SingerLewak
LLP
Los
Angeles, California
May 15,
2009
F-13
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 245,765 | $ | 76,645 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $61,398 and $60,000,
respectively
|
699,854 | 190,767 | ||||||
Prepaids
and other current assets
|
76,130 | 174,178 | ||||||
Deposits
on raw materials held for production
|
165,138 | 268,318 | ||||||
Raw
materials held for production
|
134,754 | 347,529 | ||||||
Work
in progress inventory, net
|
107,212 | 1,454,940 | ||||||
Finished
goods inventory
|
34,421 | - | ||||||
Total
current assets
|
1,463,274 | 2,512,377 | ||||||
Property
and equipment
|
93,763 | 171,722 | ||||||
Deferred
debt issuance cost
|
- | 449,052 | ||||||
Deposits
|
3,720 | 62,971 | ||||||
Total
assets
|
$ | 1,560,757 | $ | 3,196,122 | ||||
Liabilities
and stockholders' deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 912,271 | $ | 1,281,602 | ||||
Accounts
payable - related parties
|
- | 600,010 | ||||||
Accrued
interest
|
27,737 | 31,689 | ||||||
Warranty
reserve
|
289,135 | 198,854 | ||||||
Deferred
rent
|
- | 56,929 | ||||||
Deferred
revenue
|
450,189 | 1,169,957 | ||||||
Total
current liabilities
|
1,679,332 | 3,339,041 | ||||||
8%
convertible debentures, net of discount of $1,074,752 and $5,384,054 at
December 31, 2009 and 2008, respectively
|
4,687,576 | 3,425,111 | ||||||
Warrant
liability
|
470,592 | 19,055 | ||||||
Derivative
liability
|
2,151,632 | - | ||||||
Total
liabilities
|
8,989,132 | 6,783,207 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 75,000,000 shares authorized, 28,840,920 and
28,495,256 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
28,841 | 28,495 | ||||||
Additional
paid-in capital
|
30,902,885 | 33,381,140 | ||||||
Accumulated
deficit
|
(38,360,101 | ) | (36,996,720 | ) | ||||
Total
deficiency in stockholders' equity
|
(7,428,375 | ) | (3,587,085 | ) | ||||
Total
liabilities and deficiency in stockholders' equity
|
$ | 1,560,757 | $ | 3,196,122 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-14
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 4,089,569 | $ | 2,828,581 | ||||
Cost
of goods sold
|
3,902,855 | 4,350,975 | ||||||
Gross
profit/margin
|
186,714 | (1,522,394 | ) | |||||
Operating
expenses
|
||||||||
Administrative
|
1,919,036 | 5,462,582 | ||||||
Consulting
fees
|
116,501 | 612,414 | ||||||
Professional
fees
|
445,257 | 734,680 | ||||||
Research
and development
|
258,532 | 467,887 | ||||||
Impairment
|
- | 1,450,888 | ||||||
Total
operating expense
|
2,739,326 | 8,728,451 | ||||||
Loss
from operations
|
(2,552,612 | ) | (10,250,845 | ) | ||||
Other
income (expense)
|
||||||||
Change
in fair value of warrant and conversion liability
|
(1,154,584 | ) | 3,068,251 | |||||
Gain
on extinguishment of debt
|
9,553,684 | - | ||||||
Other
income
|
606,815 | - | ||||||
Other
expense
|
- | (129,795 | ) | |||||
Interest
income
|
82 | 26,857 | ||||||
Interest
expense
|
(12,336,440 | ) | (1,644,005 | ) | ||||
Total
other income (expense)
|
(3,330,443 | ) | 1,321,308 | |||||
Loss
before provision for income taxes
|
(5,883,055 | ) | (8,929,537 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
(5,883,055 | ) | (8,929,537 | ) | ||||
Basic
and diluted loss per share
|
$ | (0.21 | ) | $ | (0.31 | ) | ||
Weighted
average shares outstanding, Basic and diluted
|
28,570,768 | 28,477,607 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-15
INNOVATIVE
CARD TECHNOLOGIES INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
Additional
|
||||||||||||||||||||||||||||
Series
A Preferred Stock
|
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficiency
|
||||||||||||||||||||||
Balance,
January 1, 2008
|
- | $ | - | 28,433,116 | $ | 28,433 | $ | 28,456,621 | $ | (28,067,183 | ) | $ | 417,871 | |||||||||||||||
Exercise
of options
|
- | - | 50,000 | 50 | 49,950 | - | 50,000 | |||||||||||||||||||||
Cashless
exercise of warrants
|
- | - | 12,140 | 12 | (12 | ) | - | - | ||||||||||||||||||||
Warrants
issued with 8% debentures
|
- | - | - | - | 3,237,954 | - | 3,237,954 | |||||||||||||||||||||
Warrants
issued to consultants
|
- | - | - | - | 413,350 | - | 413,350 | |||||||||||||||||||||
Stock
based compensation
|
- | - | - | - | 1,223,277 | - | 1,223,277 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (8,929,537 | ) | (8,929,537 | ) | |||||||||||||||||||
Balance,
December 31, 2008
|
- | - | 28,495,256 | 28,495 | 33,381,140 | (36,996,720 | ) | (3,587,085 | ) | |||||||||||||||||||
Cumulative
effect of change in accounting principle
|
- | - | - | - | (3,237,954 | ) | 4,519,674 | 1,281,720 | ||||||||||||||||||||
Warrants
issued with 8% debentures
|
- | - | - | - | 33,756 | - | 33,756 | |||||||||||||||||||||
Reclassification
of derivative liabilities
|
- | - | - | - | 44,682 | - | 44,682 | |||||||||||||||||||||
Shares
issued upon conversion of debentures
|
- | - | 345,664 | 346 | 125,550 | - | 125,896 | |||||||||||||||||||||
Stock
based compensation
|
- | - | - | - | 555,711 | - | 555,711 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (5,883,055 | ) | (5,883,055 | ) | |||||||||||||||||||
Balance,
December 31, 2009
|
- | $ | - | 28,840,920 | $ | 28,841 | $ | 30,902,885 | $ | (38,360,101 | ) | $ | (7,428,375 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-16
INNOVATIVE
CARD TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (5,883,055 | ) | $ | (8,929,537 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
56,275 | 715,679 | ||||||
Bad
debts
|
1,398 | - | ||||||
Change
in fair value of warrant liability
|
46,126 | (3,068,251 | ) | |||||
Change
in fair value of conversion liability
|
1,108,458 | - | ||||||
Amortization
of debt discount
|
7,859,150 | 941,206 | ||||||
Amortization
of deferred debt issuance costs
|
449,052 | 78,448 | ||||||
Debt
default penalty
|
2,642,749 | - | ||||||
Deferred
interest and deferral fees
|
- | 309,165 | ||||||
Stock
based compensation expense
|
555,711 | 1,636,627 | ||||||
Fees
paid with debenture
|
45,000 | - | ||||||
Noncash
gain on extinguishment of debt
|
(9,613,684 | ) | - | |||||
Deposit
forfeitures, net
|
(606,815 | ) | - | |||||
Fixed
asset write off
|
15,866 | - | ||||||
Inventory
write off
|
- | 923,065 | ||||||
Change
in provision for obsolete inventory
|
255,248 | 15,724 | ||||||
Impairment
charge on intangible assest
|
- | 1,450,888 | ||||||
(Increase)
decrease in accounts receivable
|
(510,485 | ) | (177,690 | ) | ||||
(Increase)
decrease in prepaids and other current assets
|
98,048 | (120,051 | ) | |||||
(Increase)
decrease in deposits on raw materials held for production
|
23,680 | 337,344 | ||||||
(Increase)
decrease in raw materials held for production
|
117,886 | 29,642 | ||||||
(Increase)
decrease in work in progress inventory
|
1,213,689 | (568,681 | ) | |||||
(Increase)
decrease in work in finished goods inventory
|
(60,741 | ) | - | |||||
(Increase)
decrease in deposits
|
59,251 | 114,776 | ||||||
Increase
(decrease) in accounts payable and accrued expenses
|
(363,513 | ) | (2,378,442 | ) | ||||
Increase
(decrease) in accounts payable - related parties
|
- | (57,244 | ) | |||||
Increase
(decrease) in accrued interest
|
1,390,600 | 31,689 | ||||||
Increase
(decrease) in warranty reserve
|
90,281 | 171,038 | ||||||
Increase
(decrease) in deferred rent
|
(56,929 | ) | 56,929 | |||||
Increase
(decrease) in deferred revenue
|
108,553 | 271,372 | ||||||
Net
cash used in operating activities
|
(958,201 | ) | (8,216,304 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
- | (69,151 | ) | |||||
Net
cash used in investing activities
|
- | (69,151 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of 8% convertible debentures
|
1,127,321 | 8,500,000 | ||||||
Proceeds
from note
|
100,000 | - | ||||||
Repayment
of note
|
(100,000 | ) | - | |||||
Payments
on debt issuance cost
|
- | (527,500 | ) | |||||
Proceeds
from exercise of options/warrants
|
- | 50,000 | ||||||
Net
cash provided by financing activities
|
1,127,321 | 8,022,500 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
169,120 | (262,955 | ) | |||||
Cash
and cash equivalents, beginning of period
|
76,645 | 339,600 | ||||||
Cash
and cash equivalents, end of period
|
$ | 245,765 | $ | 76,645 | ||||
Supplemental
Schedule of Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | 2,705 | $ | 253,356 | ||||
Non-Cash
Financial Activity:
|
||||||||
Debt
discount attributable to beneficial conversion feature
|
$ | - | $ | 3,237,953 | ||||
Debt
discount attributable to warrants
|
- | 3,087,307 | ||||||
Value
of warrants issued as non-employee compensation included in prepaid
expenses and other current assets
|
- | 254,580 | ||||||
Warrant
liability for warrants issued with debentures
|
639,522 | - | ||||||
Warrants
issued with debentures
|
33,756 | - | ||||||
Derivative
conversion feature liability of convertible debt
|
1,373,964 | - | ||||||
Liabilities
settled with debentures and warrants
|
672,243 | - | ||||||
Debt
converted to common stock
|
86,416 | - | ||||||
Conversion
liability extinguished upon conversion of debt
|
75,410 | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-17
INNOVATIVE
CARD TECHNOLOGIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 and 2008
NOTE
1 - ORGANIZATION AND LINE OF BUSINESS
COMPANY
OVERVIEW
The
Company develops and markets secure powered cards for payment, identification,
physical and logical access applications. Our main focus is on developing
One-Time-Password (“OTP”) solutions. An OTP is a password that is
only valid for a single login session or transaction. OTPs avoid a number of
shortcomings that are associated with traditional (static) passwords. The most
important shortcoming that is addressed by OTPs is that, in contrast to static
passwords, they are not vulnerable to replay attacks. This means that, if a
potential intruder manages to record an OTP that was already used to log into a
service or to conduct a transaction, he will not be able to abuse it since it
will be no longer valid.
Currently,
our main OTP product is the ICT DisplayCard. The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTP (also referred to as a one-time
passcode). At the push of a button, the ICT DisplayCard displays, a
one-time passcode. During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for multi-factor authentication.
InCard does not provide the backend authentication server, but rather will
integrate the ICT DisplayCard into authentication systems provided by other
companies including distributors and other resellers of the ICT DisplayCard. The
ICT DisplayCard’s authentication works like tokens issued by VASCO, RSA, and
ActivIdentity, but in a more convenient, wallet-sized card. In December of 2009,
we introduced the ICard, our new low cost OTP product intended to serve the
masses.
