SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 001-15465
Intelli-Check, Inc.
(Name of small business issuer as specified in its charter)
Delaware 11-3234779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
246 Crossways Park West, Woodbury, New York 11797
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (516) 992-1900
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at March 31, 2001
----- -----------------------------
Common Stock, $.001 par value 7,827,923
Intelli-Check, Inc.
Index
Part I Financial Information Page
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Item 1. Financial Statements
Balance Sheets - March 31, 2001 (Unaudited)
and December 31, 2000 1
Statements of Operations for the three months
ended March 31, 2001 (Unaudited) and March 31,
2000 (Unaudited) 2
Statements of Cash Flows for the three months
ended March 31, 2001 (Unaudited) and March 31,
2000 (Unaudited) 3
Notes to Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-8
Part II Other Information
Item 6.
Exhibits and Reports on Form 8 8
Signatures 8
Intelli-Check, Inc.
Balance Sheets
ASSETS
March 31, December 31,
2001 2000
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $3,679,047 $4,091,689
Accounts receivable 44,890 44,795
Inventory 2,542,681 2,536,338
Other current assets 314,748 511,638
---------- ----------
Total current assets 6,581,366 7,184,460
CERTIFICATE OF DEPOSIT 258,709 250,000
PROPERTY AND EQUIPMENT, net 426,880 438,021
PATENT COSTS 65,874 67,426
---------- ----------
Total assets $7,332,829 $7,939,907
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 184,135 $ 180,792
Accrued Expenses 529,289 489,229
Deferred revenue 411,717 545,334
Current portion of capital lease obligations 44,435 48,767
---------- ----------
Total current liabilities 1,169,576 1,264,122
---------- ----------
CAPITAL LEASE OBLIGATIONS 35,206 42,738
---------- ----------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock
- $.01 par value; 250,000 shares authorized;
0 shares issued and outstanding -- --
Common stock-$.001 par value; 20,000,000 shares
authorized; 7,827,923 and 7,696,236 shares
issued and outstanding, respectively 7,828 7,696
Additional paid-in capital 15,102,105 13,561,362
Accumulated Deficit (8,981,886) (6,936,011)
---------- ----------
Total stockholders' equity 6,128,047 6,633,047
---------- ----------
Total liabilities and stockholders'
equity $7,332,829 $7,939,907
========== ==========
See accompanying notes to financial statements
1
Intelli-Check, Inc.
Statements of Operations
(Unaudited)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
-------------- --------------
REVENUE $ 204,635 $ 30,218
COST OF REVENUE: 117,795 15,171
----------- -----------
Gross profit 86,840 15,047
OPERATING EXPENSES:
Selling 210,200 96,099
General and administrative 481,876 411,839
Research and development 325,166 249,967
----------- -----------
Total operating expenses 1,017,242 757,905
----------- -----------
Loss from operations (930,402) (742,858)
OTHER INCOME (EXPENSES):
Interest income 55,087 85,269
Interest expense (3,560) (5,414)
----------- -----------
(878,875) (663,003)
INCOME TAX BENEFIT -- --
----------- -----------
Net loss $ (878,875) $ (663,003)
=========== ===========
PER SHARE INFORMATION:
Net loss per common share-
Net loss $ (878,875) $ (663,003)
Dividend on warrant modification (85,000) --
----------- -----------
Net loss attributable to common shareholders $ (963,875) $ (663,003)
=========== ===========
Basic and diluted ($0.12) ($0.10)
Common shares used in computing per
share amounts-
Basic and diluted 7,770,707 6,515,152
See accompanying notes to financial statements
2
Intelli-Check, Inc.
Statements of Cash Flows
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (878,875) $ (663,003)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 28,207 20,225
Changes in assets and liabilities-
(Increase) in certificate of deposit (8,709) --
Decrease (Increase) in accounts receivable (95) 1,939
(Increase) in inventory (6,343) (3,530)
Decrease in other current assets 196,890 --
(Increase) in deposit -- (156,500)
(Increase) in other assets -- (13,425)
(Decrease) Increase in accounts payable
and accrued expenses 43,403 (305,849)
(Decrease) in deferred revenue (133,617) --
----------- -----------
Net cash used in operating activities (759,139) (1,120,113)
----------- -----------
CASH FLOWS FROM INVESTING ACTITIVITES:
Purchases of property and equipment (15,514) (26,410)
----------- -----------
Net cash used in investing activities (15,514) (26,410)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 373,875 --
Repayment of capital lease obligation (11,864) (8,764)
----------- -----------
Net cash provided by (used in)
financing activities 362,011 (8,764)
----------- -----------
Net (decrease) in cash (412,642) (1,155,287)
CASH AND CASH EQUIVALENTS, beginning of period 4,091,689 6,380,548
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,679,047 $ 5,225,261
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,560 $ 5,414
=========== ===========
See accompanying notes to financial statements
3
Intelli-Check, Inc.
