-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O8H++cqg/nfUakUBkPkgvdQiIS3P7msUn7gRCayjrqH9syFX1wdQww0CglmaAFiW 4EM/pzq3SHdSha5UKYLHZA== 0001144204-06-033260.txt : 20060814 0001144204-06-033260.hdr.sgml : 20060814 20060814161459 ACCESSION NUMBER: 0001144204-06-033260 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLI CHECK INC CENTRAL INDEX KEY: 0001040896 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 113234779 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-50296 FILM NUMBER: 061030633 BUSINESS ADDRESS: STREET 1: 246 CROSSWAYS PARK WEST STREET 2: . CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 516-992-1900 MAIL ADDRESS: STREET 1: 246 CROSSWAYS PARK WEST STREET 2: . CITY: WOODBURY STATE: NY ZIP: 11797 10-Q 1 v049973_10q.txt 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 June 30, 2006 OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 001-15465 Intelli-Check, Inc. (Exact name of the issuer as specified in its charter) Delaware 11-3234779 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 90 days. Yes |X| No |_| 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 |_| Accelerated Filer |_| 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 |_| No |X| Number of shares outstanding of the issuer's Common Stock: Class Outstanding at August 10, 2006 ----- ------------------------------ Common Stock, $.001 par value 12,150,328 Intelli-Check, Inc. Index Page ----- Part I Financial Information Item 1. Financial Statements Balance Sheets - June 30, 2006 (Unaudited) and December 31, 2005 1 Statements of Operations for the three and six months ended June 30, 2006 and 2005 (Unaudited) 2 Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited) 3 Statements of Stockholders' Equity for the six months ended June 30, 2006 (Unaudited) 4 Notes to Financial Statements 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 Part II Other Information Item 1. Legal Proceedings 17-18 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 4. Submission of Matters to a Vote of Significant Holders 18 Item 6. Exhibits 19 Signatures 20 Exhibits 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32. 18 U.S.C. Section 1350 Certifications Intelli-Check, Inc. Balance Sheets
June 30, December 31, 2006 2005 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 356,545 $ 528,250 Marketable securities and short-term investments 4,739,134 5,263,308 Accounts receivable, net of allowance of $2,957 and $28,467, respectively 240,781 408,542 Inventory 91,038 125,981 Other current assets 587,163 419,279 ------------ ------------ Total current assets 6,014,661 6,745,360 PROPERTY AND EQUIPMENT, net 98,800 92,246 PATENT COSTS, net 33,275 36,379 OTHER ASSETS 34,916 34,916 ------------ ------------ Total assets $ 6,181,652 $ 6,908,901 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 293,601 $ 371,521 Accrued expenses 494,886 389,742 Deferred revenue 990,983 694,958 ------------ ------------ Total current liabilities 1,779,470 1,456,221 OTHER LIABILITIES 134,213 62,995 ------------ ------------ Total liabilities 1,913,683 1,519,216 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock - $.001 par value; 20,000,000 shares authorized; 12,150,328 and 12,058,240 shares issued and outstanding, respectively 12,150 12,058 Deferred compensation -- (263,460) Additional paid-in capital 45,246,472 44,748,969 Accumulated deficit (40,990,653) (39,107,882) ------------ ------------ Total stockholders' equity 4,267,969 5,389,685 ------------ ------------ Total liabilities and stockholders' equity $ 6,181,652 $ 6,908,901 ============ ============
See accompanying notes to financial statements 1 Intelli-Check, Inc. Statements of Operations (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- REVENUES $ 717,821 $ 996,967 $ 1,253,668 $ 1,293,799 COST OF REVENUES (221,827) (116,032) (402,677) (218,664) ----------- ----------- ----------- ----------- Gross profit 495,994 880,935 850,991 1,075,135 ----------- ----------- ----------- ----------- OPERATING EXPENSES Selling 415,151 306,603 795,068 627,405 General and administrative 820,752 536,386 1,538,442 1,761,491 Research and development 254,020 239,792 512,725 473,722 ----------- ----------- ----------- ----------- Total operating expenses 1,489,923 1,082,781 2,846,235 2,862,618 ----------- ----------- ----------- ----------- Loss from operations (993,929) (201,846) (1,995,244) (1,787,483) Interest income 56,200 20,003 112,473 36,037 ----------- ----------- ----------- ----------- Net loss (937,729) (181,843) (1,882,771) (1,751,446) Accretion of convertible redeemable preferred stock costs -- -- -- (160,722) Dividend on convertible redeemable preferred stock -- -- -- (36,822) ----------- ----------- ----------- ----------- Net loss attributable to common stockholders $ (937,729) $ (181,843) $(1,882,771) $(1,948,990) =========== =========== =========== =========== PER SHARE INFORMATION Net loss per common share - Basic and diluted $ (.08) $ (.02) $ (.16) $ (.18) =========== =========== =========== =========== Weighted average common shares used in computing per share amounts - Basic and diluted 12,143,392 10,765,064 12,116,090 10,621,407 =========== =========== =========== ===========
See accompanying notes to financial statements 2 Intelli-Check, Inc. Statements of Cash Flows (Unaudited)