Our
primary focus is and will continue to be the further development, sales and
marketing of OTP solutions. We anticipate we will expand our
current ICT DisplayCard product offering with other innovative OTP
products. Since 2002, we have continued to develop our power inlay
technology that is the basis of our ICT DisplayCard.
BASIS
OF PRESENTATION AND GOING CONCERN
The
accompanying consolidated financial statements of Innovative Card
Technologies, Inc. (“ICTI”) include the amounts of its wholly-owned
subsidiary, PSA Co. (“PSAC”) which was incorporated in the State of Delaware on
August 27, 2003.
As of
December 31, 2009 and 2008, the Company has incurred net losses of $5,883,055
and $8,929,537, negative working capital of $216,058 and $826,664, has an
accumulated deficit of $38,360,101 and $36,996,720 and stockholders’ deficiency
of $7,428,375 and $3,587,085, respectively. Sales of the ICT DisplayCard and
newly introduced OTP products, the Company’s main products, are not expected to
generate positive cash flow until the third quarter of 2010. As a result, there
is substantial doubt about the Company’s ability to continue as a going concern
at December 31, 2009.
Management’s
plan regarding these matters is to increase sales, resulting in reduced losses
and raise additional debt and/or equity financing to cover operating costs as
well as its obligations as they become due.
There can be no assurances that funds
will be available to the Company when needed or, if available, that such funds
would be available under favorable terms. In the event that the Company is
unable to generate adequate revenues to cover expenses and cannot obtain
additional funds in the near future, the Company may seek protection under
bankruptcy laws.
F-18
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company’s assets and the satisfaction of
liabilities in the normal course of business and does not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
As of
March 15, 2010 the Company has approximately $239,000 in cash. Combined
with anticipated revenue collections and planned expense reductions, the Company
believes this amount will be enough to fund our operations until or through the
third quarter of 2010.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Innovative Card
Technologies and its wholly owned subsidiary, PSA Co. All significant
inter-company accounts and transactions are eliminated in
consolidation.
USE
OF ESTIMATES
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE
RECOGNITION
The
Company recognizes revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue
Recognition”. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. Revenue is not
recognized on product sales transacted on a test or pilot basis. Instead,
receipts from these types of transactions offset marketing expenses. Revenue
from royalties is recognized with the passage of time in accordance with the
underlying agreement.
CASH
AND CASH EQUIVALENTS
For the
purpose of the statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
ACCOUNTS
RECEIVABLE
Our sales
to date have been to large credit card issuers and we have been successful in
collecting for products and services. We perform a regular review of our
customer activity and associated credit risks and do not require collateral from
our customers. At December 31, 2009 and 2008, based on our review of customer
activity, we recorded an allowance for doubtful accounts of $61,398 and $60,000,
respectively.
F-19
INVENTORY
The
Company values its inventory at the lower of cost (first-in, first-out) or
market. The Company uses estimates and judgments regarding the valuation of
inventory to properly value inventory. Inventory adjustments are made for the
difference between the cost of the inventory and the estimated realizable value
and charged to cost of goods sold in the period in which the facts that give
rise to the adjustments become known.
INTANGIBLE
ASSETS AND LONG-LIVED ASSETS
The cost
incurred to acquire intangible assets, which are active and relate to products
with a definitive life cycle, are amortized over the estimated useful life of
three to five years. The Company assesses the carrying value of long-lived
assets in accordance with ASC 360, "Property, Plant and Equipment". The Company
assesses the impairment of identifiable intangibles and long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors considered important that could trigger an
impairment review include, but are not limited to, the following: a significant
underperformance to expected historical or projected future operating results, a
significant change in the manner of the use of the acquired asset or the
strategy for the overall business, or a significant negative industry or
economic trend.
Based on
anticipated future income and cash flows and other factors relevant in the
opinion of the Company’s management, certain intangibles were determined to be
completely impaired during the year ended December 31, 2008. See
Note 5 – Intangible Assets.
MAJOR
SUPPLIERS
The
Company obtains the battery, a key component for the Company’s power inlay
technology, from a single source, Solicore, Inc., on a purchase order
basis. The Company believes that alternative sources for this component in the
event of a disruption or discontinuation in supply would not be available on a
timely basis, which could disrupt Company operations, delay production for up to
twelve months and impair the Company’s ability to manufacture and sell
products.
The
Company obtains the display, a key component for the Company’s ICT DisplayCard,
from a single source, SmartDisplayer, pursuant to the Company’s agreement with
SmartDisplayer. On November 10, 2007, the Company was required to make a deposit
on a purchase order to maintain its exclusivity. The Company was unable to make
the deposit and therefore does not have exclusivity with SmartDisplayer. The
Company believes that alternative sources for this component in the event of a
disruption or discontinuation in supply would not be available on a timely
basis, which could disrupt Company operations relating to the ICT DisplayCard,
delay production of the ICT DisplayCard for up to twelve months and impair the
Company’s ability to manufacture and sell the ICT DisplayCard.
The
Company assembles its ICT DisplayCard using a single source, NagraID, pursuant
to a written agreement. The Company believes that alternative sources for this
component in the event of a disruption or discontinuation in supply would not be
available on a timely basis, which could disrupt Company operations relating to
the ICT DisplayCard, delay production of the ICT DisplayCard for up to twelve
months and impair the Company’s ability to manufacture and sell the ICT
DisplayCard.
MAJOR
CUSTOMERS
Two
customers accounted for 97% and 77% of the Company’s revenues for each of the
years ended December 31, 2009 and 2008, respectively.
Two and
three customers accounted for 87% and 91% of our accounts
receivable at December 31, 2009 and 2008, respectively.
F-20
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. The Company provides for depreciation and
amortization using the double-declining method over estimated useful lives of
five to seven years. Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the statements of
operations.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value of financial instruments
In April
2009, we adopted accounting guidance which requires disclosures about fair value
of financial instruments in interim financial statements as well as in annual
financial statements.
Our
short-term financial instruments, including cash, accounts receivable, prepaid
expenses and other assets, accounts payable and accrued expenses, warranty
reserve and other liabilities, consist primarily of instruments without extended
maturities, the fair value of which, based on management’s estimates, reasonably
approximate their book value. The fair value of our convertible notes is based
on management estimates and reasonably approximates their book value based on
their current maturity. The fair value of the Company’s derivative instruments
is determined using option pricing models.
Fair
value measurements
Effective
November 1, 2008, we adopted new accounting guidance pursuant to ASC 820
“Fair Value Measurements and Disclosure”, which established a framework for
measuring fair value and expands disclosure about fair value measurements. The
Company did not elect fair value accounting for any assets and liabilities
allowed by previous guidance. Effective January 1, 2009, the Company
adopted the provisions of new accounting guidance that relate to non-financial
assets and liabilities that are not required or permitted to be recognized or
disclosed at fair value on a recurring basis. Effective April 1, 2009, the
Company adopted new accounting guidance which provides additional guidance for
estimating fair value in accordance with ASC 820, when the volume and level of
activity for the asset or liability have significantly decreased. The adoptions
of the provisions of ASC 820 did not have a material impact on our financial
position or results of operations.
ASC 820
defines fair value as the amount that would be received for an asset or paid to
transfer a liability (i.e., an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820
describes the following three levels of inputs that may be
used:
F-21
Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets and (liabilities) measured at fair value on a
recurring basis as of December 31, 2009:
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
245,765 | - | - | 245,765 | ||||||||||||
Total
Assets
|
245,765 | - | - | 245,765 | ||||||||||||
Liabilities | ||||||||||||||||
Convertible
debentures
|
- | - | 4,867,576 | 4,867,576 | ||||||||||||
Warrant
Liability
|
- | - | 470,592 | 470,592 | ||||||||||||
Derivative
liabilities
|
- | - | 2,151,632 | 2,151,632 | ||||||||||||
Total
liabilities
|
- | - | 7,489,800 | 7,489,800 |
LOSS
PER SHARE
The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and
diluted loss per share. Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive.
Common
equivalent shares are excluded from the computation of diluted loss per share if
their effect would be anti-dilutive. There were 33,431,643 common share
equivalents at December 31, 2009 and 14,113,016 at December 31, 2008. Common
equivalent shares were excluded from the calculation of diluted loss per share
for the years ended December 31, 2009 and 2008 as their inclusion would reduce
diluted loss per share for those periods.
WARRANTY
RESERVE
The
Company generally warrants its products against defects over a period of one to
three years. An accrual for estimated future costs relating to products returned
under warrants is recorded as a charge to cost of sales when products are
shipped. The accrual is based on a percentage of sales. This percentage was 10%
through December 31, 2008, 3% for the period January 1 to September 30, 2009 and
2% effective October 1, 2009 (the changes in estimate based on historical
trends). Activity in the accrued warranty reserve liability for the years ended
December 31, 2009 and 2008 is as follows:
F-22
2009
|
2008
|
|||||||
Balance
at beginning of year
|
$ | 198,854 | $ | 27,816 | ||||
Charged
to cost of sales
|
93,630 | 226,950 | ||||||
Deductions
|
(3,349 | ) | (55,912 | ) | ||||
Balance
at end of year
|
$ | 289,135 | $ | 198,854 |
STOCK
BASED COMPENSATION
The
Company accounts for its stock based compensation under ASC 718 “Compensation –
Stock Compensation” which was adopted in 2006, using the fair value based
method. Under this method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. This guidance establishes standards for
the accounting for transactions in which an entity exchanges it equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.
INCOME
TAXES
The
Company utilizes ASC 740 “Income Taxes” which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
The
Company adopted new accounting guidance effective January 1, 2007. As a result
of the implementation of this new guidance, the Company made a comprehensive
review of its portfolio of uncertain tax positions in accordance with
recognition standards established by the guidance. As a result of this review,
the Company concluded that at this time there are no uncertain tax positions
that would result in tax liability to the Company. There was no cumulative
effect on retained earnings as a result of applying the provisions of this
guidance.
RESEARCH
AND DEVELOPMENT
Research
and development costs are charged to operations as incurred.
CONCENTRATIONS
OF CREDIT RISK
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company places its cash and cash
equivalents with high credit, quality financial institutions. At times, such
cash and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit, currently $250,000.
RECLASSIFICATIONS
Certain
reclassifications have been made to prior year balances to conform to current
year presentation.
F-23
CHANGE
IN ACCOUNTING PRINCIPLE
In June
2008, the FASB issued new accounting guidance which requires entities to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock by assessing the instrument’s contingent exercise
provisions and settlement provisions. Instruments not indexed to their own stock
fail to meet the scope exception of ASC 815 and should be classified as a
liability and marked-to-market. The statement is effective for fiscal years
beginning after December 15, 2008 and is to be applied to outstanding
instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained
earnings. The Company has assessed its outstanding equity-linked financial
instruments and has concluded that, effective January 1, 2009, the
conversion feature of our convertible debentures will need to be recorded as a
derivative liability due to the fact that the conversion price is subject to
adjustment based on subsequent sales of securities. The cumulative effect of the
change in accounting principle on January 1, 2009 is an increase in our
derivative liability related to the fair value of the conversion feature of
$6,061, an increase in the unamortized discount related to our convertible
debentures of $1,287,781, a decrease in additional paid-in capital of $3,237,954
related to the decrease in beneficial conversion feature attributable to the
debentures, and a $4,519,674 net decrease in accumulated deficit, comprised of a
credit to reflect the change in fair value of the derivative liability from date
of issue to January 1, 2009 of $5,235,242 partially offset by a charge of
$715,568 for additional expense for amortization of debt discount.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Codification and GAAP Hierarchy — Effective for interim and annual
periods ending after September 15, 2009, the Accounting Standards Codification
and related disclosure requirements issued by the FASB became the single
official source of authoritative, nongovernmental GAAP. The ASC simplifies GAAP,
without change, by consolidating the numerous, predecessor accounting standards
and requirements into logically organized topics. All other literature not
included in the ASC is non-authoritative. We adopted the ASC as of September 30,
2009, which did not have any impact on our results of operations, financial
condition or cash flows as it does not represent new accounting literature or
requirements. All references to pre-codified U.S. GAAP have
been removed from this Form 10-K.
