Intellicheck, Inc. - Quarter Report: 2007 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF
1934
|
For
the
quarterly period ended September 30, 2007
OR
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF
1934
|
For
the
transition period
from
to
Commission
File No. 001-15465
Intelli-Check,
Inc.
(Exact
name of the issuer as specified in its charter)
|
Delaware
|
|
11-3234779
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
246
Crossways Park West, Woodbury, New York
|
11797
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant’s
Telephone number, including area code:
|
(516)
992-1900
|
Indicate
by check mark whether registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12
months (or for such shorter period that the registrant was required to file
such
reports), and (2) has been subject to such filing requirements for the past
90days. Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer o
Accelerated
Filer o Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
Number
of
shares outstanding of the issuer’s Common Stock:
|
Class
|
Outstanding
at Nov. 13, 2007
|
|
|
Common
Stock, $.001 par value
|
12,281,728
|
INTELLI-CHECK,
INC.
Index
|
Part
I
|
Financial Information
|
Page
|
|
|
Item
1.
|
Financial
Statements
|
||
|
Balance
Sheets - September 30, 2007 (Unaudited) and December 31,
2006
|
3
|
||
|
Statements
of Operations for the three and nine months ended September 30, 2007
and
2006 (Unaudited)
|
4
|
||
|
Statements
of Cash Flows for the nine months ended September 30, 2007 and 2006
(Unaudited)
|
5
|
||
|
Statement
of Stockholders’ Equity for the nine months ended September 30, 2007
(Unaudited)
|
6
|
||
|
Notes
to Financial Statements
|
7-12
|
||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13-19
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
|
Item
4.
|
Controls
and Procedures
|
19-20
|
|
|
Item
4T.
|
Controls
and Procedures
|
20
|
|
|
Part
II
|
Other Information
|
||
| Item 1A. |
Risk
Factors
|
20
|
|
|
Item
6.
|
Exhibits
|
20
|
|
|
Signatures
|
21
|
||
|
|
Exhibits
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
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31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
||
|
32.
|
18
U.S.C. Section 1350
Certifications
|
INTELLI-CHECK,
INC.
BALANCE
SHEETS
ASSETS
|
September
30,
|
December
31,
|
||||||
|
|
2007
|
2006
|
|||||
|
(Unaudited)
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
272,123
|
$
|
526,917
|
|||
|
Marketable
securities and short-term investments
|
2,024,996
|
3,759,133
|
|||||
|
Accounts
receivable, net of allowance of $10,000
|
|||||||
|
as
of September 30, 2007 and December 31, 2006
|
905,758
|
591,976
|
|||||
|
Inventory
|
141,830
|
119,923
|
|||||
|
Other
current assets
|
522,697
|
507,382
|
|||||
|
Total
current assets
|
3,867,404
|
5,505,331
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
86,744
|
85,603
|
|||||
|
PATENT
COSTS, net
|
25,513
|
30,170
|
|||||
|
OTHER
ASSETS
|
34,916
|
34,916
|
|||||
|
Total
assets
|
$
|
4,014,577
|
$
|
5,656,020
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
140,892
|
$
|
155,066
|
|||
|
Accrued
expenses
|
324,060
|
378,028
|
|||||
|
Deferred
revenue
|
1,123,362
|
1,037,366
|
|||||
|
Other
current liabilities
|
-
|
75,000
|
|||||
|
Total
current liabilities
|
1,588,314
|
1,645,460
|
|||||
|
OTHER
LIABILITIES
|
88,274
|
73,475
|
|||||
|
Total
liabilities
|
1,676,588
|
1,718,935
|
|||||
|
STOCKHOLDERS’
EQUITY:
|
|||||||
|
Common
stock - $.001 par value; 20,000,000 shares authorized;
|
|||||||
|
12,281,728
and 12,202,778 shares issued and outstanding, respectively
|
12,282
|
12,203
|
|||||
|
Additional
paid-in capital
|
46,602,002
|
45,912,734
|
|||||
|
Accumulated
deficit
|
(44,276,295
|
)
|
(41,987,852
|
)
|
|||
|
Total
stockholders’ equity
|
2,337,989
|
3,937,085
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,014,577
|
$
|
5,656,020
|
|||
See
accompanying notes to financial statements
3
INTELLI-CHECK,
INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
REVENUES
|
$
|
856,938
|
$
|
771,774
|
$
|
2,281,533
|
$
|
2,025,442
|
|||||
|
COST
OF REVENUES
|
(388,885
|
)
|
(308,520
|
)
|
(876,047
|
)
|
(711,197
|
)
|
|||||
|
Gross
profit
|
468,053
|
463,254
|
1,405,486
|
1,314,245
|
|||||||||
|
OPERATING
EXPENSES
|
|||||||||||||
|
Selling
|
354,783
|
347,725
|
1,160,703
|
1,142,793
|
|||||||||
|
General
and administrative
|
477,563
|
594,802
|
1,837,814
|
2,133,244
|
|||||||||
|
Research
and development
|
281,013
|
229,421
|
831,058
|
742,146
|
|||||||||
|
Total
operating expenses
|
1,113,359
|
1,171,948
|
3,829,575
|
4,018,183
|
|||||||||
|
Loss
from operations
|
(645,306
|
)
|
(708,694
|
)
|
(2,424,089
|
)
|
(2,703,938
|
)
|
|||||
|
Interest
income
|
37,564
|
57,304
|
135,646
|
169,777
|
|||||||||
|
Net
loss
|
$
|
(607,742
|
)
|
$
|
(651,390
|
)
|
$
|
(2,288,443
|
)
|
$
|
(2,534,161
|
)
|
|
|
PER
SHARE INFORMATION
|
|||||||||||||
|
Net
loss per common share -
|
|||||||||||||
|
Basic
and diluted
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
$
|
(0.19
|
)
|
$
|
(0.21
|
)
|
|
|
Weighted
average common shares used
|
|||||||||||||
|
in
computing per share amounts -
|
|||||||||||||
|
Basic
and diluted
|
12,281,728
|
12,156,215
|
12,256,701
|
12,129,612
|
|||||||||
See
accompanying notes to financial statements
4
INTELLI-CHECK,
INC.