Six Months Six Months Ended Ended June 30, June 30, 2006 2005 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,882,771) $(1,751,446) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 15,810 28,362 Noncash stock based compensation expense 411,356 220,250 Amortization of deferred compensation 129,756 70,931 Recovery of amortization of deferred compensation (53,317) -- Changes in assets and liabilities: Decrease (increase) in accounts receivable 167,761 (586,383) Decrease in inventory 34,943 115,529 (Increase) in other current assets (167,884) (17,708) Increase in accounts payable and accrued expenses 27,224 20,888 Increase in deferred revenue 296,025 171,435 Increase in other liabilities -- 71,218 ----------- ----------- Net cash used in operating activities (949,879) (1,728,142) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in marketable securities and short term investments (3,347,911) (100,000) Sales of marketable securities and short term investments 3,872,085 2,708,796 Purchases of property and equipment (19,260) (10,459) ----------- ----------- Net cash provided by investing activities 504,914 2,598,337 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 273,260 129,700 Payment of deferred financing costs -- (109,695) Payment of dividend to preferred stockholder -- (97,315) ----------- ----------- Net cash provided by (used in) financing activities 273,260 (77,310) ----------- ----------- (Decrease) increase in cash and cash equivalents (171,705) 792,885 CASH AND CASH EQUIVALENTS, beginning of period 528,250 1,750,485 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 356,545 $ 2,543,370 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Conversion of convertible redeemable preferred stock into Common Stock $ -- $ 3,000,000 =========== =========== Accretion of convertible redeemable preferred stock cost $ -- $ 160,722 =========== =========== Stock options issued for services rendered $ 16,006 $ 84,774 =========== ===========
See accompanying notes to financial statements 3 Intelli-Check, Inc. Statement of Stockholders' Equity For the Six Months Ended June 30, 2006 (Unaudited)
Common Stock Additional -------------------- Paid-in Deferred Accumulated Shares Amount Capital Compensation Deficit Total ---------- ------- ----------- ------------ ------------ ----------- BALANCE, January 1, 2006 12,058,240 $12,058 $44,748,969 $(263,460) $(39,107,882) $ 5,389,685 Stock based compensation expense -- -- 361,000 -- -- 361,000 Exercise of options 83,000 83 273,177 -- -- 273,260 Issuance of stock from cashless exercise of stock options 6,204 6 (6) -- -- -- Issuance of stock as director's compensation 2,884 3 16,003 16,006 Extension of options -- -- 34,350 -- -- 34,350 Surrender of stock options previously granted and recorded as deferred compensation -- -- (82,812) 82,812 -- -- Recovery of amortization of deferred compensation on surrender of stock options -- -- (53,317) -- -- (53,317) Amortization of deferred compensation -- -- -- 129,756 -- 129,756 Transition adjustment - FASB 123 (R) -- -- (50,892) 50,892 -- -- Net loss -- -- -- -- (1,882,771) (1,882,771) ---------- ------- ----------- --------- ------------ ----------- BALANCE, June 30, 2006 12,150,328 $12,150 $45,246,472 $ -- $(40,990,653) $ 4,267,969 ========== ======= =========== ========= ============ ===========
See accompanying notes to financial statements 4 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 June 30, 2006 and the results of its operations for the six and three months ended June 30, 2006 and 2005, stockholders' equity for the six months ended June 30, 2006 and cash flows for the six months ended June 30, 2006 and 2005. 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 six month period ended June 30, 2006 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2006. The balance sheet as of December 31, 2005 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. 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, 2005. 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 necessary technologies. 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 inventory reserves, deferred tax valuation allowances and doubtful accounts and allowances. 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 June 30, 2006 and December 31, 2005, cash equivalents included money market funds, commercial paper and other liquid short-term debt instruments (with maturities at date of purchase of three months or less) of $314,395 and $467,991, respectively. 5 Marketable Securities and Short Term Investments The Company has classified its marketable securities as held-to-maturity because the Company has the intent and ability to hold these securities to maturity. The securities are carried at amortized cost using the specific identification method. 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 1 year with a weighted average interest rate of 4.46%. The carrying value of the marketable securities as of June 30, 2006 approximated their fair market value. Doubtful Accounts and Allowances The Company records its doubtful accounts and allowances 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 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, 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 the licensing of our 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. Inventory Valuation Our current inventory consists primarily of our ID-Check terminals purchased in 1999 that run our patented software and input devices purchased in 2006. We periodically evaluate the current market value of our inventory, taking into account any technological obsolescence that may occur due to changes in hardware technology and the acceptance of the product in the marketplace. We had previously written off the total value of the ID-Check terminals. The ID-Check terminal is fully capable of running our patented software as it utilizes a high quality imager/scanner and magnetic stripe reader and was being marketed for sale through June 30, 2006. During the six months ended June 30, 2006, we sold a portion of the ID-Check terminals we held in inventory in excess of their remaining value and recorded a recovery of inventory totaling approximately $33,000. Business Concentrations and Credit Risk The Company recorded revenues for two of its customers which accounted for approximately 43% of total revenues for the six months ended June 30, 2006. As a result, the balance due from these customers was 24% of accounts receivable as of June 30, 2006, of which 39.1% of the amount due was collected as of August 7, 2006. During the second quarter ended June 30, 2005, the Company made a large credit sale to one customer that accounted for approximately 54.1% and 70.2%, respectively of total revenues for the six month and three month periods ended June 30, 2005. 