In
September 2006, the FASB issued new accounting guidance which clarifies the
principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
Under the guidance, fair value measurements would be separately disclosed by
level within the fair value hierarchy. The guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, with early adoption permitted. In
February 2008, FASB issued additional guidance which delayed the effective date
of previous guidance to fiscal years and interim periods within those fiscal
years beginning after November 15, 2008 for non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
The adoption of the guidance for our financial assets and liabilities did not
have an impact on our consolidated financial position or operating results.
In
December 2007 the FASB issued new accounting guidance which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This guidance changes the way the consolidated income
statement is presented. It requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. This guidance
establishes disclosure requirements in the consolidated financial statements,
which will enable users to clearly distinguish between the interests of the
parent’s owners and the interests of the non-controlling owners of a subsidiary.
The guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008; earlier adoption is
prohibited. The adoption of this guidance had no impact to the Company’s
consolidated financial position, results of operations, or cash flows.
F-24
In
December 2007, the FASB issued new accounting guidance which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired and the liabilities
assumed, any non-controlling interest in the acquiree and the goodwill acquired.
This guidance also establishes disclosure requirements which will enable users
to evaluate the nature and financial effects of the business combination. This
guidance is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The adoption of this guidance had no impact to the
Company’s consolidated financial position, results of operations, or cash
flows.
In March
2008, the FASB issued new accounting guidance which requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This guidance is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008; earlier adoption is encouraged. The adoption of this guidance
had no impact to the Company’s consolidated financial position, results of
operations, or cash flows.
In April
2008, the FASB issued new accounting guidance which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. This change is
intended to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset. The new guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The requirement for determining useful lives must be
applied prospectively to intangible assets acquired after the effective date and
the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. The adoption of
this guidance had no impact on the Company’s consolidated financial position,
results of operations, or cash flows.
In June
2008, the FASB issued new accounting guidance which requires that all
unvested share-based payment awards that contain nonforfeitable rights to
dividends should be included in the basic Earnings Per Share (EPS)
calculation. The new guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The adoption of this
guidance had no impact on the Company’s consolidated financial position, results
of operations, or cash flows.
In April
2009, the FASB issued new accounting guidance to be utilized in determining
whether impairments in debt securities are other than temporary, and which
modifies the presentation and disclosures surrounding such instruments. This
guidance is effective for interim periods ending after June 15, 2009, but early
adoption is permitted for interim periods ending after March 15, 2009. The
adoption of this guidance during the second quarter of 2009 had no impact on the
Company’s consolidated financial position, results of operations, or cash
flows.
In April
2009, the FASB issued new accounting which provides additional guidance in
determining whether the market for a financial asset is not active and a
transaction is not distressed for fair value measurement purposes. The guidance
is effective for interim periods ending after June 15, 2009, but early adoption
is permitted for interim periods ending after March 15, 2009. The adoption of
this guidance during the second quarter of 2009 had no impact on the Company’s
consolidated financial position, results of operations, or cash flows.
In April
2009, the FASB issued new accounting guidance which requires disclosures about
fair value of financial instruments in interim financial statements as well as
in annual financial statements. This guidance is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009. The adoption of this guidance during the second
quarter of 2009 had no impact on the Company’s consolidated financial position,
results of operations, or cash flows.
F-25
In May
2009, the FASB issued new accounting guidance which establishes general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The guidance will be effective for interim and annual financial
periods ending after June 15, 2009. The Company adopted the guidance during
the three months ended June 30, 2009. The adoption of this guidance had no
impact on the Company’s consolidated financial position, results of operations,
or cash flows.
In June
2009, the FASB issued new accounting guidance which will require more
information about the transfer of financial assets where companies have
continuing exposure to the risks related to transferred financial assets. This
guidance is effective at the start of a company’s first fiscal year beginning
after November 15, 2009, or January 1, 2010 for companies reporting earnings on
a calendar-year basis.
In June
2009, the FASB issued new accounting guidance which will change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. This guidance is effective at the
start of a company’s first fiscal year beginning after November 15, 2009, or
January 1, 2010 for companies reporting earnings on a calendar-year
basis.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
NOTE
3 - DEPOSITS FOR RAW MATERIALS HELD FOR PRODUCTION
Deposits
for raw materials are held by certain vendors, are not refundable and are made
pursuant to agreements as discussed in Note 2 under Major
Suppliers.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
|||||||
Computer
equipment
|
$
|
61,997
|
$
|
75,431
|
||||
Furniture
and fixtures
|
-
|
1,608
|
||||||
Production
equipment
|
291,550
|
339,888
|
||||||
353,547
|
416,927
|
|||||||
Less
accumulated depreciation and amortization
|
(259,784
|
)
|
(245,205
|
)
|
||||
TOTAL
|
$
|
93,763
|
$
|
171,722
|
Depreciation
expense was $56,275 and $81,053 for the years ended December 31, 2009 and
2008, respectively.
NOTE
5 - INTANGIBLE ASSETS
The
Company’s management valued intangible assets acquired in 2006 at
$3,030,000. As of December 31, 2008 these intangible assets were determined
to be fully impaired. Accordingly, the Company recorded an impairment
charge of $1,450,888 during 2008. This amount represented the entire unamortized
carrying value of the intangible assets.
F-26
Amortization
expense was $625,065 (prior to the impairment charge discussed above) for the
year ended December 31, 2008.
NOTE
6 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES
On
February 20, 2009, the Company’s stock was delisted from the NASDAQ National
Market System due to a failure to maintain adequate share pricing. As a result,
the Company defaulted on its 8% Senior Secured Convertible
Debentures. Such default results in acceleration of the debentures, a
thirty percent (30%) increase in the principal amount of the debentures, and an
increase in the interest rate on the debentures from eight percent (8%) to
eighteen percent (18%). We have accounted for the default in the financial
statements.
In June
2008, the FASB issued new accounting guidance which requires entities to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock by assessing the instrument’s contingent exercise
provisions and settlement provisions. Instruments not indexed to their own stock
fail to meet the scope exception of ASC 815 and should be classified as a
liability and marked-to-market. The statement is effective for fiscal years
beginning after December 15, 2008 and is to be applied to outstanding
instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained
earnings. The Company has assessed its outstanding equity-linked financial
instruments and has concluded that, effective January 1, 2009, the
conversion feature of our convertible debentures will need to be recorded as a
derivative liability due to the fact that the conversion price is subject to
adjustment based on subsequent sales of securities. The cumulative effect of the
change in accounting principle on January 1, 2009 includes an increase in
our derivative liability related to the fair value of the conversion feature of
$6,061. Fair value at January 1, 2009 was determined using the Black-Scholes
method based on the following assumptions: (1) risk free
interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility
factor of the expected market price of our common stock of 101%; and
(4) an expected life of the conversion feature of 2 years. At January
1, 2009 the Company has also recorded an additional discount related to the
debentures of $1,287,781 as a result of the implementation of ASC
815.
As a
result of the default described above, the principal amount of the debentures
was increased by 30%, or $2,642,750. We have recorded a charge to interest
expense related to this increase during the quarter ended March 31,
2009.
Also as a
result of the default, the maturity date of the debentures has been accelerated.
The Company has fully amortized the remaining discount and deferred debt issue
costs during the period ended March 31, 2009. The charge to interest expense for
the amortization of debt discount is $6,671,835 and for amortization of debt
issue costs is $449,052 during the quarter ended March 31, 2009.
At
September 30, 2009 we recalculated the fair value of the conversion feature
subject to derivative accounting and have determined that the fair value at
September 30, 2009 (prior to the debt extinguishment transactions described
below) is $363,477. The fair value of the conversion feature was determined
using the Black-Scholes method based on the following weighted average
assumptions: (1) risk free interest rate of 1.0%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
conversion feature of 1.4 years.
We recorded a charge of $357,416 during
the nine months ended September 30, 2009, related to the change in fair value of
the conversion feature during that period, prior to
restructure.
F-27
The
Company is accounting for the warrants, issued in connection with the debentures
as derivative liabilities in accordance with ASC 815. At September 30, 2009, the
warrant liability was valued at $347,010 (prior to the debt extinguishment
transactions described below). The Company recorded a charge of $327,955 during
the nine months ended September 30, 2009 related to the change in fair value of
the warrant liability during that period, prior to restructure. The fair value
of the warrant liability was determined using the Black-Scholes method based on
the following weighted average assumptions: (1) risk free
interest rate of 1%; (2) dividend yield of 0%; (3) volatility factor
of the expected market price of our common stock of 121%; and (4) an
expected life of the warrants of 3.4 years.
2009
Debenture Transactions
Assignment
of Debenture and Common Stock Warrant agreement
On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”). Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables. The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us. Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. On September 29, 2009 we were notified by EMC Corporation that we had
fulfilled all of our obligations and conditions under the
Assignment. As a result, approximately $7,600,000 (which includes
interest, penalties and all other costs, expenses and charges associated
therewith) of the Company’s 8% Senior Secured Convertible Debentures along with
1,008,064 common stock purchase warrants were assigned back to the Company and
retired. Also, the conversion feature subject to derivative
accounting related to these debentures in the amount of approximately $240,000
and the warrant liability related to these warrants of approximately $211,000
have been cancelled. We have made a payment of $60,000 pursuant to the
agreement; have been released from our obligation pursuant to a deposit received
from RSA Security, Inc. in the amount of $142,006; and all parties have been
mutually released from all claims. We have recorded a gain on extinguishment of
debt of approximately $8,115,000 as a result of the above
transactions.
On
September 30, 2009, the Company also entered into a series of transactions with
the holders of the remaining Debentures (“Holders”) and certain creditors as
described below.
Waiver,
Amendment and Exchange Agreement
Pursuant
to the terms of the Waiver, Amendment and Exchange Agreement, the holders agreed
to waive all existing events of default under the Debentures and to waive any
late fees, increased interest and liquidated damages that accrued prior through
September 30, 2009. Such amounts aggregated approximately $1,405,000 at
September 30, 2009.
The Company also agreed to issue to
each of the holders, in exchange for their debentures and warrants, amended and
exchanged original issuance discount debentures (“Amended Debenture”), with a
principal amount equal to each Holder’s current Debenture plus interest through
April 2, 2010 (for an aggregate face amount of $3,975,975) and amended and
exchanged warrants (“Amended Warrant”) in an amount equal to each Holders
current Warrant (for an aggregate of 700,000 warrants). Each Amended
Debenture (i) bears interest at 8% per year commencing on April 1, 2010, paid
quarterly, commencing July 1, 2010, in cash or, subject to certain conditions,
registered shares of our common stock; (ii) has a maturity of January 8, 2011,
(iii) is convertible at the holders’ option into shares of our common stock at
either $1.00 per share (for $686,502 of Debentures) or $0.25 per share (for
$3,289,473 of Debentures), (iv) is secured by all of our and our subsidiaries’
assets, including inventory, receivables, unencumbered equipment and
intellectual property, and (v) has a forced conversion feature which allows us
to force the conversion of the Amended Debenture if our common stock trades
above $1.00 for 10 consecutive trading days. Such a forced conversion
may be limited by contractual restrictions on the amount of our common stock
which the holder may own and certain other conditions. Each Amended
Warrant has a term of 5 years from the initial issuance date which is January 8,
2008 and an exercise price of $0.25 per share. The original issue discount of
$144,649 will be amortized over the period October 1, 2009 to April 2,
2010.