STATEMENTS
OF CASH FLOW
(Unaudited)
|
Nine Months Ended September 30,
|
|||||||
|
2007
|
2006
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(2,288,443
|
)
|
$
|
(2,534,161
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in
|
|||||||
|
operating
activities:
|
|||||||
|
Depreciation
and amortization
|
29,214
|
26,858
|
|||||
|
Noncash
stock-based compensation expense
|
456,988
|
567,356
|
|||||
|
Amortization
of deferred compensation
|
-
|
129,756
|
|||||
|
Recovery
of amortization of deferred compensation
|
-
|
(53,317
|
)
|
||||
|
Changes
in assets and liabilities:
|
|||||||
|
(Increase)
decrease in accounts receivable
|
(313,782
|
)
|
50,739
|
||||
|
(Increase)
decrease in inventory
|
(21,907
|
)
|
6,511
|
||||
|
Increase
in other current assets
|
(15,315
|
)
|
(55,895
|
)
|
|||
|
Decrease
in accounts payable and accrued expenses
|
(68,142
|
)
|
(62,102
|
)
|
|||
|
Increase
in deferred revenue
|
100,795
|
103,799
|
|||||
|
(Decrease)
increase in other liabilities
|
(75,000
|
)
|
52,973
|
||||
|
Net
cash used in operating activities
|
(2,195,592
|
)
|
(1,767,483
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of marketable securities and short-term investments
|
(3,237,000
|
)
|
(4,822,061
|
)
|
|||
|
Sales
of marketable securities and short-term investments
|
4,971,137
|
6,087,990
|
|||||
|
Purchases
of property and equipment
|
(25,698
|
)
|
(20,502
|
)
|
|||
|
Net
cash provided by investing activities
|
1,708,439
|
1,245,427
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Net
proceeds from issuance of common stock from exercise of stock
|
|||||||
|
options
and warrants
|
232,359
|
386,124
|
|||||
|
Net
cash provided by financing activities
|
232,359
|
386,124
|
|||||
|
Decrease
in cash and cash equivalents
|
(254,794
|
)
|
(135,932
|
)
|
|||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
526,917
|
528,250
|
|||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
272,123
|
$
|
392,318
|
|||
See
accompanying notes to financial statements
5
INTELLI-CHECK,
INC.
STATEMENT
OF STOCKHOLDERS’ EQUITY
For
the
Nine Months Ended September 30, 2007
(Unaudited)
|
Additional
|
||||||||||||||||
|
Common
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||
|
BALANCE,
January 1, 2007
|
12,202,778
|
$
|
12,203
|
$
|
45,912,734
|
$
|
(41,987,852
|
)
|
$
|
3,937,085
|
||||||
|
Stock-based
compensation expense
|
330,988
|
330,988
|
||||||||||||||
|
Exercise
of options
|
42,950
|
43
|
145,916
|
145,959
|
||||||||||||
|
Exercise
of warrants
|
16,000
|
16
|
86,384
|
86,400
|
||||||||||||
|
Issuance
of stock as directors compensation
|
20,000
|
20
|
125,980
|
126,000
|
||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(2,288,443
|
)
|
(2,288,443
|
)
|
|||||||||
|
BALANCE,
September 30, 2007
|
12,281,728
|
$
|
12,282
|
$
|
46,602,002
|
$
|
(44,276,295
|
)
|
$
|
2,337,989
|
||||||
See
accompanying notes to financial statements
6
INTELLI-CHECK,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
Note
1. Basis
of
Presentation and Significant Accounting Policies
Basis
of
Presentation
The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by
generally accepted accounting principles for complete financial statements.
In
the opinion of management, the unaudited interim financial statements furnished
herein include all adjustments necessary for a fair presentation of the
Company’s financial position at September 30, 2007 and the results of its
operations for the nine and three months ended September 30, 2007 and 2006,
stockholders’ equity for the nine months ended September 30, 2007 and cash flows
for the nine months ended September 30, 2007 and 2006. All such adjustments
are
of a normal and recurring nature. Interim financial statements are prepared
on a
basis consistent with the Company’s annual financial statements. Results of
operations for the nine month period ended September 30, 2007, are not
necessarily indicative of the operating results that may be expected for the
year ending December 31, 2007.
The
balance sheet as of December 31, 2006 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by accounting principles generally accepted in the United
States of America for complete financial statements.
Certain
prior period amounts have been reclassified to conform to current period
presentation.
For
further information, refer to the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2006.
Liquidity
The
Company anticipates that its cash on hand, marketable securities and cash
resources from expected revenues from the sale of the units in inventory and
the
licensing of its technology will be sufficient to meet its anticipated working
capital and capital expenditure requirements for at least the next twelve
months. These requirements are expected to include the purchase of inventory,
product development, sales and marketing expenses, working capital requirements
and other general corporate purposes. The Company may need to raise additional
funds to respond to business contingencies which may include the need to fund
more rapid expansion, fund additional marketing expenditures, develop new
markets for its ID-Check technology, enhance its operating infrastructure,
respond to competitive pressures, or acquire complementary businesses or
technologies. There
can
be no assurance that the Company will be able to secure the additional funds
when needed or obtain such on terms satisfactory to the Company, if at all.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” which is effective for calendar year companies on January 1,
2008. The Statement defines fair value, establishes a framework for measuring
fair value in accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. The Statement codifies the
definition of fair value as the price that would be received to sell an asset
or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the principle
that
fair value should be based on the assumptions market participants would use
when
pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The Company
is
currently assessing the potential impacts of implementing this
standard.
7
In
July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB No. 109” (“FIN 48”), effective for
fiscal years beginning after December 15, 2006. FIN 48 requires a two-step
approach to determine how to recognize tax benefits in the financial statements
where recognition and measurement of a tax benefit must be evaluated
separately. A tax benefit will be recognized only if it meets a
“more-likely-than-not” recognition threshold. For tax positions that meet
this threshold, the tax benefit recognized is based on the largest amount of
tax
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement with the taxing authority. On May 2, 2007 the FASB issued
Interpretation No. 48-1, “Definition of Settlement in FASB Interpretation 48”
(“FIN 48-1”). FIN 48-1 amends FIN 48 to provide guidance on how an enterprise
should determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits. The guidance in FIN 48-1
shall be applied upon the initial adoption of FIN 48. We adopted FIN 48 and
FIN
48-1 as of January 1, 2007. The adoption of FIN 48 did not have an impact
on our results of operations or financial position. As a result of our
continuing losses for tax purposes, we have historically not paid income taxes
and have recorded a full valuation allowance against our net deferred tax asset.
Therefore, we have not recorded a liability for unrecognized tax benefits prior
to adoption of FIN 48 and there was no adjustment from the implementation.
There
continues to be no liability related to unrecognized tax benefits at September
30, 2007. We recognize interest and penalties related to unrecognized tax
benefits in income tax expense. There was no accrued interest related to
unrecognized tax benefits at September 30, 2007. The tax years 2003-2006 remain
open to examination by the major taxing jurisdictions to which we are subject.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financials Liabilities — Including an Amendment of FASB
Statement No. 115”. This standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the provisions
of SFAS No. 159 to determine the potential impact, if any, the adoption will
have on the Company’s financial statements.