6 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 #25, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. SFAS 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 adopted SFAS No. 123(R) using a modified prospective application, as permitted under SFAS No. 123(R). Accordingly, prior period amounts have not been restated. 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. Prior to the Company's adoption of SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net loss attributable to common stockholders and net loss per common share as if compensation cost for the Company's stock based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure portion of SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure," requiring quarterly SFAS No. 123 pro forma disclosure. The pro forma charge for compensation cost related to stock based awards granted was recognized over the service period. For stock options, the service period represents the period of time between the date of grant and the date each option becomes exercisable without consideration of acceleration provisions (e.g., retirement, change of control, etc.). The following table illustrates the effect on net loss per common share as if the fair value method had been applied to all outstanding awards for the three and six months ended June 30, 2005.
Three months ended Six months ended ------------------ ---------------- June 30, 2005 June 30, 2005 ------------- ------------- Net loss attributable to common stockholders, as reported ($181,843) ($1,948,990) Add: Total stock based employee compensation expense determined under fair value based method for all awards 706,849 1,086,744 --------- ----------- Net loss, pro forma ($888,692) ($3,035,734) Basic and diluted loss per share, as reported ($0.02) ($0.18) Basic and diluted loss per share, pro forma ($0.08) ($0.29)
The fair value of the Company's stock-based awards issued to employees prior to 2006 was estimated at the date of grant using the Black-Scholes method, assuming no dividends and using an expected life of 5 to 10 years, volatility of 60% to 90%, and a risk free rate of 2.0% to 5.0%. The fair value of the Company's stock-based awards issued to employees in the first and second quarters of 2006 was estimated at the date of grant using the Black-Scholes method, assuming no dividends and using an expected life of 5 to 10 years, volatility of 50% to 74% and a risk free rate of 4.2% to 5.3%. Beginning with our 2006 fiscal year, with the adoption of SFAS 123(R), we included stock based compensation in operating expenses for the cost of stock options. Stock based compensation expense for the three months and six months ended June 30, 2006 was $241,000 and $361,000, respectfully. 7 Under SFAS No. 123(R) the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. 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) 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 15% 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. Stock option activity under the 1998, 1999, 2001, 2003 and 2006 Plans during the periods indicated below is as follows: Number Of Options(1) Weighted Average Exercise Price -------------------- ---------------- Outstanding at January 1, 2006 2,764,955 $6.77 Granted 115,550 5.94 Canceled (149,500) 8.88 Exercised (108,000) 3.22 --------- ---- Outstanding at June 30, 2006 2,623,005 $6.76 ========= ===== (1)Included in the table are 839,425 non-plan options, of which all options are fully vested. The weighted-average remaining life of the options outstanding at June 30, 2006 is 3.21 years. The weighted-average grant-date fair value of the options granted during the six month period ended June 30, 2006 was $3.16. As of June 30, 2006, the Company had 2,443,055 options exercisable with a weighted average exercise price of $6.76. As of June 30, 2006, the Company had 732,311 options available for future grant under the 1998, 1999, 2001, 2003 and 2006 Plans. 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. 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. 8 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 June 30, 2006 and 2005 had been converted: 2006 2005 --------- --------- Stock options 2,623,005 2,990,149 Warrants 938,636 328,061 --------- --------- Total 3,561,641 3,318,210 --------- --------- Note 3. Investment Firm Relationship On April 6, 2006, the Company entered into a non-exclusive agreement with an investment banking firm to act as a consultant in advising the Company in various financial and investment related matters. The Company agreed to pay an upfront fee of $25,000 and all future fees will be based upon the successful consummation of a transaction. Note 4. Employment Agreement Effective January 1, 2006, the Company entered into a letter of understanding with its Chairman and Chief Executive Officer, Mr. Mandelbaum, which provides for an annual base salary of $256,804. In addition, on November 8, 2005, the Company granted to Mr. Mandelbaum an option to purchase 25,000 shares of common stock at an exercise price of $3.22 per share. The