F-28
Both the
conversion price of the $3,289,473 Amended Debentures initially convertible at
$0.25 per share and the exercise price of 580,000 of the Amended Warrants are
subject to “full-ratchet” price protection in the event of stock issuances below
their respective conversion or exercise prices, except for specified exempted
issuances including grants of stock options and stock issuances to officers,
directors, employees and consultants. For the Debentures and Warrants
for which price protection have been removed, the related conversion liability
of $21,324 and related warrant liability of $23,358 at September 30, 2009 have
been reclassified to additional paid-in capital.
During
the fourth quarter of 2009, certain debenture holders converted an aggregate of
$86,416 of debentures into 345,664 shares of common stock. We recorded a credit
of $21,893 related to the change in fair value of the conversion feature of the
converted debentures through the dates of conversion. At the dates of
conversion, we extinguished a conversion feature liability in the amount of
$75,410. Since the conversion feature was accounted for as a liability, we have
recorded a gain upon conversion of debt in the amount of $32,900.
At
December 31, 2009 we recalculated the fair value of the re-priced conversion
feature of the remaining Amended Debentures with price protection subject to
derivative accounting and have determined that the fair value at December 31,
2009 is $1,558,072. The fair value of the conversion feature was determined
using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
conversion feature of 1 year. We recorded a charge of $1,553,339 during
2009 related to the change in fair value of the conversion feature of the
repriced debentures.
At
December 31, 2009, we recalculated the fair value of the re-priced warrant
liability for the warrants with price protection and have determined that the
fair value at December 31, 2009 is $70,533. The fair value of the warrant
liability was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
warrants of 1 year. We recorded a credit of $42,365 at December 31, 2009
related to the change in fair value of the re-priced warrant
liability.
We have
recorded a gain on extinguishment of debt of approximately $1,438,000 as a
result of the above transactions.
Debt
Settlement
In
addition to the exchange of the Debentures and Warrants, we also settled certain
outstanding obligations owed to creditors of the Company in an aggregate amount
of $672,243 in exchange for Amended Debentures in the amount of $699,354 and
Amended Warrants to purchase 135,533 shares of common stock. The Debentures are
convertible at the holders’ option into shares of our common stock at either
$1.00 per share (for $652,539 of Debentures) or $0.25 per share (for $46,815 of
Debentures). The original issue discount of $27,111 will be amortized
over the period October 1, 2009 to April 2, 2010.
Both the
conversion price of the $46,815 Amended Debentures initially convertible at
$0.25 per share and the exercise price of 9,073 of the Amended Warrants are
subject to “full-ratchet” price protection in the event of stock issuances below
their respective conversion or exercise prices, except for specified exempted
issuances including grants of stock options and stock issuances to officers,
directors, employees and consultants.
F-29
At
September 30, 2009 we calculated the fair value of the conversion feature of the
Amended Debentures with price protection subject to derivative accounting and
have determined that the fair value at September 30, 2009 is $52,713. The fair
value of the conversion feature was determined using the Black-Scholes method
based on the following assumptions: (1) risk free interest rate
of 1.0%; (2) dividend yield of 0%; (3) volatility factor of the
expected market price of our common stock of 121%; and (4) an expected
life of the conversion feature of 1.25 years. We recorded a discount of
$52,713 at September 30, 2009 related to the fair value of the conversion
feature of the debentures, of which $10,267 has been immediately charged to
expense. The remaining discount of $42,446 will be amortized to the date of
maturity, January 8, 2011.
At December 31, 2009 we calculated the
fair value of the conversion feature of the Amended Debentures with price
protection subject to derivative accounting and have determined that the fair
value at December 31, 2009 is $22,772. The fair value of the conversion feature
was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
conversion feature of 1 year. We recorded a credit of $29,941 at December
31, 2009 related to the change in fair value of the conversion
feature.
At
September 30, 2009, we calculated the fair value of the warrant liability for
the warrants with price protection and have determined that the fair value at
September 30, 2009 is $2,554. The fair value of the warrant liability was
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
warrants of 1.25 years. We recorded a discount of $2,554 at September 30,
2009 related to the fair value of the warrant liability. The discount will be
amortized to the date of maturity, January 8, 2011.
At
December 31, 2009, we calculated the fair value of the warrant liability for the
warrants with price protection and have determined that the fair value at
December 31, 2009 is $1,103. The fair value of the warrant liability was
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
warrants of 1 year. We recorded a credit of $1,451 at December 31, 2009
related to the change in fair value of the warrant liability.
At
September 30, 2009, we calculated the relative fair value of the warrants
without price protection and have determined that the relative fair value at
September 30, 2009 is $33,756. The relative fair value of the warrants was
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
warrants of 1.25 years. We recorded a discount of $33,756 at September 30,
2009 related to the relative fair value of the warrants. The discount will be
amortized to the date of maturity, January 8, 2011.
Debenture
& Warrant Purchase Agreement
Pursuant
to the terms of a Debenture and Warrant Purchase Agreement, the Company issued
an additional $1,173,416 face value of its Amended Debentures (convertible into
4,693,664 common shares) and 2,254,642 Amended Warrants. We received
cash proceeds of $1,127,321. The Amended Debentures and Warrants issued to these
investors have a conversion price and exercise price of $0.25 and $0.25,
respectively. Both the conversion price of the Amended Debentures and the
exercise price of the Amended Warrants are subject to “full-ratchet” price
protection in the event of stock issuances below their respective conversion or
exercise prices, except for specified exempted issuances including grants of
stock options and stock issuances to officers, directors, employees and
consultants. The original issue discount of $46,095 will be amortized over the
period October 1, 2009 to April 2, 2010.
F-30
At
September 30, 2009 we calculated the fair value of the conversion feature of the
Amended Debentures subject to derivative accounting and have determined that the
fair value at September 30, 2009 is $1,321,251. The fair value of the conversion
feature was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1.0%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
conversion feature of 1.25 years. We recorded a discount of $1,321,251 at
September 30, 2009 related to the fair value of the conversion feature of the
debentures, of which $828,604 has been immediately charged to expense. The
remaining discount of $492,647 will be amortized to the date of maturity,
January 8, 2011.
At
December 31, 2009 we calculated the fair value of the conversion feature of the
Amended Debentures subject to derivative accounting and have determined that the
fair value at December 31, 2009 is $570,788. The fair value of the conversion
feature was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
conversion feature of 1 year. We recorded a credit of $750,463 at December
31, 2009 related to the change in fair value of the conversion feature.
At
September 30, 2009, we calculated the fair value of the warrant liability for
the warrants with price protection and have determined that the fair value at
September 30, 2009 is $634,674. The fair value of the warrant liability was
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
warrants of 1.25 years. We recorded a discount of $634,674 at September 30,
2009 related to the fair value of the warrant liability. The discount will be
amortized to the date of maturity, January 8, 2011.
At
December 31, 2009, we calculated the fair value of the warrant liability for the
warrants with price protection and have determined that the fair value at
December 31, 2009 is $274,184. The fair value of the warrant liability was
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.335%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
warrants of 1 year. We recorded a credit of $360,491 at December 31, 2009
related to the change in fair value of the warrant liability.
Repriced
Consultant Warrants
In
connection with the above transactions we have replaced 410,000 consultant
warrants granted and fully vested in 2008 with Amended Warrants. At December 31,
2009, we calculated the fair value of the warrant liability for these warrants
with price protection and have determined that the fair value at December 31,
2009 is $63,156. The fair value of the warrant liability was determined using
the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1.0%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 162%; and (4) an expected life of the
warrants of 1.75 years. We recorded a charge of $63,156 at December 31,
2009 related to the change in fair value of the warrant liability.
2008
Debenture Transactions
On
January 8, 2008, we entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with 13 institutional and accredited investors (the
“Purchasers”). Pursuant to the terms of the Purchase Agreement, the Purchasers
purchased $3.5 million of our 8% Senior Secured Convertible Debentures
(“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
quarterly in cash or registered common stock, at the Company’s discretion;
(ii) has a maturity of January 8, 2011, (iii) is convertible at
the holder’s option into shares of common stock at $2.50 per share, (iv) is
secured by all of the Company’s and its subsidiary’s assets including inventory,
receivables, unencumbered equipment and intellectual property under the terms of
a Security Agreement, and (v) has a forced conversion feature which allows
the Company to force the conversion of the Debenture if the Company’s common
stock trades above $5.00 for 20 consecutive trading days and certain other
conditions are met. The Company also issued to the Purchasers five-year common
stock purchase warrants to purchase 700,000 shares of common stock at an
exercise price of $2.75 per share (the “Warrants”). The Company used the net
proceeds of the financing for working capital requirements and to pay down
certain obligations. The Debenture also contains customary events of default
provisions. As part of the transaction, the Company agreed to: (i) cut its
monthly burn rate to $600,000 (ii) be compliant with NASDAQ listing
requirements; and (iii) obtain shareholder approval prior to effectuating a
reverse stock split.
F-31
Both the
conversion price under the Debenture and the exercise price of the Warrants are
subject to “full-ratchet” price protection in the event of stock issuances below
their respective conversion or exercise prices and have been reset to $2.48 and
$2.728 respectively as a result of the April financing discussed below. The
“full-ratchet” price protection does not apply to issuances of stock options and
stock issuances to officers, directors, employees and consultants. Both the
conversion price of the Debenture and the Warrant strike price were reset
following the April 15, 2008 financing described below.
Upon
review of ASC 815-40-05 the Company concluded that all applicable requirements
for equity treatment on the conversion feature were met. The intrinsic value of
the conversion feature amounting to $1,534,460 was calculated in accordance with
ASC 470-20-30 and recorded as additional paid-in capital and a corresponding
reduction of the carrying value of the Debenture.
The
Company is accounting for the Warrants, issued in connection with the Debenture,
as derivative liabilities in accordance with ASC 815 – Derivative and Hedging,
and ASC 815-40-05. The warrant liability was valued at $1,464,459 at warrant
issuance date. In accordance with ASC 815-40-05, the value of Warrants has been
recorded as liability subject to marked-to-market revaluation at each period
end. At December 31, 2008, the warrant liability was valued at $7,150. The
Company recorded a gain on the change in fair value of warrant liability of
$1,457,309. The Company uses the Black Scholes model to value the liability. The
assumptions used at January 8, 2008 and December 31, 2008 included expected
volatility of 118% and 88%, a risk free interest rate of 3.16% and 2.98% and
expected life of 5 and 4.3 years, respectively.
The
discount attributable to the issuance date intrinsic value of the conversion
feature and fair value of Warrants totaling $2,998,918 is being amortized using
the effective interest method over the term of the Debenture. During the year
ended December 31, 2008, $444,458 of this discount was amortized to interest
expense.
In
connection with this Debenture, the Company incurred financing cost of $290,000.
This financing cost was capitalized and amortized over the life of the Debenture
using the effective interest method. During the year ended December 31, 2008,
$42,980 of the capitalized financing cost was amortized to interest
expense.