In
June
2007, the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research
and
Development Activities,” which is effective for calendar year companies on
January 1, 2008. The Task Force concluded that nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected
to
be provided. The Company is currently assessing the potential impact of
implementing this standard.
Use
of
Estimates
The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the Company’s financial statements and accompanying notes. Significant estimates
and assumptions that affect amounts reported in the financial statements include
deferred tax valuation allowances and allowance for doubtful accounts. Due
to
the inherent uncertainties involved in making estimates, actual results reported
in future periods may be different from those estimates.
Cash
and
Cash Equivalents
Cash
and
cash equivalents include cash and highly liquid investments with original
maturities of three months or less when purchased. As of September 30, 2007,
cash equivalents included money market funds and other liquid short-term debt
instruments (with maturities at date of purchase of three months or less) of
$10,065.
8
Marketable
Securities and Short Term Investments
The
Company accounts for investments in marketable securities as available-for-sale
securities in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 115, “Accounting for Certain Investments in Debt and
Equity Securities” (“SFAS No. 115”). Under SFAS No. 115,
securities purchased to be held for indefinite periods of time and not intended
at the time of purchase to be held until maturity are classified as
available-for-sale securities. The Company continually evaluates whether any
marketable investments have been impaired and, if so, whether such impairment
is
temporary or other than temporary. Interest income is recorded using an
effective interest rate, with the associated premium or discount amortized
to
interest income. All of the Company’s marketable securities have maturities of
less than one year with a weighted average interest rate of 5.8%. The carrying
value of the marketable securities as of September 30, 2007 approximated their
fair market value. Marketable Securities and Short Term Investments are invested
in highly liquid Municipal Auction Rate Securities.
Allowance
for Doubtful Accounts
The
Company records its allowance for doubtful accounts based upon its assessment
of
various factors. The Company considers historical experience, the age of the
accounts receivable balances, credit quality of the Company’s customers, current
economic conditions and other factors that may affect customers’ ability to
pay.
Revenue
Recognition and Deferred Revenue
The
Company sells its products directly through its sales force and through
distributors. Revenue from direct sales
of
our products is recognized when
shipped to
the
customer and title has passed. The Company’s products require continuing service
or post contract customer support and performance; accordingly, a portion of
the
revenue pertaining to the service and support is deferred based on its fair
value and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently,
with respect to sales of certain of our products, the Company does not have
enough experience to identify the fair value of each element, therefore the
full
amount of the revenue and related gross margin is deferred and recognized
ratably over the one-year period in which the future service, support and
performance are provided.
In
addition, the Company recognizes sales from licensing of its patented software
to customers. The Company’s licensed software requires continuing service or
post contract customer support and performance; accordingly, a portion of the
revenue is deferred based on its fair value and recognized ratably over the
period in which the future service, support and performance are provided, which
is generally one year. Royalties
from the licensing of the Company’s technology are recognized as revenues in the
period they are earned.
Inventory
Inventory
is stated at the lower of cost or market and cost is determined using the
first-in, first-out method. Inventory is primarily comprised of finished
goods.
Business
Concentrations and Credit Risk
During
the three and nine months ended September 30, 2007, the Company made sales
to
two customers that accounted for approximately 31% and 26% of total revenues,
respectively. During the three and nine months ended September 30, 2006, the
Company made sales to two other customers that accounted for approximately
43%
of total revenues in each of the periods presented.
The
above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction
is
specifically dictated by generally accepted accounting principles, with no
need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce
a
materially different result.
9
Note
2. Net
Loss
per Common Share
The
Company computes net loss per common share in accordance with SFAS No. 128,
“Earnings Per Share.” Under the provisions of SFAS No. 128, basic net loss per
common share is computed by dividing net loss by the weighted average number
of
common shares outstanding. Diluted net loss per common share is computed by
dividing net loss by the weighted average number of common shares then
outstanding, but does not include the impact of stock options and warrants
then
outstanding, as the effect of their inclusion would be
antidilutive.
The
following table summarizes the additional number of common shares that would
be
outstanding assuming that all the options and warrants that were outstanding
as
of September 30, 2007 and 2006 had been converted:
|
2007
|
2006
|
||||||
|
Stock
options
|
2,033,217
|
2,499,755
|
|||||
|
Warrants
|
922,636
|
938,636
|
|||||
|
Total
|
2,955,853
|
3,438,391
|
|||||
Note
3.
Stock-Based
Compensation
On
January 1, 2006, the Company adopted SFAS No. 123(R). SFAS No. 123(R) eliminates
the option to use the intrinsic value method of accounting that was provided
in
APB No. 25, which generally resulted in no compensation expense recorded in
the
financial statements related to the issuance of equity awards to employees.
SFAS
No. 123(R) requires that the cost resulting from all share based payment
transactions be recognized in the financial statements. SFAS No. 123(R)
establishes fair value as the measurement objective in accounting for share
based payment arrangements and requires all companies to apply a fair value
based measurement method in accounting for all share based payment transactions
with employees. We included stock based compensation in selling, general and
administrative expense for the cost of stock options.
Stock
based compensation expense for the three and nine months ended September 30,
2007 and 2006 is as follows:
|
Three
Months Ended
|
Nine
months ended
|
||||||||||||
|
September
30,
|
September
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Compensation
cost recognized:
|
|||||||||||||
|
Stock
options
|
$
|
80,910
|
$
|
156,000
|
$
|
330,988
|
$
|
517,000
|
|||||
|
Restricted
stock
|
-
|
-
|
126,000
|
16,006
|
|||||||||
|
$
|
80,910
|
$
|
156,000
|
$
|
456,988
|
$
|
533,006
|
||||||
In
order
to retain and attract qualified personnel necessary for the success of the
Company, the Company adopted several Stock Option Plans from 1998 through 2004
(and an amendment to the 2004 plan in 2006 pursuant to which the plan was
renamed the “2006 Equity Incentive Plan” and amended to provide for the issuance
of other types of equity incentives such as restricted stock grants)
(collectively, the “Plans”) covering up to 3,250,000 of the Company’s common
shares, pursuant to which officers, directors, key employees and consultants
to
the Company are eligible to receive incentive stock options and nonqualified
stock options. The Compensation Committee of the Board of Directors administers
these Plans and determines the terms and conditions of options granted,
including the exercise price. These Plans generally provide that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under these Plans must be granted at an exercise price that
is
not less than the fair market value per share at the date of the grant and
the
exercise price must not be less than 110% of the fair market value per share
at
the date of the grant for grants to persons owning more than 10% of the voting
stock of the Company. These Plans also entitle non-employee directors to receive
grants of non-qualified stock options as approved by the Board of
Directors.