Company also agreed that if it were to terminate Mr. Mandelbaum for any reason other than cause, the Company would pay Mr. Mandelbaum two (2) years of cash base salary in twelve (12) equal monthly installments. Note 5. Legal Proceedings On August 1, 2003, the Company filed a summons and complaint against Tricom Card Technologies, Inc. alleging infringement on its patent and seeking injunctive and monetary relief. On October 23, 2003, the Company amended its complaint to include infringement on an additional patent. On May 18, 2004, the Company 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 the request of the Company to discuss the Company's proposed motion to disqualify defendants' counsel for a conflict of interest. Pursuant to the Court's order, the Company served moving papers upon defendants on July 14, 2006 and defendants served opposition to the motion on around July 28, 2006. The Company 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 the Company's opposition to defendants' motion and defendants' reply to the opposition. 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 would have a material adverse effect on our business. 9 Note 6. Stock Options During January 2006, the Company's Board of Directors approved the cashless exercise of 25,000 options which were converted into 6,204 shares of its common stock for the Company's Chairman and CEO. As a result, the Company recorded the transaction as an adjustment to paid-in capital in accordance with SFAS 123(R). On March 24, 2006, the board of directors extended the expiration date of 56,500 stock options for one of our directors originally due to expire May 14, 2006 until February 13, 2007. As a result, we recorded the incremental value of the extension of $34,350 as a non cash expense during the first quarter ended March 31, 2006, which was calculated in accordance with SFAS 123(R). In March 2006, one of our consultants returned and cancelled a stock option agreement which the Company issued in February 2002 that granted options to purchase 50,000 shares of common stock at an exercise price of $12.10. The remaining unamortized balance in deferred compensation of $82,812 was reversed and offset against additional paid in capital and amortization expense of $53,317 recorded through December 31, 2005 was recognized as income in the first quarter of 2006. Note 7. 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, 2006, the Board of Directors authorized extending these rights, which were due to expire on June 30, 2006 to June 30, 2007. 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, state issued non-driver and military identification cards used as proof of identity. Our patented ID-Check(R) software technology instantly reads, analyzes, and verifies the encoded data in magnetic stripes and barcodes on government-issue IDs from approximately 60 jurisdictions in the U.S. and Canada to determine if the content and 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. After the tragic events that occurred on September 11, 2001, 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. We, therefore, have also begun to market to various government and state agencies, which have long sales cycles, including extended test periods. Since inception, we have incurred significant losses and negative cash flow from operating activities and, as of June 30, 2006, we had an accumulated deficit of approximately $41 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 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. Our ID-Check's patented technology provides the ability to verify the validity of military ID's, driver licenses and state issued non-driver ID cards that contain magnetic stripes, bar codes and SMART chips that in most instances conform to AAMVA/ANSI/ISO standards, 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, a significant retailer, several large financial service companies, Certegy, 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 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, and Northrop Grumman and General Dynamics (formally Anteon), integrators in the defense industry, Intermec Technologies 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. 10 We have developed additional software products that utilize our patented software technology. Our latest products include ID-Check(R) POS, ID-Check(R) BHO, ID-Traveler and ID-Prove. ID-Check(R) POS is the technology that has been integrated into the Verifone 37XX to enable the user to do verification of a driver license as an additional function of the terminal. ID-Check(R) BHO is a browser helper object that enables a customer to add intelligence to any browser-based form and deploy the ID-Check(TM) technology as a "plug-in," to Internet Explorer(TM) pages without requiring software programming expertise. ID Traveler electronically verifies and matches two forms of government issued ID's instantaneously while the ID Prove product offering provides "out of wallet" questions to assist in proving a user's claimed identity. Additional software solutions include ID-Check(R) PC and ID-Check(R) PDA, which replicate the features of ID-Check. These products are designed to be platform-independent and compatible with both stationary and mobile hardware applications. Another application is an enhanced version of C-Link(R), the company's networkable data management software. Additionally, ID-Check(R) PC and the most recent release of C-Link are designed to read the smart chip contained on the military Common Access Card (CAC). These products are all designed for use with Intelli-Check's new data capture devices, which are compact, and contain either both or one of two-dimensional bar code and magnetic stripe readers. The devices enable the new software applications to be used on a variety of commercially available data processing devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale Computers, therefore negating the need to replace the ID-Check terminal. Our C-Link(R) software product, which runs on a personal computer and was created to work in conjunction with the ID-Check technology allows a user to instantly first analyze the data, then view the encoded data for further verification and to generate various reports where permitted by law. We introduced a new product, ID-Mobile, which 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 inventory reserves, deferred tax valuation allowances and doubtful accounts and allowances. 