As part
of the transaction, the Company granted the investors registration rights with
regard to: (i) the common shares issuable upon conversion of the
Debentures; (ii) the common shares underlying the Warrants; and
(iii) the common shares issuable as interest payments pursuant to the
Debentures. Pursuant to the registration rights agreement, the Company was
required to use its best efforts to file a registration statement by
June 7, 2008 and have it be declared effective by August 7, 2008. The
registration statement covering the registrable shares was timely filed and
declared effective on July 3, 2008. The Company has a continuing obligation
to use its best efforts to maintain the registration statement effective until
such time as all the registrable securities are eligible for resale without
volume or manner-of-sale restrictions and without current public information
pursuant to Rule 144.
F-32
On
April 15, 2008, the Company entered into a Securities Purchase Agreement
with EMC Corporation (“EMC”). Pursuant to the terms of the agreement, EMC
purchased $5 million of the Company’s 8% Senior Secured Convertible Debenture
(“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
quarterly in cash or, subject to certain conditions, registered shares of the
Company’s common stock; (ii) has a maturity of April 15, 2011,
(iii) is convertible at EMC’s option into shares of the Company’s common
stock at $2.48 per share, (iv) is secured by all of the Company’s assets,
including inventory, receivables, unencumbered equipment and intellectual
property, and (v) has a forced conversion feature which allows the Company
to force the conversion of the Debenture if the Company’s common stock trades
above $5.00 for 20 consecutive trading days. Such a forced conversion may be
limited by contractual restrictions on the amount of the Company’s common stock
which EMC may own and certain other conditions. The Company also agreed to issue
EMC five-year Common Stock Purchase Warrants to purchase 1,008,064 shares of the
Company’s common stock at an exercise price of $2.728 per share. The Company is
using the net proceeds of the financing for working capital requirements and to
pay down certain obligations. The Debenture also contains customary events of
default provisions. As part of the transaction, the Company agreed to:
(i) maintain monthly burn rate at $600,000 or below, (ii) be compliant
with NASDAQ listing requirements; and (iii) obtain shareholder approval
prior to effectuating a reverse stock split and for the issuance of additional
shares of the Company’s common stock. Both the conversion price of the Debenture
and the exercise price of the Warrants are subject to “full-ratchet” price
protection in the event of stock issuances below their respective conversion or
exercise prices, except for specified exempted issuances including grants of
stock options and stock issuances to officers, directors, employees and
consultants. The Company agreed to grant registration rights to EMC, by filing a
registration statement covering the shares of common stock issuable upon the
conversion of the Senior Secured Convertible Debenture, exercise of the Common
Stock Purchase Warrant, and issuable by the Company as interest payments by
June 7, 2008, and to obtain effectiveness of that registration statement by
August 7, 2008. The Company’s officers, directors, and 10% shareholders
also executed agreements prohibiting the sales of the Company’s common stock by
them until October 31, 2008. In connection with the transaction, the
Company also secured voting agreements from its officers, directors and 10%
shareholders approving the transaction in the event that the Company is required
to seek such approval pursuant to the rules of the NASDAQ.
Both the
conversion price under the Debenture and the exercise price under the Warrants
are subject to “full-ratchet” price protection in the event of stock issuances
below their respective conversion or exercise prices, except for specified
exempted issuances including grants of stock options and stock issuances to
officers, directors, employees and consultants.
Upon
review of ASC 815-40-05, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock”, paragraphs
12-32, the Company concluded that all applicable requirements for equity
treatment on the conversion feature were met. The intrinsic value of the
conversion feature amounting to $1,703,494 was calculated in accordance with ASC
470-20-3 and recorded as additional paid-in capital and a corresponding
reduction of the carrying value of the Debenture.
The
Company is accounting for the Warrants issued in connection with the Debenture,
as derivative liabilities in accordance with ASC 815 – Derivative and Hedging
and ASC 815-40-05. The warrant liability was valued at $1,622,848 at warrant
issuance date. In accordance with ASC 815-40-05, the value of Warrants has been
recorded as liability subject to marked-to-market revaluation at each period
end. At December 31, 2008, the warrant liability was valued at $11,905. The
Company recorded a gain on the change in fair value of warrant liability of
$1,610,943. The Company uses the Black-Scholes model to value the liability. The
assumptions used at April 15, 2008 and December 31, 2008 included expected
volatility of 80% and 88%, a risk free interest rate of 2.68% and 2.98% and
expected life of 5 and 4.5 years, respectively.
The
discount attributable to the issuance date intrinsic value of the conversion
feature and fair value of Warrants totaling $3,326,342 is being amortized using
the effective interest method over the term of the Debenture. During the year
ended December 31, 2008, $496,748 of this discount was amortized to interest
expense.
In
connection with this Debenture, the Company incurred financing cost of $237,500.
This financing cost was capitalized and amortized over the life of the Debenture
using the effective interest method. During the year ended December 31,
2008, $35,468 of the capitalized financing cost was amortized to interest
expense.
F-33
As part
of the transaction, the Company granted the investors registration rights with
regard to: (i) the common shares issuable upon conversion of the
Debentures; (ii) the common shares underlying the Warrants; and
(iii) the common shares issuable as interest payments pursuant to the
Debentures. Pursuant to the registration rights agreement, the Company was
required to use its best efforts to file a registration statement by
June 7, 2008 and have it be declared effective by August 7, 2008. The
registration statement covering the registrable shares was timely filed and
declared effective on July 3, 2008. The Company has a continuing obligation
to use its best efforts to maintain the registration statement effective until
such time as all the registrable securities are eligible for resale without
volume or manner-of-sale restrictions and without current public information
pursuant to Rule 144.
In
September 2008, the Company reached agreements with holders of debentures
totaling $6,950,000 such that in lieu of cash, the holders received their
interest payments due October 1, 2008 and January 1, 2009 in the form of an
increase in the principal amount of the debentures. Included in the increase to
the principal amount was a deferral fee equal to ten percent (10%) of the
deferred interest. The total increases to the principal balance during 2008
amounted to $309,165.
NOTE
7 – NOTE PAYABLE
On
September 9, 2009 we executed a promissory note in the amount of $100,000.
The full amount of principal and accrued but unpaid interest under this
note is due on the earlier of: (i) October 31, 2009; or (ii) the date on which
we complete the restructuring of our 8% Senior Secured Convertible Debentures
described above. We repaid $50,000 on September 30, 2009 and $50,000 on October
1, 2009. As a result of these repayments, no interest was payable on the
note.
The
holder of the note also received a warrant to purchase 40,000 shares of our
common stock at an exercise price of $2.50 per share. The warrant has a term of
5 years. The warrant is subject to “full-ratchet” price protection in the event
of stock issuances below its exercise price, except for specified exempted
issuances including grants of stock options and stock issuances to officers,
directors, employees and consultants. At September 9, 2009, we calculated the
fair value of the warrant liability for the warrant and have determined that the
fair value at September 9, 2009 is $2,294. The fair value of the warrant
liability was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 121%; and (4) an expected life of the
warrant of 2 years. We recorded a discount of $2,294 at September 9, 2009
related to the fair value of the warrant liability and this discount has been
fully expensed at September 30, 2009.
As a
result of the restructuring of our 8% Senior Secured Convertible Debentures
described above, the warrant was increased to 400,000 shares and the exercise
price was reduced to $0.25 per share. At December 31, 2009, we recalculated the
fair value of the re-priced warrant liability and have determined that the fair
value at December 31, 2009 is $61,616. The fair value of the warrant liability
was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 1%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 162%; and (4) an expected life of the
warrants of 1.75 years. We recorded a charge of $59,322 during 2009 related
to the change in fair value of the re-priced warrant liability.
F-34
NOTE
8 - STOCKHOLDER’S EQUITY
PREFERRED
STOCK
The
Company has 5,000,000 authorized shares of $0.001 par value preferred stock. The
preferred stock may be issued in series, from time to time, with such
designations, rights, preferences, and limitations as the Board of Directors may
determine by resolution.
COMMON
STOCK
The
Company has 75,000,000 authorized shares of $0.001 par value common
stock.
During
the fourth quarter of 2009 the Company issued 345,664 shares of common stock
upon conversion debentures in the amount of $86,416.
During
2008 the Company issued 50,000 shares of common stock upon the exercise of
50,000 stock options and received cash proceeds of $50,000.
During
2008 the Company issued 12,140 shares of common stock upon the cashless exercise
of warrants.
NOTE
9- STOCK OPTIONS AND WARRANTS
STOCK
OPTIONS
2004
STOCK INCENTIVE PLAN
The
Company’s Board of Directors and stockholders approved the 2004 Stock Incentive
Plan in August 2004. The 2004 Stock Incentive Plan provides for the grant
of incentive stock options to the Company’s employees, and for the grant of
non-statutory stock options, restricted stock, stock appreciation rights and
performance shares to the Company’s employees, directors and
consultants.
The
Company reserved a total of 2,351,000 shares of its common stock for issuance
pursuant to the 2004 Stock Incentive Plan. The board of directors, or a
committee of the board, administers the 2004 Stock Incentive Plan. Stock options
are generally granted with terms of up to ten years and vest over a period of
five years under the 2004 Stock Incentive Plan. The administrator determines the
exercise price of options granted under the 2004 Stock Incentive Plan, but the
exercise price must not be less than 85% of the fair market value of the
Company’s common stock on the date of grant. In the event the participant owns
10% or more of the voting power of all classes of the Company’s stock, the
exercise price must not be less than 110% of the fair market value per share of
the Company’s common stock on the date of grant. With respect to all incentive
stock options, the exercise price must at least be equal to the fair market
value of the Company’s common stock on the date of grant. The term of an
incentive stock option may not exceed 10 years, except that with respect to any
participant who owns 10% of the voting power of all classes of the Company’s
outstanding stock or the outstanding stock of any parent or subsidiary of the
Company, the term must not exceed five years and the exercise price must equal
at least 110% of the fair market value on the grant date. The administrator
determines the term of all other options; however, no option will have a term in
excess of 10 years from the date of grant.
2009
|
2008
|
|||||||||||||||
WEIGHTED
AVERAGE
EXERCISE PRICE
|
WEIGHTED
AVERAGE
EXERCISE PRICE
|
|||||||||||||||
Outstanding
at beginning of period
|
1,544,758
|
$
|
1.63
|
2,184,498
|
$
|
1.97
|
||||||||||
Options
granted
|
-
|
-
|
-
|
-
|
||||||||||||
Options
forfeited
|
(190,258
|
)
|
$
|
1.73
|
(589,740
|
)
|
$
|
2.95
|
||||||||
Options
expired
|
-
|
-
|
-
|
-
|
||||||||||||
Options
exercised
|
-
|
$
|
-
|
(50,000
|
)
|
$
|
1.00
|
|||||||||
Outstanding
at end of period
|
1,354,500
|
$
|
1.62
|
1,544,758
|
$
|
1.63
|
||||||||||
Exercisable
at end of period
|
1,321,166
|
$
|
1.59
|
1,451,425
|
$
|
1.52
|
F-35
No
options were granted under the 2004 Stock Incentive Plan during the years ended
December 31, 2009 or 2008.
The
weighted average remaining contractual lives of the options outstanding and
options exercisable were as follows:
Options
outstanding
|
Options
exercisable
|
||||
December 31,
2009
|
3.71 years
|
3.67 years
|
|||
December 31,
2008
|
6.26 years
|
6.01 years
|
2007
EQUITY INCENTIVE PLAN
The
Company’s Board of Directors approved the 2007 Equity Incentive Plan in
September 2007 and stockholders approved the 2007 Equity Incentive Plan in
December 2007. The 2007 Equity Incentive Plan provides for the grant of
incentive stock options to the Company’s employees, and for the grant of
non-statutory stock options, restricted stock, stock appreciation rights,
performance units and performance shares to the Company’s employees, directors
and consultants.