10
Option
activity under the Plans as of September 30, 2007 and changes during the nine
months ended September 30, 2007 were as follows:
|
|
Shares
(1)
|
Weighted-
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic
Value
|
|||||||||
|
Outstanding
at January 1, 2007
|
2,470,055
|
$
|
6.55
|
||||||||||
|
Granted
|
185,362
|
5.61
|
|||||||||||
|
Exercised
|
(42,950
|
)
|
3.40
|
||||||||||
|
Forfeited
or expired
|
(579,250
|
)
|
10.33
|
||||||||||
|
Outstanding
at September 30, 2007
|
2,033,217
|
$
|
5.46
|
3.12
|
$
|
548,499
|
|||||||
|
|
|||||||||||||
|
Exercisable
at September 30, 2007
|
1,826,354
|
$
|
5.44
|
2.62
|
$
|
491,499
|
|||||||
(1)
Included in the table are 469,425 non-plan options, of which all options are
fully vested.
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between the Company’s closing stock price on the
last trading day of the third quarter of 2007 and the exercise price, multiplied
by the number of in-the-money options) that would have been received by the
option holders had all option holders exercised their options on September
30,
2007. This amount changes based on the fair market value of the Company’s stock.
The total intrinsic value of options exercised for the nine months ended
September 30, 2007 was $137,515.
As
of
September 30, 2007, unrecognized compensation expense related to granted and
non-vested stock options amounted to approximately $366,685 and is expected
to
be recognized over a weighted-average period of 1.4 years.
As
of
September 30, 2007, the Company had 884,415 options available for future grant
under the Plans.
The
Company uses the Black-Scholes option pricing model to value the options. The
table below presents the weighted average expected life of the options in years.
The expected life computation is based on historical exercise patterns and
post-vesting termination behavior. Volatility is determined using changes in
historical stock prices. The interest rate for periods within the expected
life
of the award is based on the U.S. Treasury yield curve in effect at the time
of
grant.
The
fair
value of share-based payment units was estimated using the Black-Scholes option
pricing model with the following assumptions and weighted average fair values
as
follows:
|
Three
Months Ended
|
Nine
months ended
|
||||||||||||
|
September
30,
|
September
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Weighted
average fair value of grants
|
$
|
1.61
|
$
|
3.69
|
$
|
2.85
|
$
|
3.95
|
|||||
|
Valuation
assumptions:
|
|||||||||||||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|||||
|
Expected
volatility
|
60.5
|
%
|
71.6
|
%
|
58.8
|
%
|
80.4
|
%
|
|||||
|
Expected
life (in years)
|
4.5
|
4.5
|
4.58
|
4.88
|
|||||||||
|
Risk-free
interest rate
|
4.21
|
%
|
4.70
|
%
|
4.62
|
%
|
4.70
|
%
|
|||||
11
Note
4.
Legal Proceedings
On
August
1, 2003, we filed a summons and complaint against Tricom Card Technologies,
Inc.
alleging infringement on our patent and seeking injunctive and monetary
relief. On October 23, 2003, we amended our complaint to include
infringement on an additional patent. On May 18, 2004, we filed a Second
Amended Complaint alleging infringement and inducement to infringe against
certain principals of Tricom in their personal capacities, as well as alleging
in the alternative false advertising claims under the Lanham Act against all
the
defendants. The principals moved to dismiss the claims against them, and
Tricom moved to dismiss the false advertising claims, which motions have been
administratively terminated by the Court. On August 1, 2005, defendants
filed an Answer and Affirmative Defenses to the Second Amended Complaint and
Tricom filed a declaratory counterclaim. On November 2, 2005, the Court
allowed Tricom to plead two additional defenses and declaratory counterclaims
in
the case, and on January 3, 2006, the parties filed a Stipulation of Dismissal
of the Estoppel and Unenforceability Counterclaims and Affirmative
Defenses. On February 28, 2006, the parties filed a Supplemental Proposed
Joint Pretrial Order, and on March 1, 2006, the Court certified that fact
discovery in this action was complete. On June 29, 2006, the Court held a
pre-motion conference at our request to discuss our proposed motion
to disqualify defendants' counsel for a conflict of interest.
Pursuant to the Court's order, we served moving papers upon defendants on July
14, 2006 and defendants served opposition to the motion on around July 28,
2006. We served a reply to the opposition on August 11, 2006 and filed the
motion with the Court. Also, on or about July 21, 2006, defendants filed
with the Court a motion for claim construction together with our opposition
to
defendants' motion and defendants' reply to the opposition. As of
September 30, 2007, the Court has not scheduled a hearing date for either motion
and there is no trial date pending.
We
are
not aware of any infringement by our products or technology on the proprietary
rights of others.
Other
than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to
have
a material adverse effect on our business.
Note
5.
Commitments and Contingencies
On
June
7, 2007, Frank Mandelbaum, the Company’s Chairman and Chief Executive Officer,
passed away. In accordance with his letter of understanding, his widow is
entitled to a payment equal to six months salary ($132,000), payable in six
equal monthly installments. The Company recorded this amount in general and
administrative expenses in the second quarter of 2007.
Note
6. Extension
of Rights
In
March
2001, the Company declared a dividend distribution of one non-transferable
right
to purchase one share of its common stock for every 10 outstanding shares of
common stock continuously held from the record date to the date of exercise,
as
well as common stock underlying vested stock options and warrants, held of
record on March 30, 2001, at an exercise price of $8.50. On May 10, 2007, the
Board of Directors authorized extending these rights, which were due to expire
on June 30, 2007 to June 30, 2008.
Note
7.
Proposed Merger
On
August
8, 2007, the Company and Mobilisa, Inc., a private company that is a leader
in
identity systems and mobile and wireless technologies, entered into an agreement
in principle to combine the two companies. The terms of the agreement in
principle provide that Mobilisa will become a wholly-owned subsidiary of
Intelli-Check and that shares of Intelli-Check will be issued to the Mobilisa
shareholders such that the stockholders of the two companies will each own
50%of
the common stock of the combined company. Mobilisa option holders will also
exchange their options for Intelli-Check options. The combination is anticipated
to be structured as a “tax-free reorganization” under Section 368 of the
Internal Revenue Code of 1986, as amended. The
Companies are in the process of completing due diligence related to the merger.
It is anticipated that the merger will close in the first quarter of 2008.
12
Item
2.
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(a)
Overview
Intelli-Check
was formed in 1994 to address a growing need for a reliable document and age
verification system that could be used to detect fraudulent driver licenses
and
other widely accepted forms of government-issued identification documents.