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, valuation of inventory, stock based compensation, deferred taxes and commitments and contingencies. These policies and our procedures related to these policies are described in detail below. 11 A. Revenue Recognition 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. B. Inventory Valuation Our current inventory consists primarily of our ID-Check terminals purchased in 1999 that run our patented software and input devices purchased in 2006. We periodically evaluate the current market value of our inventory, taking into account any technological obsolescence that may occur due to changes in hardware technology and the acceptance of the product in the marketplace. We had previously written off the total value of the ID-Check terminals. The ID-Check terminal is fully capable of running our patented software as it utilizes a high quality imager/scanner and magnetic stripe reader and is being marketed for sale until June 30, 2006. During the six months ended June 30, 2006, we sold a portion of the ID-Check terminals we held in inventory in excess of their remaining value and recorded a recovery of inventory totaling approximately $33,000. C. Stock-Based Compensation On January 1, 2006, we adopted SFAS 123(R). We adopted SFAS 123(R) using a modified prospective application, as permitted under SFAS 123(R). Accordingly, prior period amounts have not been restated. 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(R) requires that the cost resulting from all share based payment transactions be recognized in the financial statements. SFAS 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. D. 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 June 30, 2006, due to the uncertainty of the realizability of those assets. 12 E. Commitments and Contingencies We are currently involved in certain legal proceedings as discussed in footnote 5, above. Other than as described in footnote 5 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 six months ended June 30, 2006 to the six months ended June 30, 2005. Revenues decreased by 3.1%, or $40,131, from $1,293,799 for the six months ended June 30, 2005 to $1,253,668 for the six months ended June 30, 2006. Revenues for the period ended June 30, 2006 consisted of revenues from distributors of $666,835, revenues from direct sales to customers of $572,024 and royalty payments of $14,809. Sales bookings, which represent shipments of products and contracted services, increased by 4.6% from $1,516,871 for the six months ended June 30, 2005 to $1,587,130 for the six months ended June 30, 2006. We are optimistic that sales opportunities should continue to increase as a result of our recent successes in the retail market, the positive results of certain of our recent marketing tests and agreements and our introduction of additional products in 2005 and 2006, as well as legislative efforts to improve identity management and security and control sales of age restricted products. 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. As of June 30, 2006 we have a backlog, which represents non-cancelable sales orders for products and services not yet shipped or performed, as the case may be, of approximately $835,000. Gross profit decreased by 20.8%, or $224,144, from $1,075,135 for the six months ended June 30, 2005 to $850,991 for the six months ended June 30, 2006. Our gross profit as a percentage of revenues amounted to 67.9% for the six months ended June 30, 2006 compared to 83.1% for the six months ended June 30, 2005. In 2005, the gross profit percentage was favorably impacted as a result of a large "software only" sale to a significant retailer, which typically has higher margins than equipment or bundled sales. Even though we did not have a large "software only" sale in 2006, our gross profit percentage was still generally favorable relative to prior periods resulting from a higher revenue mix of our licensing products over our bundled sales of hardware and software products which have a lower gross profit percentage Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased 1% from $2,862,618 for the six months ended June 30, 2005 to $2,846,235 for the six months ended June 30, 2006. Selling expenses, which consist primarily of salaries and related costs for marketing, increased 26.7% from $627,405 for the six months ended June 30, 2005 to $795,068 for the six months ended June 30, 2006 primarily due to an increase in salaries, commissions, travel expense and employee costs of approximately $98,000 and an increase in non cash expenses from the granting of stock options totaling approximately $70,000. 