The
Company reserved a total of 4,000,000 shares of its common stock for issuance
pursuant to the 2007 Equity Incentive Plan. A committee of the board of
directors administers the 2007 Equity Incentive Plan. Stock options are
generally granted with terms of up to ten years and vest over a period of five
years under the 2007 Equity Incentive Plan. The administrator determines the
exercise price of options granted under the 2007 Equity Incentive Plan, but the
exercise price must not be less than 85% of the fair market value of the
Company’s common stock on the date of grant. In the event the participant owns
10% or more of the voting power of all classes of the Company’s stock, the
exercise price must not be less than 110% of the fair market value per share of
the Company’s common stock on the date of grant. With respect to all incentive
stock options, the exercise price must at least be equal to the fair market
value of the Company’s common stock on the date of grant. The term of an
incentive stock option may not exceed 10 years, except that with respect to any
participant who owns 10% of the voting power of all classes of the Company’s
outstanding stock or the outstanding stock of any parent or subsidiary of the
Company, the term must not exceed five years and the exercise price must equal
at least 110% of the fair market value on the grant date. The administrator
determines the term of all other options; however, no option will have a term in
excess of 10 years from the date of grant. Awards in excess of the 4,000,000
shares reserved under the 2007 Plan will be considered made from the 2010 Equity
Compensation Plan, described in Note 12, upon formal board approval of the 2010
Plan.
Without
further stockholder approval, the 2007 Equity Incentive Plan may not issue
incentive stock options after September 2017.
F-36
A summary
of stock option activity and weighted average exercise prices for the years
ended December 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||||||||||
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|||||||||||||||
Outstanding
at beginning of period
|
2,433,177
|
$
|
0.80
|
68,511
|
$
|
2.76
|
||||||||||
Options
granted
|
2,872,000
|
0.20
|
3,414,666
|
1.20
|
||||||||||||
Options
forfeited
|
(600,000
|
)
|
1.55
|
(1,050,000
|
)
|
2.25
|
||||||||||
Options
expired
|
-
|
-
|
-
|
-
|
||||||||||||
Options
exercised
|
-
|
-
|
-
|
-
|
||||||||||||
Outstanding
at end of period
|
4,705,177
|
$
|
0.33
|
2,433,177
|
$
|
0.80
|
||||||||||
Exercisable
at end of period
|
1,252,402
|
$
|
0.43
|
364,719
|
1.77
|
The
weighted average remaining contractual lives of the options outstanding and
options exercisable, which had exercise prices ranging from $0.06 to $2.76, were
as follows:
Options
outstanding
|
Options
exercisable
|
||||
December 31,
2009
|
7.75 years
|
8.57 years
|
|||
December 31,
2008
|
9.54 years
|
9.24 years
|
In April
2009 the Company’s board of directors approved stock option awards to two
employees aggregating 150,000 shares of common stock, 100,000 options with an
exercise price of $0.072 per share and vest over one year and 50,000 options
with an exercise price of $0.062 per share and vest over three years. Both
options expire after five years.
In July
2009 the Company’s board of directors approved stock option awards to its
directors aggregating 825,000 shares of common stock with an exercise price of
$0.18 per share. These options vest over one year. All options expire after ten
years. The options had an aggregate grant date fair value of
$55,146.
In July
2009 the Company’s board of directors approved stock option awards to employees
aggregating 927,000 shares of common stock with an exercise price of $0.18 per
share. These options vest one third on the one year anniversary of the grant and
the remaining two thirds vest quarterly over the following two years. Of these
options, 525,000 expire after ten years and 382,000 expire after five
years. The options had an aggregate grant date fair value of
$95,040.
F-37
In July
2009 the Company’s board of directors approved stock option awards to
consultants aggregating 170,000 shares of common stock with an exercise price of
$0.18 per share. These options vest one third on the one year anniversary of the
grant and the remaining two thirds vest quarterly over the following two years.
All options expire after five years. The options will be valued as they vest,
with estimated compensation cost recorded between vesting periods.
During
the fourth quarter of 2009 the Company’s board of directors approved a stock
option award to a director aggregating 100,000 shares of common stock with an
exercise price of $0.35 per share. These options vest over one year. All options
expire after ten years. The options had an aggregate grant date fair value of
$16,661.
During
the fourth quarter of 2009 the Company’s board of directors approved stock
option awards to employees aggregating 395,000 shares of common stock with
exercise prices of $0.18 - $0.35 per share. These options vest one third on the
one year anniversary of the grant and the remaining two thirds vest quarterly
over the following two years. The options expire after five years. The
options had an aggregate grant date fair value of $71,987.
During
the fourth quarter of 2009 the Company’s board of directors approved stock
option awards to consultants aggregating 305,000 shares of common stock with
exercise prices of $0.18 - $0.35 per share. These options vest one third on the
one year anniversary of the grant and the remaining two thirds vest quarterly
over the following two years. All options expire after five years. The options
will be valued as they vest, with estimated compensation cost recorded between
vesting periods.
The
Company recorded $14,597 and $689,030 of compensation expense for consultant
stock options during the years December 31, 2009 and 2008, respectively, which
is included in the administrative expense category.
The
Company recorded $541,114 and $947,597 of compensation expense for employee
stock options during the years ending December 31, 2009 and 2008,
respectively, which is included in the administrative expense category. At
December 31, 2009 and 2008, there was a total of $644,429 and $1,520,380,
respectively, of unrecognized compensation costs related to the non-vested
share-based employee compensation arrangements under the 2004 and 2007 Plans.
The cost is expected to be recognized as follows: 2010, $337,973; 2011,
$156,584; 2012, $121,923; and 2012, $27,949. The weighted average grant date
fair value per share for options granted in 2009 and 2008 was $0.11 and $1.09,
respectively. The intrinsic value of total outstanding options and
total exercisable options were $284,080 and $107,200, respectively, as of
December 31, 2009.
The Black
Scholes assumptions used are listed below:
2009
|
2008
|
||||
Risk
free interest rate
|
0.335
% - 1.00 %
|
1.35
% - 3.73 %
|
|||
Dividends
|
-
|
-
|
|||
Volatility
factor
|
113
% - 162%
|
102
%
|
|||
Expected
life
|
0.625
– 1.75 years
|
10
years
|
|||
Annual
forfeiture rate
|
-
|
10
%
|
F-38
STOCK
WARRANTS
The
following summarizes the warrant transactions:
Warrants
Outstanding
|
Weighted-Average
Exercise Price
|
|||||||
Outstanding,
December 31, 2007
|
4,614,598
|
$
|
1.43
|
|||||
Granted
|
2,118,064
|
$
|
2.68
|
|||||
Expired
|
(12,860
|
)
|
$
|
1.25
|
||||
Exercised
|
(12,140
|
)
|
$
|
1.25
|
||||
Outstanding,
December 31, 2008
|
6,707,662
|
$
|
1.83
|
|||||
Granted
|
3,900,175
|
$
|
0.25
|
|||||
Expired/Cancelled
|
(2,268,064
|
)
|
$
|
2.72
|
||||
Exercised
|
-
|
$
|
-
|
|||||
Outstanding,
December 31, 2009
|
8,339,773
|
$
|
0.84
|
|||||
Exercisable,
December 31, 2009
|
8,339,773
|
$
|
0.84
|
The
weighted-average remaining contractual life of the 8,339,773 warrants
outstanding as of December 31, 2009 is 1.92 years.
During
2009, the Company repriced 700,000 of the warrants issued in 2008 in connection
with its 8% Senior Secured Debentures (see Note 6).
During
2009, the Company repriced the 410,000 warrants issued in 2008 as payment for
services (see Note 6).
During
2009, the Company cancelled 1,008,064 warrants issued in 2008 in connection with
its 8% Senior Secured Debentures (see Note 6).
During
2009, the Company issued 2,390,175 warrants in connection with its 2009
debentures and debt settlement (see Note 6).
During
2009, the Company issued 400,000 warrants in connection with a note payable (see
Note 7).
During
2008, the Company issued 1,708,064 warrants in connection with its 8% Senior
Secured Debentures (see Note 6).
Additionally,
during 2008, the Company issued 410,000 warrants in payment for services. In
accordance with EITF No. 96-18 “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,” and EITF No. 00-18, “Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees,” the
compensation cost associated with these warrants of $413,350 was recognized
during 2008.
NOTE
10 - PROVISION FOR INCOME TAXES
Income
taxes are accounted for using an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement and the
tax bases of assets and liabilities at the applicable tax rates. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
F-39
Reconciliations
between the statutory federal income tax rate and the Company’s effective income
tax rate were as follows:
2009
|
2008
|
|||||||
Federal
income tax at statutory rates
|
34
|
%
|
34
|
%
|
||||
Nontaxable
items
|
-53
|
%
|
-
|
%
|
||||
Change
in fair value of warrants
|
-
|
%
|
12
|
%
|
||||
Section
382 limitation
|
-
|
%
|
(12
|
)%
|
||||
Return
to provision
|
-
|
%
|
(2
|
)%
|
||||
Current
year tax credit
|
-
|
%
|
2
|
%
|
||||
State
income taxes, net of federal benefit
|
-7
|
%
|
7
|
%
|
||||
Change
in valuation allowance
|
26
|
%
|
(37
|
)
%
|
||||
Other
|
-
|
%
|
(4
|
)%
|
||||
Effective
income tax rate
|
0
|
%
|
0
|
%
|
Deferred
tax assets and liabilities are measured based on the difference between the
financial statement and tax bases of assets and liabilities at the applicable
tax rates. The significant components of the Company’s net deferred tax assets
and (liabilities) consisted of the following:
2009
|
2008
|
|||||||
Benefits
from NOL carryforwards
|
$
|
8,419,000
|
$
|
10,103,826
|
||||
Tax
credit carryforward
|
268,000
|
268,133
|
||||||
Differences
in financial statement and tax accounting for:
|
||||||||
Stock
compensation
|
1,661,000
|
1,471,870
|
||||||
Accruals
|
-
|
168,201
|
||||||
Inventory
|
-
|
49,291
|
||||||
Deferred
revenue
|
-
|
501,210
|
||||||
Beneficial
conversion feature
|
-
|
(1,180,481
|
)
|
|||||
Depreciation
and amortization
|
-
|
1,564,649
|
||||||
State
income tax
|
(557,000
|
)
|
(909,192
|
)
|
||||
Other
|
-
|
-
|
||||||
Total
Deferred tax assets (gross)
|
9,791,000
|
12,037,507
|
||||||
Less
Valuation allowance
|
(9,791,000
|
)
|
(12,037,507
|
)
|
||||
Total
Deferred Tax assets, net
|
$
|
-
|
$
|
-
|
A
valuation allowance has been established due to the uncertainty of realizing
certain net operating loss (“NOL”) carryforwards and the other deferred tax
assets. The Company had net operating loss (“NOL”) carryforwards at
December 31, 2009 and 2008 of approximately $20.6 million and $23.8
million, respectively, for federal income tax purposes and an aggregate of $19.5
million and $22.7 million, respectively, for state income tax purposes. The
Company also has Federal research tax credit carryforwards of $130,680 for the
years ended December 31, 2009 and 2008 and State research tax credit
carryforwards of $137,453 for the years ended December 31, 2009 and 2008,
respectively. The Company’s Federal and State NOL carryforwards will be
available to offset taxes through December 31, 2029.
F-40
For the
years ended December 31, 2009 and 2008, the cumulative unrecognized tax
benefit was $114,915 which was netted against deferred tax assets with a
full valuation allowance, and if recognized there will be no effect on the
Company’s effective tax rate. Following is a reconciliation of the beginning to
ending cumulative unrecognized tax benefits.