Since
then, our technology has been further developed for application in the
commercial fraud protection, access control and governmental security markets.
Additionally, it is currently being used to increase productivity by addressing
inefficiencies and inaccuracies associated with manual data entry. The core
of
Intelli-Check’s product offerings is our proprietary software technology that
verifies the authenticity of driver licenses and state issued non-driver and
military identification cards used as proof of identity. Our patented ID-Check®
software technology instantly reads, analyzes, and verifies the encoded format
in magnetic stripes and barcodes on government-issued IDs from over 60
jurisdictions in the U.S. and Canada to determine if the encoded format is
valid. We have served as the national testing laboratory for the American
Association of Motor Vehicle Administrators (AAMVA) since 1999 and have access
to all the currently available encoded driver license formats.
Because
of continuing terrorist threats worldwide, we believe there has been a
significant increase in awareness of our software technology to help improve
security across many industries, including airlines, rail transportation and
high profile buildings and infrastructure, which we believe should enhance
future demand for our technology. The adaptation of Homeland Security
Presidential Directive 12 (HSPD 12) and the promulgation of Federal Identity
Processing Standards 201 (FIPS 201) have raised the awareness of our technology
in the government sector. Therefore, we have begun to market to various
government and state agencies, which have long sales cycles, including extended
test periods. Since inception, we have incurred significant losses and negative
cash flow from operating activities and, as of September 30, 2007, we had an
accumulated deficit of approximately $44 million. We will continue to fund
operating and capital expenditures from proceeds that we received
from sales of our equity securities.
In view
of the rapidly evolving nature of our business and our operating history, we
believe that period-to-period comparisons of revenues and operating results
are
not necessarily meaningful and should not be relied upon as indications of
future performance.
By
verifying the encoded format, our ID-Check® patented technology provides
the ability to verify the validity of military IDs, driver licenses and state
issued non-driver ID cards that contain magnetic stripes, bar codes and SMART
chips, which
enables
us to target three distinct markets. Our original target market was focused
on
resellers of age-restricted products, such as alcohol and tobacco, where the
proliferation of high-tech fake IDs exposes merchants to fines and penalties
for
the inadvertent sale of these products to underage purchasers. We now
also
target
commercial fraud, which includes identity theft, and our technology is designed
to help prevent losses from these frauds. We are also marketing our products
for
security applications involving access control. As a result of its applicability
in these markets, we have sold our products to some of the largest companies
in
the gaming industry, significant retailers, several large financial service
companies, Certegy, now part of Fidelity National, one of the largest providers
of check authorization services in the United States, a state port authority,
military establishments, airports, nuclear power plants and high profile
buildings. Our technology is currently being used or tested by several Fortune
50 Companies. We have entered into strategic alliances with VeriFone, the
largest provider of credit card terminals in the U.S., the two largest providers
of driver licenses in North America to assist with their compliance with the
provisions of the Real ID Act (which is intended to set standards for the
issuance of driver licenses and identification cards), several biometric
companies, Northrop Grumman, EDS and General Dynamics (formerly Anteon),
integrators in the defense industry, and Intermec Technologies, Motorola and
Metrologic, hardware manufacturers, to utilize our systems and software as
the
proposed or potential verification application for their proposed solutions
for
credentialing in the government sector and to jointly market these security
applications. The passage of the Real ID ACT together with the regulations
arising from HSPD-12, which sets the policy for a common identification standard
for federal employees and contractors, have additionally created opportunities
for our verification technology in the governmental market at the federal,
state
and local levels. In addition, we have executed agreements with some high
profile organizations to promote the use of our technology and our products.
We
believe these relationships have broadened our marketing reach through their
sales efforts and we intend to develop additional strategic alliances with
additional high profile organizations and providers of security solutions.
13
We
have
developed additional software products that utilize our patented software
technology. Our products include ID-Check® Portal, ID-Check® POS, ID-Check® BHO,
ID-Traveler and the ID-Prove software solution. ID-Check® Portal utilizes our
ID-Check® technology together with ID-Prove to provide an additional layer of
security to prove an individual’s claimed identity. ID-Check® POS is the
technology that has been integrated into multiple VeriFone platforms such as
the
37xx series to enable the user to do verification of the encoded format on
driver licenses as an additional function of the terminal. ID-Check® BHO is a
browser helper object that enables a customer to add the ID-Check® technology as
a “plug-in” to Internet Explorer pages without requiring software programming
expertise. ID-Check®
EHO is
an executable helper object for non browser based applications. ID-Traveler
electronically verifies and matches two forms of government issued IDs
instantaneously while the embedded ID-Prove software solution provides “out of
wallet” questions to assist in proving a user’s claimed identity. Additional
software solutions include ID-Check® PC and ID-Check® Mobile, which replicate
the features of ID-Check®. Another application is C-Link®, the company’s
networkable data management software. Additionally, ID-Check® PC and C-Link® are
designed to read the smart chip contained on the military Common Access Card
(CAC). These products, which run on a personal computer, were created to work
in
conjunction with our ID-Check® technology and allow a user to first verify the
encoded format and then view the encoded data for further verification. Our
ID-Check® Mobile product gives the user the additional flexibility of utilizing
our software in a hand-held product. To date, we have entered into multiple
licensing agreements and are in discussions with additional companies to license
our software to be utilized within other existing systems.
Critical
Accounting Policies and the Use of Estimates
The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in
the Company’s financial statements and accompanying notes. Significant estimates
and assumptions that affect amounts reported in the financial statements include
deferred tax valuation allowances and allowance for doubtful accounts. Due
to
the inherent uncertainties involved in making estimates, actual results reported
in future periods may be different from those estimates.
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These significant accounting policies
relate to revenue recognition, stock based compensation, deferred taxes and
commitments and contingencies. These policies and our procedures related to
these policies are described in detail below.
A.
Revenue Recognition and Deferred Revenue
We
sell
our products directly through our sales force and through distributors. Revenue
from direct sales of our product is recognized when
shipped
to the
customer and title has passed. Our products require continuing service or post
contract customer support and performance by us; accordingly, a portion of
the
revenue pertaining to the service and support is deferred based on its fair
value and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently,
with respect to sales of certain of our products, we do not have enough
experience to identify the fair value of each element and the full amount of
the
revenue and related gross margin is deferred and recognized ratably over the
one-year period in which the future service, support and performance are
provided.
In
addition, we recognize sales from licensing of our patented software to
customers. Our licensed software requires continuing service or post contract
customer support and performance by us; accordingly, a portion of the revenue
is
deferred based on its fair value and recognized ratably over the period in
which
the future service, support and performance are provided, which is generally
one
year.