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 12.7% from $1,761,491 for the six months ended June 30, 2005 to $1,538,442 for the six months ended June 30, 2006, primarily as a result of a decrease in expenses relating to investor relations fees of approximately $50,000, a decrease in legal fees of approximately $296,000 relating to decreased activity on our patent infringement litigation, a decrease in rent expense of approximately $25,000 due to the reduction in rented space and a recovery of bad debts of approximately $17,000, which were partially offset by increases in employee costs and related expenses and travel of approximately $41,000, an increase in non-cash expenses from the granting of stock options totaling approximately $80,000 and an increase in board of directors fees and expenses of approximately $16,000. Research and development expenses, which consist primarily of salaries and related costs for the development of our products, increased 8.2% from $473,722 for the six months ended June 30, 2005 to $512,725 for the six months ended June 30, 2006, primarily as a result of increases in employee salaries and related expenses of approximately $70,000, which were partially offset by an decrease in consulting expenses for product development of approximately $26,000. As the Company experiences sales growth, we expect that we will incur additional operating expenses to support this growth. Research and development expenses may increase as we integrate additional products and technologies with our patented ID-Check technology. 13 Interest income increased from $36,037 for the six months ended June 30, 2005 to $112,473 for the six months ended June 30, 2006, which is a result of an increase in our cash and cash equivalents, marketable securities and short term investments available for investment from the completion of our private placement in August 2005, as well as higher interest rates from investments during 2006. 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 for the six months ended June 30, 2006 of $1,882,771, which included $503,605 of non-cash expenses, increased from $1,751,446, which included $319,543 of non-cash expenses for the six months ended June 30, 2005. Comparison of the three months ended June 30, 2006 to the three months ended June 30, 2005. Revenues decreased by 28%, or $279,146, from $996,967 for the three months ended June 30, 2005 to $717,821 for the three months ended June 30, 2006. Revenues for the period ended June 30, 2006 consisted of revenues from distributors of $372,471, revenues from direct sales to customers of $338,617 and royalty payments of $6,733. Sales bookings, which represent shipments of products and contracted services, decreased by 25.7% from $1,145,211 for the three months ended June 30, 2005 to $850,699 for the three months ended June 30, 2006. Revenues and sales bookings decreases for the 2006 period as compared to those reported for the 2005 period resulted from the fact that a large direct software only sale to a significant retailer was made during the second quarter of 2005. Revenues and sales bookings for the 2006 period were in line with the mix of sales for periods prior to 2005 and therefore, we deferred more of the sales bookings for the 2006 period as compared to 2005, which will be recognized in future periods in accordance with our revenue recognition policy. We are optimistic that sales opportunities should continue to increase as a result of our recent successes in the retail market, the positive results of certain of our recent marketing tests and new opportunities that have developed as a result of new agreements, as well as our introduction of additional products in 2005 and 2006, together with legislative efforts to improve identity management and security and control sales of age restricted products to under-age purchasers. 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. Gross profit decreased by 43.7%, or $384,941, from $880,935 for the three months ended June 30, 2005 to $495,994 for the three months ended June 30, 2006. Our gross profit as a percentage of revenues amounted to 69.1% for the three months ended June 30, 2006 compared to 88.4% for the three months ended June 30, 2005. In 2005, the gross profit percentage was favorably impacted as a result of a large software only sale to a significant retailer. Even though we did not have a large software sale in 2006, our gross profit percentage was generally favorable relative to prior periods resulting from a higher revenue mix of our licensing products over our bundled sales of hardware and software products which have a lower gross profit percentage. Operating expenses, which consist of selling, general and administrative and research and development expenses, increased 37.6% from $1,082,781 for the three months ended June 30, 2005 to $1,489,923 for the three months ended June 30, 2006. Selling expenses, which consist primarily of salaries and related costs for marketing, increased 35.4% from $306,603 for the three months ended June 30, 2005 to $415,151 for the three months ended June 30, 2006 primarily due to an increase in salaries, commissions and employee costs of approximately $28,000 and an increase in non cash expenses from the granting of stock options totaling approximately $90,000. General and administrative expenses, which consist primarily of salaries and related costs for general corporate functions, including executive, accounting, facilities and fees for legal and professional services increased 53.0% from $536,386 for the three months ended June 30, 2005 to $820,752 for the three months ended June 30, 2006, primarily as a result of an increase in non-cash expenses from the granting of stock options totaling approximately $103,000, an increase in legal fees of approximately $203,000 relating to our patent infringement litigation, which were partially offset by a decrease in investor relations expenses of approximately $26,000 and a reduction in rent expense of approximately $13,000. Research and development expenses, which consist primarily of salaries and related costs for the development and testing of our products, increased 5.9% from $239,792 for the three months ended June 30, 2005 to $254,020 for the three months ended June 30, 2006, primarily as a result of increases in salaries and related expenses of approximately $17,000. As the Company experiences sales growth, we expect that we will incur additional operating expenses to support this growth. Research and development expenses may increase as we integrate additional products and technologies with our patented ID-Check technology. 