Notes to Financial Statements
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation
The financial information provided herein was prepared from the books and
records of the Company without audit. The information furnished reflects all
normal recurring adjustments, which, in the opinion of the Company, are
necessary for a fair statement of the balance sheets, statement of operations,
and statements of cash flows, as of the dates and for the periods presented. The
Notes to Financial Statements included in the Company's 2000 Annual Report on
Form 10-KSB should be read in conjunction with these financial statements.
Revenue Recognition
Revenue on sales of the Company's product is recognized upon shipment to the
customer. Certain sales require continuing service or post contract customer
support and performance by the Company, and accordingly a portion of the revenue
is deferred and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently, if
the Company does not have enough experience to identify the fair value of each
element, the full amount of the revenue and related gross margin is deferred and
recognized ratably over the one-year period in which the future service, support
and performance are provided.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. Net Loss Per Common Share
Basic and diluted net loss per common share was computed by dividing the net
loss by the weighted average number of shares of Common Stock. In accordance
with the requirements of Statement of Financial Accounting Standards No. 128,
common stock equivalents have been excluded from the calculation as their
inclusion would be antidilutive.
Note 3. Stockholders' Equity
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of the Company's common stock for
every 10 outstanding shares of common stock continuously held from the record
date to the date of exercise, as well as common stock underlying vested stock
options and warrants, held of record on March 30, 2001, at an exercise price of
$8.50. The rights will expire one year after the date of an effective
registration statement relating to the shares of common stock underlying the
rights. If certain conditions occur, the Company has the right to redeem the
outstanding rights for $.01 per right. The Company reserved 970,076 shares of
common stock for future issuance under this rights agreement. The Company has
recorded the fair value of the rights of $1,082,000 as a dividend during the
quarter ended March 31, 2001, which was calculated under the Black-Scholes
valuation method.
In March 2001, the Company extended the expiration date of its warrants that
were due to expire on various dates through June 30, 2001, until September 30,
2001. As such, the Company recorded the difference in the fair value of the
warrants prior to the extension and subsequent to the extension of $85,000 as a
dividend during the quarter ended March 31, 2001, which was calculated under the
Black-Scholes valuation method, and it is included in net loss attributable to
common shareholders.
In March 2001, the Board of Directors authorized, subject to certain business
and market conditions, the purchase of up to $1,000,000 of the our common stock.
As of May 10, 2000, we purchased 10,000 shares totaling $53,000.
4
Note 4. Letter of Intent
In February 2001, the Company signed a letter of intent to acquire certain
assets of Neotilt Corp., a Canadian developer of software for hand held age and
document verification units for 50,000 shares of the Company's common stock
valued at the closing price on the day prior to closing. Neotilt Corp. may earn
additional performance incentives in cash of up to $125,000 and additional stock
options based upon the achievement of certain milestones. The letter of intent
expired on March 31, 2001. However, the Company is still under negotiations with
Neotilt Corp. If consummated, the Company will account for this acquisition
under the purchase method of accounting.
Note 5. Termination of Employment agreement
On May 7, 2001, The Board of Directors accepted the resignation of its Senior
Executive Vice President and Chief Technology Officer. Accordingly, all of the
obligations under the employment agreement including salary and incentives
ceased as of this date.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Overview
Our company was formed in 1994 to address a growing need for a reliable
document and age verification system to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. Our
sales through September 30, 2000 had been minimal since through 1998 we had
previously produced only a limited pre-production run of our product for testing
and market acceptance. In late 1999, we received a limited number of ID-Check
terminals, which were then available for sale. Shortly thereafter, these
terminals were returned to the manufacturer to be upgraded to contain an
advanced imager/scanner, which allows our software to currently read the
encoding on 55 jurisdictions as opposed to 32 jurisdictions on the original
scanner. During the fourth quarter of 2000, we experienced a material increase
in sales as a result of product availability and establishing marketing and
distributor agreements with resellers. Since inception, we have incurred
significant losses and negative cash flow from operating activities, and as of
March 31, 2001 we had an accumulated deficit of approximately $7,800,000. We
will continue to fund operating and capital expenditures from proceeds that the
company received from its initial public offering ("IPO") as well as the
exercising of warrants and options. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of revenues and operating results are not necessarily meaningful and
should not be relied upon as indications of future performance.