Royalties
from licensing our technology are recognized as revenues in the period they
are
earned.
14
B.
Stock-Based Compensation
On
January 1, 2006, we adopted SFAS No. 123(R). Under this application, we are
required to record compensation expense for all awards granted after the date
of
adoption and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. SFAS No. 123(R) requires that the cost
resulting from all share based payment transactions be recognized in the
financial statements. SFAS No. 123(R) establishes fair value as the measurement
objective in accounting for share based payment arrangements and requires us
to
apply a fair value based measurement method in accounting for generally all
share based payment transactions with employees.
C.
Deferred Income Taxes
Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss carry forwards. Deferred tax assets and liabilities
are measured using expected tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. We have recorded
a full valuation allowance for our net deferred tax assets as of September
30,
2007, due to the uncertainty of the realizability of those assets.
D.
Commitments and Contingencies
We
are
currently involved in certain legal proceedings as discussed in footnote 4,
above. We do not believe these legal proceedings will have a material adverse
effect on our financial position, results of operations or cash flows.
The
above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction
is
specifically dictated by generally accepted accounting principles, with no
need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce
a
materially different result.
(b)
Results of Operations
Comparison
of the three months ended September 30, 2007 to the three months ended September
30, 2006.
Revenues
increased by 11.0%, or $85,164, to $856,938, for the three months ended
September 30, 2007 from $771,774 for the three months ended September 30, 2006.
Revenues for the period ended September 30, 2007 consisted of revenues from
direct sales to customers of $571,892, revenues from distributors of $278,611
and royalty payments of $6,435 compared to $640,799, $122,815 and $8,160,
respectively, in the period ended September 30, 2006. We remain optimistic
that
revenues will continue to increase, since our pipeline of sales opportunities
is
substantial and growing, particularly in the commercial sector. We expect our
recently announced partnerships, together with the success of our technology
in
tests in both the commercial and government sectors, to contribute to this
anticipated growth. While we continue to believe that the government sector
could ultimately be a significant market segment, we have been disappointed
that
there have been insignificant government revenues to date. We are encouraged
by
the President’s signing of the 911 Homeland Security bill on August 3, 2007;
however, the timing of the ultimate funding of each of the proposed initiatives
is still uncertain at this time. Also, additional legislative efforts to address
identity management and to control under-age access to age-restricted products
could, if enacted, lead to future sales opportunities. Due to the uncertainty
regarding the timing and funding of these initiatives, we have reduced our
internal near term estimates of the amount of government business anticipated.
Period to period comparisons may not be indicative of future operating results,
since we still face long sales cycles, particularly in the government sector,
and, therefore, we cannot predict with certainty at this time in which period
the opportunities currently in the pipeline will develop into sales or if they
will develop at all. Our booked orders, which represent the total value of
all
new non-cancellable orders for products, services and fees received from our
customers and distributors, were $1.1 million during the third quarter as
compared to $826,000 in the third quarter of 2006. As of September 30, 2007,
our
backlog, which represents non-cancelable sales orders for products and services
not yet shipped or performed, was approximately $2.6 million. Of this amount,
approximately $1.3 million could be recognized over one to four years depending
upon release dates by the customer. We expect that our backlog will continue
to
increase as we shift our revenue model towards pursuing more subscription based
and transaction based contracts rather than product sales for a one time fee.
While this may initially result in lower current period revenues, our total
revenue stream over the period of the contract will be greater as we increase
the proportion of this contract to the total orders booked.
15
Our
gross
profit as a percentage of revenues amounted to 54.6% for the three months ended
September 30, 2007 compared to 60.0% for the three months ended September 30,
2006. Our gross profit percentage was lower than in the prior year period as
a
result of a higher mix of our bundled sales of hardware and software products,
including laptops purchased on behalf of larger customers which have lower
margins than our licensing products which have a higher gross profit percentage.
Based upon the mix of products included in the orders in backlog, it is
anticipated that near term margins will continue to be lower as a percent of
revenues.
Operating
expenses, which consist of selling, general and administrative and research
and
development expenses, decreased 5.0% from $1,171,948 for the three months ended
September 30, 2006 to $1,113,359 for the three months ended September 30, 2007.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 2.0% from $347,725 for the three months ended September
30,
2006 to $354,783 for the three months ended September 30, 2007, primarily due
to
higher employee and related costs of approximately $27,000 due to an increase
in
sales force headcount, partially offset by a reduction in non-cash stock-based
compensation expense from the granting of stock options totaling approximately
$19,000. General and administrative expenses, which consist primarily of
salaries and related costs for general corporate functions, including executive,
accounting, facilities and fees for legal and professional services, decreased
19.7% from $594,802 for the three months ended September 30, 2006 to $477,563
for the three months ended September 30, 2007. This was principally as a result
of a decrease in non cash stock-based compensation expense from the granting
of
stock options totaling approximately $71,000, lower legal fees of approximately
$55,000 due to decreased activity on our patent infringement litigation and
a
decrease in employee costs and related expenses of approximately $78,000,
partially offset by higher directors fees, accounting and consulting fees of
$88,000. Research and development expenses, which consist primarily of salaries
and related costs for the development of our products, increased 22.5% from
$229,421 for the three months ended September 30, 2006 to $281,013 for the
three
months ended September 30, 2007, primarily as a result of higher salaries and
related costs of approximately $42,000 due to an increase in headcount and
an
increase in non cash stock-based compensation expense from the granting of
stock
options totaling approximately $15,000, partially offset by lower travel costs
of approximately $6,000. As the Company experiences sales growth, we expect
that
we will incur additional operating expenses to support this growth. Research
and
development expenses may also increase as we integrate additional products
and
technologies with our patented ID-Check technology.
Interest
income decreased from $57,304 for the three months ended September 30, 2006
to
$37,564 for the three months ended September 30, 2007, which is a result of
a
decrease in our cash and cash equivalents, marketable securities and short
term
investments, partially offset by higher interest rates received on investments
during 2007.
We
have
incurred net losses to date; therefore, we have paid nominal income taxes.
As
a
result of the factors noted above, our net loss decreased from $651,390 for
the
three months ended September 30, 2006 to $607,742 for the three months ended
September 30, 2007.
Comparison
of the nine months ended September 30, 2007 to the nine months ended September
30, 2006.
Revenues
increased by 12.6%, or $256,093, to $2,281,533 for the nine months ended
September 30, 2007 from $2,025,442 for the nine months ended September 30,
2006.