14 Interest income increased from $20,003 for the three months ended June 30, 2005 to $56,200 for the three months ended June 30, 2006, which is a result of an increase in our cash and cash equivalents, marketable securities and short term investments available for investment from the completion of our private placement in August 2005, as well as higher interest rates from investments during 2006. We have incurred net losses to date; therefore, we have paid nominal taxes. As a result of the factors noted above, our net loss for the three months ended June 30, 2006 of $937,729, which included $263,765 of non-cash expenses, increased from $181,843, which included $73,141 of non-cash expenses, for the three months ended June 30, 2005. (c) Liquidity and Capital Resources Cash used in operating activities for the six months ended June 30, 2006 of $949,879 resulted primarily from the net loss of $1,882,771 and the increase of other current assets of $167,884 consisting of deferred cost of revenues, which was offset by an increase of deferred revenue of $296,025, a decrease of accounts receivable of $167,761, recognition of noncash stock based compensation expense resulting primarily from the granting and exercise of stock options of $411,356, and amortization of deferred compensation of $129,756. Cash used in operating activities for the six months ended June 30, 2005 of $1,728,142 resulted primarily from the net loss of $1,751,446 and an increase in accounts receivable of $586,383 resulting from a large sale in the second quarter of 2005, which was primarily offset by recognition of noncash stock based compensation expense resulting from the extension and exercise of stock options of $220,250 and an increase in deferred revenue of $171,435. Cash provided by investing activities for the six months ended June 30, 2006 of $504,914 resulted primarily from net sales exceeding purchases of marketable securities and short term investments of $524,174. Cash provided by investing activities for the six months ended June 30, 2005 of $2,598,337 resulted primarily from the sale of marketable securities and short term investments of $2,708,796. Cash provided by financing activities was $273,260 for the six months ended June 30, 2006 and resulted from the proceeds of $273,260 from the issuance of common stock from the exercise of stock options. Cash used in financing activities was $77,310 for the six months ended June 30, 2005 and was primarily related to proceeds of $129,700 from the issuance of common stock from the exercise of stock options, which was partially offset by the payment of deferred financing costs of $109,695 and the dividend payment of $97,315 to a preferred shareholder. 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 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 expiration date of the rights of June 30, 2006 has been extended until June 30, 2007. We have the right to redeem the outstanding rights for $.01 per right under certain conditions, which were not met as of August 10, 2006. 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 six months ended June 30, 2006. 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 June 30, 2006, we cumulatively purchased 40,200 shares totaling approximately $222,000 and subsequently retired these shares. None of these shares were purchased during 2006. We may purchase additional shares when warranted by certain conditions. 15 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 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, 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. (d) Net Operating Loss Carry forwards As of June 30, 2006 the Company had net operating loss carry forwards (NOL's) for federal income tax purposes of approximately $32.5 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 which expires beginning in the year 2013 if not utilized. Under Section 382 of the Internal Revenue Code, these NOL's may be limited in the event of an ownership change. Contractual Obligations Below is a table, which presents our contractual obligations and commitments at June 30, 2006: Payments Due by Period
Less than Total One Year 1-3 years 4-5 years After 5 years ---------- --------- --------- --------- ------------- Operating Leases $1,031,910 $ 204,389 $ 431,446 $ 396,075 -- Consulting Contracts 36,000 36,000 -- -- -- Employment contracts 81,042 81,042 -- -- -- ---------- --------- --------- --------- --- Total Contractual Cash Obligation $1,148,952 $ 321,431 $ 431,446 $ 396,075 $-- ---------- --------- --------- --------- ---