The Company's initial marketing focus was targeted towards retailers of
age-restricted products such as alcohol and tobacco. Because of the Company's
enhanced ability to verify the validity of military ID's, driver licenses and
State issued ID cards, containing either magnetic stripes or bar codes that
conform to AAMVA/ANSI/ISO standards, the Company has refocused its marketing
efforts to address the larger market being affected by the well-publicized cost
to industry of "Identity Theft." Additionally, during 2000, it entered into a
marketing agreement with Sensormatic Electronics Corporation, the world's
leading supplier of electronic security systems. As a result of the Company's
ID-Check product having the ability to verify the encoded formats of the
documents described above, it has already sold its ID-Check unit to some of the
largest companies in the gaming industry and has begun to place test units in
some of the largest pharmacy and grocery chains and nationally known mass
merchandisers.
The foregoing contains certain forward-looking statements. Due to the fact
that the company could face intense competition in a business characterized by
rapidly changing technology and high capital requirements, actual results and
outcomes may differ materially from any such forward looking statements and, in
general are difficult to forecast.
5
(b) Results of Operations
Comparison of the three months ended March 31, 2001 to the three months
ended March 31, 2000.
Revenue on sales of our products is recognized upon shipment to the
customer. Certain sales require continuing service or post contract customer
support, and performance by us, accordingly, a portion of the revenue is
deferred and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently, if
we do not have enough experience to identify the fair value of each element, the
revenue and related gross margin is deferred and recognized ratably over the 1
year period in which the future service, support and performance are provided.
Revenues increased substantially from $30,218 for the three months ended
March 31, 2000 to $204,638 recorded for the three months ended March 31, 2001.
Revenues for the period ended March 31, 2000 included initial sales of a limited
number of ID-Check terminals prior to the early return of our inventory of these
terminals to the manufacturer for upgrading. Revenues for the period ended March
31, 2001 includes $180,984 of sales deferred during the prior 12 month period.
Sales for the period was minimal due to the recent refocus of our marketing
efforts towards the larger retail market, in which the sales cycle requires an
extended time frame involving multiple meetings, presentations and a test
period. In addition, the roll out of Sensormatic's sales and marketing
initiatives first began in April 2001.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 34% from $757,905 for the three
months ended March 31, 2000 to $1,017,242 for the three months ended March 31,
2001. Selling expenses, which consist primarily of salaries and related costs
for marketing, increased 119% from $96,099 for the three months ended March 31,
2000 to $210,200 for the three months ended March 31, 2001 primarily due to the
hiring of a director of national sales and increased travel expenses as well as
increases in advertising and marketing expenses resulting from our advertising
campaign. General and administrative expenses, which consist primarily of
salaries and related costs for general corporate functions, including executive,
accounting, facilities and fees for legal and professional services, increased
17% from $411,839 for the three months ended March 31, 2000 to $481,876 for the
three months ended March 31, 2001, primarily as a result of an increase in rent
expense as we moved to a larger facility and increased professional and legal
fees, resulting from the defense of our patent law suit. Research and
development expenses, which consist primarily of salaries and related costs for
the development of our products, increased 30% from $249,967 for the three
months ended March 31, 2000 to $325,166 for the three months ended March 31,
2001. This increase is primarily attributable to increases in salaries and
related expenses in hiring additional programmers. We believe that we will
require additional investments in development and operating infrastructure.
Therefore, we expect that expenses will continue to increase for the foreseeable
future as we may increase expenditures for advertising, brand promotion, public
relations and other marketing activities. We expect that we will incur
additional general and administrative expenses as we continue to hire personnel
and incur incremental costs related to the growth of the business. Research and
development expenses will also increase as we complete and introduce additional
products based upon our patented ID-Check technology.
Interest expense decreased from $5,414 for the three months ended March
31, 2000 to $3,560 for the three months ended March 31, 2001 as we have paid
down certain capital leases which had higher interest rates.
Interest income decreased from $85,269 for the three months ended March
31, 2000 to $55,087 for the three months ended March 31, 2001, which is a result
of a decrease in our cash and cash equivalents.
We have incurred net losses to date, therefore we have paid nominal income
taxes.
As a result of the factors noted above, our net loss increased from
$663,003 for the three months ended March 31, 2000 to $878,875 for the three
months ended March 31, 2001.