Revenues for the period ended September 30, 2007 consisted of revenues from
direct sales to customers of $1,517,842, revenue from distributors of $745,330
and royalty payments of $18,361, compared to $1,213,543, $789,650 and $22,249,
respectively, in the nine month period ended September 30, 2006. Our booked
orders, which represent the total value of all new non-cancellable orders for
products, services and fees received from our customers and distributors, during
the first nine months of 2007 were $4.0 million compared to $2.8 million in
the
first nine months of 2006. However, period to period comparisons may not be
indicative of future operating results, since we still face long sales cycles,
particularly in the government sector, and, therefore, we cannot predict with
certainty at this time in which period the opportunities currently in the
pipeline will develop into sales or if they will develop at all.
Our
gross
profit as a percentage of revenues amounted to 61.6% for the nine months ended
September 30, 2007 compared to 64.9% for the nine months ended September 30,
2006. Our gross profit percentage was lower than in the prior year period as
a
result of a higher mix of our bundled sales of hardware and software products
over our licensing products which have a higher gross profit
percentage.
16
Operating
expenses, which consist of selling, general and administrative and research
and
development expenses, decreased 4.7% from $4,018,183 for the nine months ended
September 30, 2006 to $3,829,575 for the nine months ended September 30, 2007.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 1.6% from $1,142,793 for the nine months ended September
30, 2006 to $1,160,703 for the nine months ended September 30, 2007, primarily
due to higher employee costs due to an increase in sales headcount and higher
marketing expenses of approximately $109,000, which was offset by a reduction
in
non-cash stock-based compensation expense from the granting of stock options
totaling approximately $92,000. General and administrative expenses, which
consist primarily of salaries and related costs for general corporate functions,
including executive, accounting, facilities and fees for legal and professional
services, decreased 13.8% from $2,133,244 for the nine months ended September
30, 2006 to $1,837,814 for the nine months ended September 30, 2007, primarily
as a result of a reduction in legal fees of approximately $337,000 relating
to
decreased activity on our patent infringement litigation, lower non cash
stock-based compensation expense from the granting of stock options totaling
approximately $138,000 and a decrease in employee costs and related expenses
of
approximately $156,000. These amounts were offset by higher directors’ fees,
accounting and consulting fees of $156,000, including Sarbanes-Oxley Section
404
compliance fees and the death benefit and other payroll costs of $152,000
resulting from the untimely passing of our Chairman and CEO, Frank Mandelbaum
in
June 2007. Also, included in the nine month period of 2006 was a bad debt
recovery of approximately $26,000. Research and development expenses, which
consist primarily of salaries and related costs for the development of our
products, increased 12.0% to $831,058 for the nine months ended September 30,
2007 from $742,146 for the nine months ended September 30, 2006, primarily
as a
result of higher project management and employee related expenses of
approximately $47,000 and an increase in non cash stock-based compensation
expense from the granting of stock options totaling approximately $43,000.
As
the Company experiences sales growth, we expect that we will incur additional
operating expenses to support this growth. Research and development expenses
may
also increase as we integrate additional products and technologies with our
patented ID-Check technology.
Interest
income decreased from $169,777 for the nine months ended September 30, 2006
to
$135,646 for the nine months ended September 30, 2007, which is a result of
a
decrease in our cash and cash equivalents, marketable securities and short
term
investments, partially offset by higher interest rates received on investments
during 2007.
We
have
incurred net losses to date; therefore, we have paid nominal income taxes.
As
a
result of the factors noted above, our net loss decreased from $2,534,161 for
the nine months ended September 30, 2006 to $2,288,443 for the nine months
ended
September 30, 2007.
(c)
Liquidity and Capital Resources
As
of
September 30, 2007, the Company had cash and cash equivalents, marketable
securities and short term investments of $2,297,119, working capital (defined
as
current assets minus current liabilities) of $2,279,090, total assets of
$4,014,577 and stockholders’ equity of $2,337,989. The Company currently has no
bank financing or long term debt. Cash used in operating activities for the
nine
months ended September 30, 2007 was $2,195,592, an increase of approximately
$428,109 over the cash used in operating activities for the nine months ended
September 30, 2006. The increase was primarily a result of cash used to fund
the
increase in accounts receivable and a reduction in non-cash adjustments for
stock-based expenses, partially offset by a lower net loss. Cash provided by
investing activities for the nine months ended September 30, 2007 of $1,708,440
resulted primarily from net redemptions of marketable securities and short
term
investments, which were the principal means used to fund the operating cash
deficit. Cash provided by financing activities was $232,359 for the nine months
ended September 30, 2007 and resulted from the proceeds from the issuance of
common stock from the exercise of stock options and warrants.
17
During
the nine months ended September 30, 2007, the Company used net cash of
approximately $2.0 million or approximately $220,000 per month. During the
third
quarter of 2007, the level of accounts receivable increased by $280,000
resulting from a delay in payment from some of our larger customers. We
anticipate full collection from these accounts in the fourth quarter of 2007.
Also, as a result of the decrease in the market price of our common stock in
the
third quarter, there were no stock option exercises in the third quarter
compared to cash proceeds of $232,000 in the first six months of 2007. Not
taking into account our proposed merger with Mobilisa (as described below),
we
currently anticipate that our available cash on hand and marketable securities
and cash resources from expected revenues from the sale of the units in
inventory and the licensing of our technology, as well as from the significant
amount of deferred revenues and backlog, will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next twelve months. These requirements are expected to include the purchase
of inventory, product development, sales and marketing, working capital
requirements and other general corporate purposes. We may need to raise
additional funds (regardless of whether the proposed merger with Mobilisa is
consummated), however, to respond to business contingencies which may include
the need to fund more rapid expansion, fund additional marketing expenditures,
develop new markets for our ID-Check® technology, enhance our operating
infrastructure, respond to competitive pressures, or acquire complementary
businesses or necessary technologies. There can be no assurance that the Company
will be able to secure the additional funds when needed or obtain such on terms
satisfactory to the Company, if at all.
We
are
currently involved in certain legal proceedings as discussed in Note 4 above.
We
do not believe these legal proceedings will have a material adverse effect
on
our financial position, results of operations or cash flows.
On
August
8, 2007, the Company and Mobilisa, Inc., a private company that is a leader
in
identity systems and mobile and wireless technologies, entered into an agreement
in principle to combine the two companies. The terms of the agreement in
principle provide that Mobilisa will become a wholly-owned subsidiary of
Intelli-Check and that shares of Intelli-Check will be issued to the Mobilisa
shareholders such that the two companies will each have 50%-ownership in the
combined company. Mobilisa shareholders will also exchange their shares and
options for Intelli-Check shares and options. The combination is anticipated
to
be structured as a “tax-free reorganization” under Section 368 of the Internal
Revenue Code of 1986, as amended. The Companies are in the process of completing
due diligence related to the merger. It is anticipated that the merger will
be
close in the first quarter of 2008.