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 The foregoing contains certain forward-looking statements. Due to the fact that our business is characterized by rapidly changing technology, high capital requirements and an influx of new companies trying to respond to enhanced security needs as a result of current events, actual results and outcomes may differ materially from any such forward looking statements and, in general, are difficult to forecast. Non-GAAP Financial Measures This 10-Q contains disclosure of our "sales bookings" for certain periods, which may be deemed to be a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. We believe that discussion of our sales bookings provides investors with additional information regarding revenues it has received in respect of products and services that have been shipped to a customer, but which are required to be deferred for a period of less than one year under applicable principles of GAAP. The disclosure of "sales bookings" may not be comparable to similarly titled measures reported by other companies. "Sales bookings," while providing useful information, should not be considered in isolation or as an alternative to other financial measures determined in accordance with GAAP. 16 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, and (ii) to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Under the supervision and with the participation of our management, including our 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 Chief Executive and Chief Financial Officer have concluded that these procedures are effective. Additionally, there were no changes in our internal controls over financial reporting that materially affected or are reasonably likely to materially affect these controls subsequent to the end of the period covered by this report. We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), 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. This report will also contain a statement that our independent registered public accountants have issued an attestation report on management's assessment of such internal controls and conclusion on the operating effectiveness of those controls. 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 are currently performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. We believe our process, which began in 2005 and continues in 2006 for documenting, evaluating and monitoring our internal control over financial reporting is consistent with the objectives of Section 404 of the Act. Part II Other Information Item 1. 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. The Court has not scheduled a hearing date for either motion and there is no trial date pending. 17 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. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In June 2006, we issued 2,884 shares of our restricted common stock to two directors pursuant to our 2006 Equity Incentive Plan. The market price of the shares issued was equal to $16,006 on the date of grant, based on the closing sale price of such common stock on the American Stock Exchange, and were issued in lieu of annual fees for each such director. We did not receive any cash in connection with the grant. We issued the foregoing securities in reliance on Section 4(2) of the Securities Act, based on the identity and number of persons. Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held June 16, 2006. A proposal to elect one (1) director to serve for a three-year term was approved by the stockholders. The nominee received the following votes: Name Votes For Votes Withheld - --------- ---------- -------------- Jeff Levy 10,883,709 234,947 The following persons continued in their positions as our directors: Frank Mandelbaum, Ed Winiarz, Arthur Money, Guy Smith, Ashok Rao, and Jay Maxwell. Our stockholders ratified the appointment of Amper, Politziner & Mattia, P.C. as the Company's independent public accountants for the year ended December 31, 2006. This proposal received the following votes: For Against Abstain - ---------- ------- ------- 11,085,094 33,562 0 Our stockholders ratified and approved our 2006 Equity Incentive Plan, amending our 2004 Stock Option Plan. This proposal received the following votes: For Against Abstain Not Voted - ---------- ------- ------- --------- 3,748,706 641,989 4,001 6,723,960 18 Item 6. Exhibits (a) The following exhibits are filed as part of the Quarterly Report on Form 10-Q: Exhibit No. Description - ----------- ----------- 10.1* 2006 Equity Incentive Plan 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 * Incorporated by reference to Exhibit C to Intelli-Check's Proxy Statement filed with the SEC on May 19, 2006 19 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date - August 14, 2006 Intelli-Check, Inc. (Registrant) By: /s/ Frank Mandelbaum --------------------------------- Frank Mandelbaum Chairman/CEO By: /s/ Edwin Winiarz --------------------------------- Edwin Winiarz Senior Executive Vice President, Treasurer/CFO 20 EX-31.1 2 v049973_ex31-1.txt Exhibit 31.1 Certification Pursuant to Rule 13a-14(a) of the Exchange Act I, Frank Mandelbaum, certify that: 1. I have reviewed this Form 10-Q of Intelli-Check, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/ Frank Mandelbaum --------------------------------- Name: Frank Mandelbaum Title: Chief Executive Officer EX-31.2 3 v049973_ex31-2.txt Exhibit 31.2 Certification Pursuant to Rule 13a-14(a) of the Exchange Act I, Edwin Winiarz, certify that: 1. I have reviewed this Form 10-Q of Intelli-Check, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/ Edwin Winiarz ---------------------------------- Name: Edwin Winiarz Title: Chief Financial Officer EX-32 4 v049973_ex32.txt Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350 Pursuant to U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Intelli-Check, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2006 /s/ Frank Mandelbaum ---------------------------------- Name: Frank Mandelbaum Title: Chief Executive Officer Dated: August 14, 2006 /s/ Edwin Winiarz ---------------------------------- Name: Edwin Winiarz Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Intelli-Check, Inc. and will be retained by Intelli-Check, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----