December 31,
|
||||||||
2009
|
2008
|
|||||||
Beginning
unrecognized tax benefits
|
$
|
114,915
|
$
|
-
|
||||
Increase
for tax positions in prior years
|
-
|
66,788
|
||||||
Increase
in tax positions for current year
|
-
|
48,127
|
||||||
Ending
unrecognized tax benefits
|
$
|
114,915
|
$
|
114,915
|
During
2008, it was determined that, in accordance with Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”) the Company experienced an
ownership change and would be unable to utilize Federal and State operating
losses, resulting in a reduction of its deferred tax asset of $1.1 million. In
general, an “ownership change” as defined by Section 382 of the Code,
results from a transaction or series of transactions over a three-year period
resulting in an ownership change of more than 50 percentage points of the
outstanding stock of a company by certain stockholders or public
groups
The
impact of this limitation resulted in a reduction of the Company’s deferred tax
assets and a corresponding reduction in its valuation allowance.
Any
additional ownership changes in the future, and any future change at its current
market capitalization would severely limit the annual use of these NOLs going
forward. Such limitation could also result in expiration of a portion of the
NOLs before utilization. Due to the existence of the valuation allowance, future
changes in the Company’s unrecognized benefits will not impact its effective tax
rate.
The
Company’s practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. During the years ended December 31, 2009
and 2008, the Company did not recognize any interest or penalties.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
LEASE
The
Company leases office space on a month-to-month basis.
Rent
expense was $50,826 and $161,499 for the years ended December 31, 2009 and
2008, respectively.
LITIGATION
To date,
the Company has never been a party to and has never been involved with any
litigation. However, in the future, the Company, like any other business or
individual, may become subject to litigation some of which the Company can
control and other litigation that the Company cannot control. If the Company
were to become involved in any litigation, management would have to assess
whether or not such litigation would likely have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
F-41
EMPLOYMENT
AGREEMENT
On
February 20, 2009, we entered in into a written employment agreement with
Richard Nathan. The agreement provides for a bonus equal to: (i) 3%
of increase in market capitalization occurring during first year of employment;
and (ii) 2% of increase in market capitalization year after year for all periods
thereafter. Mr. Nathan’s employment under the agreement is
“At-Will.”
NOTE
12 - SUBSEQUENT EVENTS
Subsequent
to December 31, 2009:
The
Company issued 352,667 shares of common stock upon the exercise of
options.
The
Company issued 1,364,975 shares of common stock upon the conversion of
debentures aggregating $341,244.
On
February 22, 2010, our Board and Compensation Committee approved the
2010 Equity Compensation Plan (“2010 Plan”). The 2010 Plan permits
the granting of up to 6,000,000 shares of common stock through the issuance of
Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock
Appreciation Rights, Restricted Stock Units, Performance Units, Performance
Shares and Other Stock Based Awards to our employees, directors and
consultants. We anticipate submitting the plan for shareholder
approval during the following 12 months. In the event the Plan is not
approved by our shareholders during this time, the 2010 Plan will be considered
a non-qualified plan.
F-42
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
Sec Securities
and Exchange Commission Registration Fee
|
$
|
172
|
||
AccAccounting
Fees and Expenses
|
25,000
|
*
|
||
Leg
Legal Fees and Expenses
|
25,000
|
*
|
||
Mi
sMiscellaneous
|
7,500
|
*
|
||
Total
|
$
|
57,672
|
*
|
*
Estimate.
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have
adopted provisions in our certificate of incorporation that limit the liability
of our directors for monetary damages for breach of their fiduciary duty as
directors, except for liability that cannot be eliminated under the Delaware
General Corporation Law. Delaware law provides that directors of a company will
not be personally liable for monetary damages for breach of their fiduciary duty
as directors, except for liabilities:
·
|
for any breach of their duty of
loyalty to us or our
stockholders;
|
·
|
for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law;
|
·
|
for unlawful payment of dividend
or unlawful stock repurchase or redemption, as provided under Section 174
of the Delaware General Corporation Law;
or
|
for any transaction from which
the director derived an improper personal
benefit.
|
In
addition, our bylaws provide for the indemnification of officers, directors and
third parties acting on our behalf, to the fullest extent permitted by Delaware
General Corporation Law, if our board of directors authorizes the proceeding for
which such person is seeking indemnification (other than proceedings that are
brought to enforce the indemnification provisions pursuant to the bylaws). We
maintain directors' and officers' liability insurance.
These
indemnification provisions may be sufficiently broad to permit indemnification
of our executive officers and directors for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED
SECURITIES
On June
28, 2006, the Company purchased from nCryptone all intellectual property
relating to the DisplayCard under the July 25, 2005 Joint Development Agreement
with nCryptone, all nCryptone intellectual property relating to the DisplayCard,
all tangible assets relating to the DisplayCard and assumed certain accounts
payable directly allocable to the DisplayCard. The purchase price was 4,500,000
shares of common stock (valued at $19,741,500) and an agreement to pay $1
million within one year from closing for a license relating to nCryptone's
buzzer patent for use in the Company's SoundCard.
40
In
connection with the appointment of Steven Delcarson as Chief Executive Officer,
on September 21, 2007, Mr. Delcarson was issued 1,000,000 options priced at
$3.00 the closing price on September 21, 2007 vesting pursuant to a schedule
associated with the achievement of certain milestones.
On
January 4, 2008, we issued a common stock purchase warrant to purchase 60,000 of
our common shares at $2.49 per share to one of our consultants. The warrant has
a ten year exercise period.
On
January 8, 2008, we sold $3.5 million of our 8% Senior Secured Convertible
Debentures. As part of the transaction, we issued the purchasers common stock
purchase warrants to purchase 700,000 of our common shares.
On
February 25, 2008, pursuant to our 2007 Equity Incentive Plan, we issued one of
our directors an option to purchase 63,333 common shares at $1.95 per share as
compensation for serving on the board and any relevant committees thereof. The
option has a vesting period of three years (vesting 1/3 per year), and a
duration of 10 years. In the event the director resigns or is removed, the
holder has 90 days to exercise of the option.
On
February 25, 2008, pursuant to our 2007 Equity Incentive Plan, we issued one of
our directors an option to purchase 63,333 common shares at $1.95 per share as
compensation for serving on the board and any relevant committees thereof. The
option has a vesting period of three years (vesting 1/3 per year), and a
duration of 10 years. In the event the director resigns or is removed, the
holder has 90 days to exercise of the option.
On March
27, 2008, pursuant to our 2007 Equity Incentive Plan, we issued to our CEO an
option to purchase 1,000,000 common shares at $2.25 per share. The option vests
over a period of approximately 36 months upon the occurrence of certain
milestones and has duration of 10 years.
On March
27, 2008, pursuant to our 2007 Equity Incentive Plan, we issued to our CFO an
option to purchase 200,000 common shares at $2.25 per share. The option vests
over a period of approximately 36 months upon the occurrence of certain
milestones and has duration of 10 years.
On April
15, 2008, we sold $5 million of our 8% Senior Secured Convertible Debentures. As
part of the transaction, we issued the purchaser common stock purchase warrant
to purchase 1,008,064 of our common shares. For a more detailed description of
the transaction, refer to Note 12 of our financials contained in this
prospectus.
On May 5,
2008, pursuant to our 2007 Equity Incentive Plan, we granted one of our
employees an option to purchase 225,000 common shares at an exercise price of
$1.95 per share. The option vests over five years and expires if not
exercised in 10 years from the grant date.
On May
22, 2008, pursuant to our 2007 Equity Incentive Plan, we granted one of our
employees an option to purchase 350,000 common shares at an exercise price of
$1.67 per share. The option vests over four years and expires if not
exercised in 10 years from the grant date.
On June
16, 2008, we issued a common stock purchase warrant to purchase 350,000 of our
common shares at $2.48 per share to one of our consultants. The warrant has a
five year exercise period.
On June
16, 2008, pursuant to our 2007 Equity Incentive Plan, we granted one of our
employees an option to purchase 5,000 common shares at an exercise price of
$1.67 per share. The option vests over five years and expires if not
exercised in 10 years from the grant date.
On
November 11, 2008, pursuant to our 2007 Equity Incentive Plan, we agreed to
grant Richard Nathan, or Chief Executive Officer, an option to purchase
1,000,000 common shares at an exercise price of $0.10 per share. The
granting of the option was contingent on Mr. Nathan and us reaching an agreement
on the terms of his employment contract and board approval. Both
these conditions were met in early 2009. The option vests quarterly
over two (2) years and expires if not exercised on November 11,
2009.
On
December 19, 2009, pursuant to our 2007 Equity Incentive Plan, we granted 6
employees an aggregate of 408,000 options to purchase common stock at an
exercise price per share of $0.07. The options vest over three years
and expire on December 19, 2018 if not exercised.
On
December 19, 2008, pursuant to our 2007 Equity Incentive Plan, we granted one of
our directors an option to purchase 100,000 common shares at an exercise price
of $0.07. The option vests over three years and expires on December
19, 2018 if not exercised.
In April
2009 the Company’s board of directors approved stock option awards to two
employees aggregating 150,000 shares of common stock, 100,000 options with an
exercise price of $0.072 per share that vest over one year and 50,000 options
with an exercise price of $0.062 per share that vest over three years. Both
options expire after five years.
41
On July
22, 2009, we granted stock options to our directors, officers, employees and
consultants, pursuant to our 2007 Equity Compensation Plan, as
follows:
Directors
(pursuant to our director’s compensation policy as follows):
Options
to purchase 250,000 common shares of which 25,000 vest immediately and the
balance vest quarterly over the grant year. The options expire
on July 22, 2019 and have an exercise price of $0.18 per
share;
|
||
Scott Ogilvie
|
Options
to purchase 200,000 common shares of which 25,000 vest immediately and the
balance vest quarterly over the grant year. The options expire
on July 22, 2019 and have an exercise price of $0.18 per
share;
|
|
Donald Joyce
|
Options
to purchase 150,000 common shares of which 25,000 vest immediately and the
balance vest quarterly over the grant year. The options expire
on July 22, 2019 and have an exercise price of $0.18 per
share;
|
|
Harry Tredennick
|
Options
to purchase 125,000 common shares of which 25,000 vest immediately and the
balance vest quarterly over the grant year. The options expire
on July 22, 2019 and have an exercise price of $0.18 per
share;
|
|
Officers:
|
||
Richard Nathan
|
Options
to purchase an aggregate of 625,000 common shares. The options
vest as follows: (i) options to purchase 100,000 common shares
vest quarterly over the year following the grant date; and (ii) options to
purchase 525,000 common shares vest over three years with 1/3 vesting on
the one year anniversary of the grant date and 2/3 vesting quarterly over
the following two years. The options all have an exercise price
of $0.18 and expire on July 22, 2019.
|
|
Employees & Consultants
|
We
issued options to purchase an aggregate of 572,000 common shares to
employees and consultants. The options vest over three years
with 1/3 vesting on the one year anniversary of the granted date and 2/3
vesting quarterly over the following two years. The options all
have an exercise price of $0.18 and expire on July 22,
2014.
|
On
September 9, 2009, we issued a 5% promissory note in the amount of
$100,000. The maturity date of the note was September 30,
2009. In connection with the issuance, we granted a common stock
purchase warrant to purchase 40,000 common shares at a price per share of
$2.50. On September 30, 2009, as a result of the Waiver,
Amendment and Exchange Agreement and the Debenture and Warrant Purchase
Agreement, as described below, the exercise price and number of shares issuable
pursuant to the warrant was adjusted. The adjusted warrant allows the
holder to purchase up to 400,000 common shares at a price per share of
$0.25.
