| INTELLI CHECK INC Item 1A Risk Factors RISK FACTORS Risks Related to Our Business and Industry We have incurred losses since inception and losses may continue, which could result in a decline in the value of our securities and a loss of your investment |
| We sustained net losses of dlra6cmam922cmam931 and dlra3cmam238cmam959 for the fiscal years ended December 31, 2004 and December 31, 2005, respectively |
| Since we expect to incur additional expenditures in line with the sales growth of our business, we cannot assure you that we will achieve operating profits in the near future |
| We may be unable to meet our future capital requirements |
| Our capital requirements have been and will continue to be significant |
| In the event that we do not generate meaningful revenue, we would need to raise additional capital |
| If we are unable to raise additional capital, we plan to implement cost saving measures to sustain business activities on a reduced level |
| Unplanned acquisition and development opportunities and other contingencies may arise, which could require us to raise additional capital |
| If we raise additional capital through the sale of equity, including preferred stock, or convertible debt securities, the percentage ownership of our then existing stockholders will be diluted |
| We currently do not have a credit facility or any commitments for additional financing |
| We cannot be certain that additional financing, should it be needed, will be available when and to the extent required |
| If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, develop or enhance our products, or respond to competitive pressures |
| Such limitation could have a material adverse effect on our business, financial condition and results of operations |
| 11 We may not be able to keep up with rapid technological change |
| Our market is characterized by frequent new product announcements and rapid advancements in hardware technology |
| Significant technological change could render our existing technology obsolete |
| If we are unable to successfully respond to these developments, or do not respond in a cost-effective way, our business, financial condition and results of operations will be materially adversely affected |
| Our proprietary software relies on reference data provided by government and quasi-government agencies |
| If these governmental and quasi-government agencies were to stop sharing data with us, the utility of our proprietary software would be diminished in those jurisdictions and our business would be damaged |
| Currently, fifty (50) states, eight (8) Canadian provinces and the District of Columbia, which conform to the guidelines established by certain organizations responsible for implementing industry standards, cooperate with us by providing sample identification cards so that we may modify all of our hardware and software products to read and analyze the encoded information found on such jurisdictionapstas identification cards |
| We cannot assure you that each of these jurisdictions will continue to cooperate with us |
| In the event that one or more of these jurisdictions do not continue to provide this reference data, the utility of our proprietary software may be diminished in those jurisdictions |
| Future government regulation restricting the capture of information electronically stored on identification cards could adversely affect our business |
| Our proprietary software products are designed to read, verify and capture information from identification cards |
| Currently, those customers located in Nebraska, New Hampshire, North Carolina and Texas have some restrictions on what can be done with this information without customer consent |
| Because issues of personal privacy continue to be a major topic of public policy debate, it is possible that in the future additional customers in these and other jurisdictions may be restricted from capturing this information |
| Therefore, the implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and reduce our revenues and potential revenues |
| Our business strategy exposes us to long sales and implementation cycles for our products |
| Our target customers in the commercial fraud protection, access control and age verification markets include large retailers and government agencies, which typically require longer sales and implementation cycles for our products than do our potential customer base solely interested in age verification, such as restaurant, bar and convenience store operators |
| The longer sales and implementation cycles for larger retail companies continue to have an adverse impact on the timing of realizing our revenues |
| In addition, budgetary constraints and potential economic slowdowns may also continue to delay purchasing decisions by these prospective customers |
| These initiatives have costs associated with them, and we cannot assure you that they ultimately will prove successful or result in, an increase to, our revenues or profitability |
| In addition, the loss or significant reduction in government spending by government entities could materially limit our ability to obtain government contracts |
| These limitations, if significant, could also have a material adverse effect on our business, financial condition and results of operations |
| In addition, we will need to develop additional strategic relationships with large government contractors in order to successfully compete for government contracts |
| Should we lose or fail to develop these strategic relationships we may not be able to implement our business strategy |
| Demand and market acceptance for recently introduced and existing systems and software and sales from such systems and software, are subject to a high level of uncertainty and risk |
| Our business may suffer if the market develops more slowly than anticipated and does not sustain market acceptance |
| 12 Failure to manage our operations if they expand could impair our future growth |
| If we are able to expand our operations, particularly through multiple sales to large retailers and government agencies in the document verification market, the expansion will place significant strain on our management, financial controls, operating systems, personnel and other resources |
| Our ability to manage future growth, should it occur, will depend to a large extent upon several factors, including our ability to do the following: o build and train our sales force; o establish and maintain relationships with distributors; o develop customer support systems; o develop expanded internal management and financial controls adequate to keep pace with growth in personnel and sales, if they occur; and o manage the use of third-party manufacturers and suppliers |
| If we are able to grow our business but do not manage our growth successfully, we may experience increased operating expenses, loss of customers, distributors or suppliers and declining or slowed growth of revenues |
| We are subject to risks associated with product failure and technological flaws |
| Products as complex as those offered by us may contain undetected errors or result in failures when first introduced or when new versions are released |