6
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective on November 18, 1999, we financed
our operations primarily through several private placements of stock and debt
financings. We used the net proceeds of these financings for the primary purpose
of funding working capital and general corporate purposes and for the purchase
of hardware terminals. As a result of our IPO and the underwriters exercise of
their over allotment option, we received approximately $6,907,000 in net
proceeds after deducting underwriters commissions and offering expenses. During
2000 and the first quarter of 2001, we received $3,426,374 and $373,875,
respectively, from the issuance of common stock from the exercise of warrants
and stock options. We funded the purchase of hardware terminals for resale and
working capital primarily from these proceeds. We will continue to use these
proceeds to fund working capital until we reach profitability.
Cash used in operating activities for the three months ended March 31,
2001 of $759,139 was primarily attributable to the net loss of $878,875 and a
net decrease in deferred revenues of $133,617, which was primarily offset by a
net increase in other current assets of $196,890 primarily consisting of the
related deferred costs of revenues. Cash used in operating activities for the
three months ended March 31, 2000 of $1,120,113 resulted primarily from the net
loss of $663,003, deposits on hardware purchases of $156,500 and a decrease in
accounts payable and accrued expenses of $305,849. Cash used in investing
activities was $15,514 for the three months ended March 31, 2001 and $26,410 for
the three months ended March 31, 2000. Net cash used in investing activities for
both periods consisted primarily of capital expenditures for computer equipment
and furniture and fixtures. Cash provided by financing activities was $362,011
for the three months ended March 31, 2001 and was primarily related to the
exercise of outstanding warrants and stock options. Cash used in financing
activities was $8,764 for the three months ended March 31, 2000 and was related
to the repayment of capital lease obligations.
As of March 31, 2001, there were warrants outstanding to purchase 363,350
shares of our common stock at an exercise price of $3.00, except for 10,000
underwriter's warrants that carry an exercise price of $8.40. If certain
conditions occur, we have the right to redeem the outstanding warrants on not
less than 20 days written notice for $0.01 per warrant, except for the
Underwriter's warrants. 319,600 of these warrants expire on September 30, 2001
and the balance of the warrants expire on various dates up to November 2004. As
of May 10, 2001, the conditions for redeeming the warrants have not been met.
In March 2001, we declared a dividend distribution of one non-transferable
right to purchase one share of our common stock for every 10 outstanding shares
of common stock continuously held from the record date to the exercise date, as
well as common stock underlying vested stock options and warrants, held of
record on March 30, 2001, at an exercise price of $8.50. The rights entitle the
holders to acquire up to approximately 970,076 shares of common stock. The
rights will expire one year after the date of an effective registration
statement relating to the shares of common stock underlying the rights. If
certain conditions occur, we have the right to redeem the outstanding rights for
$.01 per right.
In March 2001, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of the our
common stock. As of May 10, 2000, we purchased 10,000 shares totaling $53,000.
We currently anticipate that our available cash resources from the IPO and
expected revenues from the sale of the units in inventory combined with either
the exercise of outstanding warrants before expiration or the exercise of
outstanding warrants should we be able to redeem them, 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 the balance of the 7,000 terminals to run our patented software,
product development, sales and marketing, working capital requirements and other
general corporate purposes. We may need to raise additional funds, however, to
respond to business contingencies which may include the need to fund more rapid
expansion, fund additional marketing expenditures, develop new markets for our
ID-Check technology, enhance our operating infrastructure, respond to
competitive pressures, or acquire complementary businesses or necessary
technologies.
7
(d) Net Operating Loss Carry forwards
As of March 31, 2001, we had a net operating loss carry forward of
approximately $7,400,000, which expires beginning in the year 2013. The issuance
of equity securities in the future, together with our recent financings and our
IPO, could result in an ownership change and, thus could limit our use of our
prior net operating losses. If we achieve profitable operations, any significant
limitation on the utilization of our net operating losses would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of these net-operating
losses since this availability is dependent upon profitable operations, which we
have not achieved in prior periods.
Part II Other Information
Item 6. Exhibits and Reports on Form 8
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to he signed on its
behalf by the undersigned thereunto duly authorized.
Date - May 10, 2001
Intelli-Check, Inc.
(Registrant)
By: /s/ Frank Mandelbaum
-----------------------
Frank Mandelbaum
Chairman/CEO
By: /s/Edwin Winiarz
-----------------------
Edwin Winiarz
Senior Executive Vice President/CFO
8