On
September 30, 2009, pursuant to a Waiver, Amendment and Exchange Agreement
entered into between the us and the certain debenture holders named therein, we
issued to the holders, in exchange for their outstanding debentures and
warrants, an aggregate of $3,975,974 Amended and Exchanged Original Issuance
Discount Debentures with a conversion price of $1.00 and warrants to purchase
700,000 shares of common stock at an exercise price of $0.25. In connection with
the transaction, we also exchanged certain outstanding obligations owed to
creditors of the Company in an aggregate amount of $672,243 in exchange for
convertible debentures in the face amount of $699,354 (including interest
through April 2, 2010) with a conversion price of $1.00 and warrants to purchase
135,533 shares of common stock with an exercise price of $0.25.
On
September 30, 2009, pursuant to a Debenture and Warrant Purchase Agreement
between the Company and the Purchasers named therein, the Company sold an
additional $1,173,416 face amount of convertible debentures with a conversion
price of $0.25 and 2,254,643 warrants to purchase shares of common stock at an
exercise price of $0.25. The purchase price of the debentures
$1,127,321 and the face amount included interest through April 2,
2010. As a condition to the closing, the investors required any
Holders not participating in the Debenture and Warrant Purchase Agreement to
further amend their debentures and warrants to remove the anti-dilution
provisions in each document relating to subsequent equity issuances, including
this financing. As a result, the conversion price of debentures in
the principal amount of $3,336,287 was reduced to $0.25.
On
October 1, 2009, we issued 200,000 common shares in connection with the
conversion of $50,000 of our convertible debentures.
On
October 13, 2009, we issued Joseph Zelayeta, one of our non-executive directors,
an option to purchase 100,000 common shares as compensation under our
non-executive board compensation policy. The option has an exercise
price of $0.35, vests quarterly over the grant year and has a term of 10
years.
42
On
October 15, 2009, we issued 45,664 common shares in connection with the
conversion of $11,415.89 of our convertible debentures.
On
November 6, 2009, we issued 100,000 common shares in connection with the
conversion of $25,000 of our convertible debentures.
During
the fourth quarter of 2009 the Company’s board of directors approved stock
option awards to employees and consultants aggregating 700,000 shares of common
stock with exercise prices of $0.18 - $0.35 per share. These options vest one
third on the one year anniversary of the grant and the remaining two thirds vest
quarterly over the following two years. The options expire after five
years.
On
January 4, 2010, we issued John Ward, III, one of our non-executive directors,
an option to purchase 100,000 common shares as compensation under our
non-executive board compensation policy. The option has an exercise
price of $0.35, vests quarterly over the grant year and has a term of 10
year.
On
January 7, 2010, we issued 100,000 common shares in connection with the
conversion of $25,000 of our convertible debentures.
During
February of 2010 we issued 352,667 shares of common stock upon the exercise of
352,667 employee stock options. We received $5,250 in cash proceeds from the
exercise of the options; the balance of the exercise price was paid through the
reduction of accrued compensation in the amount of $24,137.
On
February 17, 2010, we issued 1,264,975 common shares in connection with the
conversion of $316,224 of our convertible debentures.
In
connection with the foregoing, the Company relied upon the exemption from
securities registration afforded by Rule 506 of Regulation D as promulgated by
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The issuances were made to a limited number of persons, and transfer
of the securities was restricted in accordance with the requirements of the
Securities Act of 1933.
The
exhibits listed in the accompanying index to exhibits are incorporated by
reference.
ITEM
17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of this registration statement, or most recent post-effective amendment, which,
individually or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the estimated maximum
offering range may be reflected in the form of prospects filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in the registration statement.
2. That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered hereby which remain unsold at the termination of the
offering.
43
Insofar
as indemnification for liabilities arising under the Securities Act maybe
permitted to our directors, officers and controlling persons pursuant to the
provisions above, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other than the
payment by us of expenses incurred or paid by one of our directors, officers, or
controlling persons in the successful defense of any action, suit or proceeding,
is asserted by one of our directors, officers, or controlling persons in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification is
against public policy as expressed in the Securities Act, and we will be
governed by the final adjudication of such issue.
44
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on May 28, 2010.
Innovative
Card Technologies, Inc.
|
||
Date:
May 28, 2010
|
By:
|
/s/ Richard
Nathan
|
Richard
Nathan
|
||
Chief
Executive Officer
|
In
accordance with the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities on
May 28, 2010.
Signature
|
Capacity
|
|
/s/ Richard
Nathan
|
Chief
Executive Officer (principal executive officer, principal
financial
|
|
Richard
Nathan
|
officer, and
principal accounting officer) and Director
|
|
/s/ W. Robert
Ramsdell*
|
Director
|
|
W.
Robert Ramsdell
|
||
/s/ Scott V.
Ogilvie*
|
Director
|
|
Scott
V. Ogilvie
|
||
/s/ Harry L. Tredennick
III*
|
Director
|
|
Harry
L. Tredennick III
|
||
/s/ Joe
Zelayeta*
|
Director
|
|
Joe
Zelayeta
|
||
/s/ John Ward
III*
|
Director
|
|
John
Ward III
|
|
*By: /s/ Richard
Nathan
|
|
Richard
Nathan,
attorney-in-fact
|
45
Exhibit
Index
|
Incorporated by Reference
|
|||||||||||
Exhibit
No.
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
No.
|
File No.
|
Filing Date
|
||||||
3.01(i)
|
Amended
and Restated Certificate of Incorporation of Innovative Card Technologies,
Inc. filed on 5/11/05
|
10-K
|
3.01(i)
|
001-33353
|
5/15/09
|
|||||||
3.02(i)
|
Certificate
of Amendment to Certificate of Incorporation of Innovative Card
Technologies, Inc. filed on 12/21/07
|
8-K
|
3.1
|
001-33353
|
1/2/08
|
|||||||
3.03(ii)
|
Amended
and Restated Bylaws of Innovative Card Technologies, Inc. adopted on May
5, 2005
|
10-K
|
3.03(ii)
|
001-33353
|
5/15/09
|
|||||||
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP (previously
filed)
|
|||||||||||
10.01**
|
2004
Stock Incentive Plan as amended
|
S-8
|
10.1
|
333-137033
|
3/25/08
|
|||||||
10.02
|
Form
of Warrant pursuant to private placement dated October 19,
2005
|
8-K
|
4.1
|
000-51260
|
10/25/05
|
|||||||
10.03
|
Form
of Warrant issued to TR Winston & Company, LLC dated May 30,
2006
|
8-K
|
4.1
|
000-51260
|
5/31/06
|
|||||||
10.04
|
Form
of Securities Purchase Agreement dated May 30, 2006
|
8-K
|
10.1
|
000-51260
|
5/31/06
|
|||||||
10.05
|
Form
of Registration Rights Agreement dated May 30, 2006
|
8-K
|
10.2
|
000-51260
|
5/31/06
|
|||||||
10.06
|
Licensing
Agreement dated September 26, 2006 by and between Innovative Card
Technologies, Inc. and NCryptone, SA as license
|
SB-2
|
10.35
|
333-135715
|
7/12/06
|
|||||||
10.07
|
Licensing
Agreement dated September 26, 2006 by and between NCryptone, SA as
licensor and Innovative Card as license
|
SB-2
|
10.36
|
333-135715
|
7/12/06
|
|||||||
10.08
|
Form
of Indemnification Agreement for Executive Officers and Directors of
Innovative Card Technologies, Inc.
|
8-K
|
10.1
|
001-33353
|
3/23/07
|
|||||||
10.09**
|
2007
Equity Incentive Plan
|
10-QSB
|
10.44
|
001-33353
|
11/19/07
|
|||||||
10.10
|
Form
of Indemnification Agreement entered into between the Company and Messrs.
Delcarson and Caporale
|
8-K
|
10.1
|
001-33353
|
11/29/07
|
46
Form
of Securities Purchase Agreement Dated January 8, 2008
|
8-K
|
10.1
|
001-33353
|
1/9/07
|
||||||||
10.12
|
Form
of 8% Senior Secured Convertible Debenture issued January 8,
2008
|
8-K
|
10.2
|
001-33353
|
1/9/07
|
|||||||
10.13
|
Form
of Common Stock Purchase Warranted issued January 8, 2008
|
8-K
|
10.3
|
001-33353
|
1/9/07
|
|||||||
10.14
|
Form
of Registration Rights Agreement dated January 8, 2008
|
8-K
|
10.4
|
001-33353
|
1/9/07
|
|||||||
10.15
|
Form
of Security Agreement dated January 8, 2008
|
8-K
|
10.5
|
001-33353
|
1/9/07
|
|||||||
10.16
|
Form
of Subsidiary Guarantee dated January 8, 2008
|
8-K
|
10.6
|
001-33353
|
1/9/07
|
|||||||
10.17
|
Form
of Securities Purchase Agreement Dated April 15, 2008
|
8-K
|
10.1
|
001-33353
|
4/16/08
|
|||||||
10.18
|
Form
of 8% Senior Secured Convertible Debenture issued April 15,
2008
|
8-K
|
10.2
|
001-33353
|
4/16/08
|
|||||||
10.19
|
Form
of Common Stock Purchase Warranted issued April 15, 2008
|
8-K
|
10.3
|
001-33353
|
4/16/08
|
|||||||
10.20
|
Form
of Registration Rights Agreement dated April 15, 2008
|
8-K
|
10.4
|
001-33353
|
4/16/08
|
|||||||
10.21
|
Form
of Security Agreement dated April 15, 2008
|
8-K
|
10.5
|
001-33353
|
4/16/08
|
|||||||
10.22
|
Form
of Subsidiary Guarantee dated April 15, 2008
|
8-K
|
10.6
|
001-33353
|
4/16/08
|
|||||||
10.23**
|
Form
of Executive Employment Agreement of Vincent M. Schiavo, dated as of May
22, 2008
|
8-K
|
10.1
|
001-33353
|
5/27/08
|
|||||||
10.24**
|
Employment
Agreement of Mr. Richard Nathan dated February 20, 2009
|
8-K
|
10.01
|
001-33353
|
2/24/09
|
|||||||
10.25
|
Assignment
of Debenture and Common Stock Warrants Agreement with EMC
|
8-K
|
10.01
|
001-33353
|
7/17/09
|
|||||||
10.26
|
Waiver,
Amendment and Exchange Agreement
|
8-K
|
10.16
|
001-33353
|
10/05/09
|
|||||||
10.27
|
Debenture
& Warrant Purchase Agreement
|
8-K
|
10.17
|
001-33353
|
10/05/09
|
|||||||
10.28
|
Form
of Amended Debenture dated September 30, 2009
|
8-K
|
10.18
|
001-33353
|
10/05/09
|
47
Form
of Amended Warrant dated September 30, 2009
|
8-K
|
10.19
|
001-33353
|
10/05/09
|
||||||||
10.30**
|
2010
Equity Compensation Plan
|
8-K
|
4.01
|
001-33353
|
2/22/10
|
|||||||
14.01
|
Code
of Ethics
|
10-KSB
|
14.0
|
000-51260
|
3/20/06
|
|||||||
21.1
|
List
of Subsidiaries
|
SB-2
|
21.1
|
333-119814
|
10/19/04
|
|||||||
23.1
|
Consent
of SingerLewak LLP
|
*
|
||||||||||
23.2
|
Consent
of RBSM LLP
|
*
|
||||||||||
23.3
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1)
|
**Management
contracts or compensation plans or arrangements in which directors or executive
officers are eligible to participate.
48