In
March
2001, the Company declared a dividend distribution of one non-transferable
right
to purchase one share of its common stock for every 10 outstanding shares of
common stock continuously held from the record date to the date of exercise,
as
well as common stock underlying vested stock options and warrants, held of
record on March 30, 2001, at an exercise price of $8.50. On May 10, 2007, the
Board of Directors authorized extending these rights, which were due to expire
on June 30, 2007 to June 30, 2008. We have the right to redeem the outstanding
rights for $.01 per right under certain conditions, which were not met as of
August 10, 2007. We reserved 970,076 shares of common stock for future issuance
under this rights offering. To date, we have received $2,482,009 before expenses
from the exercise of 292,001 of these rights, which has reduced the amount
of
shares available for future issuance. None of these rights were exercised in
the
nine months ended September 30, 2007.
In
March
2001, our Board of Directors authorized, subject to certain business and market
conditions, the purchase of up to $1,000,000 of our common stock. As of
September 30, 2007, we cumulatively purchased 40,200 shares for a total of
approximately $222,000 and subsequently retired these shares. None of these
shares were purchased during 2007 or 2006. We may purchase additional shares
when warranted by certain conditions.
(d)
Net
Operating Loss Carry forwards
As
of
September 30, 2007 the Company had net operating loss carryforwards (“NOL’s”)
for federal income tax purposes of approximately $35.3 million. There can be
no
assurance that the Company will realize the benefit of the NOL’s. The federal
NOL’s are available to offset future taxable income and expire from 2018 to 2027
if not utilized. Under Section 382 of the Internal Revenue Code, these NOL’s may
be limited in the event of an ownership change.
18
Contractual
Obligations
Below
is
a table, which presents our contractual obligations and commitments at September
30, 2007:
Payments
Due by Period
|
Total
|
Less
than
One
Year
|
1-3
years
|
4-5
years
|
After
5 years
|
||||||||||||
|
Operating
Leases
|
$
|
773,729
|
$
|
214,982
|
$
|
443,559
|
$
|
115,188
|
$
|
-
|
||||||
|
Consulting
Contracts
|
72,000
|
72,000
|
-
|
-
|
-
|
|||||||||||
|
Purchase
Commitments
|
159,225
|
159,225
|
-
|
-
|
-
|
|||||||||||
|
Total
Contractual Cash Obligation
|
$
|
1,004,954
|
$
|
446,207
|
$
|
443,559
|
$
|
115,188
|
$
|
-
|
||||||
Off-Balance
Sheet Arrangements
We
have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Forward
Looking Statements
This
document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating
future growth in revenues, loss from operations and cash flow. Words such as
“anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,”
“believes” and words and terms of similar substance used in connection with any
discussion of future operating or financial performance identify forward-looking
statements. These forward-looking statements are based on management’s current
expectations and beliefs about future events. As with any projection or
forecast, they are inherently susceptible to uncertainty and changes in
circumstances, and the Company is under no obligation to, and expressly
disclaims any obligation to, update or alter its forward-looking statements
whether as a result of such changes, new information, subsequent events or
otherwise.
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
Financial
instruments, which subject the Company to concentrations of credit risk, consist
primarily of cash, cash equivalents and marketable securities. The Company
maintains cash between two financial institutions. The marketable securities
consist primarily of short term investment grade corporate and government bonds
and Certificate of Deposits. The Company performs periodic evaluations of the
relative credit standing of these institutions.
Item
4. Controls
and Procedures
Internal
Controls
We
maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed (i) to collect the information we
are
required to disclose in the reports we file with the SEC; (ii) to record,
process, summarize and disclose this information within the time periods
specified in the rules of the SEC; and (iii) to ensure that information is
accumulated and communicated to our management, including our Interim Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Under the supervision and with the
participation of our management, including our Interim Chief Executive Officer
and Chief Financial Officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures. Such evaluation was
conducted as of the end of the period covered by this report. Based on such
evaluation, our Interim Chief Executive Officer and Chief Financial Officer
have
concluded that these procedures are effective.
19
There
was no
change
in the Company’s internal control over financial reporting that occurred during
our most recently completed fiscal quarter that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
Compliance
with Section 404 of the Sarbanes-Oxley Act of 2002
Beginning
with our Annual Report on Form 10-K for the fiscal year ending December 31,
2007, we will be required to furnish a report by our management on our internal
control over financial reporting. This report will contain, among other matters,
an assessment of the effectiveness of our internal control over financial
reporting as of the end of our fiscal year, including a statement as to whether
or not our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal
control over financial reporting identified by management. If we identify one
or
more material weaknesses in our internal control over financial reporting,
we
will be unable to assert that our internal control over financial reporting
is
effective. As of June 30, 2007, we did not meet the requirements to be an
accelerated filer under Section 404 of the Sarbanes-Oxley Act of 2002 (the
Act),
and, therefore our independent registered public accountants will not have
to
issue an opinion on the effectiveness of our internal controls until the fiscal
year ending December 31, 2008.
Management
acknowledges its responsibility for internal controls over financial reporting
and seeks to continually improve those controls. In order to achieve compliance
with Section 404 of the Act within the prescribed period, we have hired a
consulting firm to assist us in completing our system and process documentation
and evaluation needed to comply with Section 404. We believe our process for
documenting, evaluating and monitoring our internal control over financial
reporting is consistent with the objectives of Section 404 of the
Act.
Item
4T.
Controls and Procedures
Not
applicable.
Part
II Other
Information
Item
1A.
Risk Factors
Our
operations and financial results are subject to various risks and uncertainties
that could adversely affect our business, financial condition, results of
operations, and trading price of our common stock. Please refer to our annual
report on Form 10-K for fiscal year 2006 for information concerning other risks
and uncertainties that could negatively impact us.
Item
6. Exhibits
(a)
The
following exhibits are filed as part of the Quarterly Report on Form
10-Q:
|
Exhibit
No.
|
Description
|
|
|
10.1
|
Term
Sheet Dated August 8, 2007 (Incorporated b reference to the registrant’s
Current Report on Form 8-K dated August 8, 2007)
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
32.1
|
18
U.S.C. Section 1350
Certifications
|
20
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Date:
November 13, 2007
|
INTELLI-CHECK,
INC.
|
|
|
/s/
Jeffrey Levy
|
||
|
Jeffrey
Levy
|
||
|
Interim
Chairman &
|
||
|
Interim
Chief Executive Officer
|
||
|
By:
|
/s/
Peter J. Mundy
|
|
|
Peter
J. Mundy
|
||
|
Vice
President Finance, CFO,
|
||
|
Treasurer
& Secretary
|
||
21