| Despite vigorous product testing efforts and testing by current and potential customers, it is possible that errors will be found in a new product or enhancement after commencement of commercial shipments |
| The occurrence of product defects or errors could result in adverse publicity, delay in product introduction, diversion of resources to remedy defects, loss of, or a delay in market acceptance, claims by customers against us, or could cause us to incur additional costs, any of which could adversely affect our business |
| Our failure to protect our proprietary technology may impair our competitive position |
| We continue to allocate significant resources to develop new and innovative technologies which we utilize in our products and systems |
| We consider such allocation to be fundamental to our continued success as such success depends, to a significant degree, upon our ability to provide products and systems that provide superior functionality and performance compared to those of our competitors |
| Accordingly, we must protect our technology from unauthorized use |
| This is done by processes aimed at identifying and seeking appropriate protection for newly developed intellectual property, ie, patents, trade secrets, copyrights and trademarks, as well as policies aimed at identifying unauthorized use of such property in the marketplace |
| These processes include: o contractual arrangements providing for non-disclosure of proprietary information; o maintaining and enforcing issued patents and filing patent applications on innovative solutions to commercially important problems; o protecting our trade secrets; o protecting our copyrights and trademarks by registration and other appropriate means, o establishing internal processes for identifying and appropriately protecting new and innovative technologies; and o establishing practices for identifying unauthorized use of our intellectual property |
| While we actively protect our intellectual property, it does not follow that others will not intentionally or innocently use such intellectual property |
| Accordingly, at times we may be required to bring legal proceedings to preclude such unauthorized use |
| We are mindful that such measures can be costly and time consuming and undertake such measures only as a last resort |
| These policies and practices with respect to our intellectual property rights do not prevent our competitors from independently developing products similar or superior to our products and technologies |
| It merely protects our property rights created as a result of our allocating significant portions of our technical and monetary resources |
| 13 If our future products incorporate technologies that infringe the proprietary rights of third parties, and we do not secure licenses from them, we could be liable for substantial damages |
| We are not aware that our current products infringe the intellectual property rights of any third parties |
| We also are not aware of any third party intellectual property rights that may hamper our ability to provide future products and services |
| However, we recognize that the development of our services or products may require that we acquire intellectual property licenses from third parties so as to avoid infringement of those parties &apos intellectual property rights |
| These licenses may not be available at all or may only be available on terms that are not commercially reasonable |
| If third parties make infringement claims against us which, whether or not they are upheld, such claims could: o consume substantial time and financial resources; o divert the attention of management from growing our business and managing operations; and o disrupt product sales and shipments |
| If any third party prevails in an action against us for infringement of its proprietary rights, we could be required to pay damages and either enter into costly licensing arrangements or redesign our products so as to exclude any infringing use |
| As a result, we would incur substantial costs, delays in product development, sales and shipments, our revenues may decline substantially and we may not be able to achieve the minimum, necessary growth for our continued success |
| Failure to attract and retain management and other personnel may damage our operations and financial results and cause our stock price to decline |
| We depend to a significant degree on the skills, experience and efforts of our executive officers and other key management, technical, finance, sales and other personnel |
| Our failure to attract, integrate, motivate and retain existing or additional personnel could disrupt or otherwise harm our operations and financial results |
| We do not carry key man life insurance policies covering any employees |
| The loss of services of certain of our key employees, an inability to attract or retain qualified personnel in the future, or delays in hiring additional personnel could delay the development of our business and could cause our stock price to decline |
| Changes in accounting standards or our accounting policy relating to stock-based compensation may negatively affect our operating results |
| During December 2004, the Financial Accounting Standards Board ( "e FASB "e ) issued SFAS Nodtta 123R requiring that the compensation cost relating to share based payment transactions be recognized in financial statements |
| SFAS Nodtta 123R becomes effective for us on January 1, 2006 and will require that stock-based compensation charges be recorded for the unvested portions of options and restricted stock granted through December 31, 2005, as well as for all future grants, based on the fair value of the options or warrants or restricted stock as of their grant dates |
| This will require a change in our accounting policy and the amount of our operating expenses could increase |
| Our share price may be volatile and could decline substantially The market price of our common stock, like the price of shares of technology companies generally, has been and may continue to be volatile |
| From January 1, 2002 to March 24, 2006, the closing bid price of our common stock has varied from a high of dlra19dtta45 to a low of dlra2dtta10 per share, as reported on the American Stock Exchange |
| Many factors may cause the market price for our common stock to decline, including: o shortfalls in revenues, cash flows or continued losses from operations; o delays in development or roll-out of any of our products; o announcements by one or more competitors of new product acquisitions or technological innovations; and o unfavorable outcomes from outstanding litigation |
| 14 In addition, the stock market experiences extreme fluctuations in price and volume that particularly affect the market price of shares of emerging technology companies, such as ours |
| These price and volume fluctuations are often unrelated or disproportionate to the operating performance of the affected companies |
| Because of this volatility, we may fail to meet the expectations of our shareholders or of securities analysts and our stock price could decline as a result |
| Declines in our stock price for any reason, as well as broad-based market fluctuations or fluctuations related to our financial results or other developments, may adversely affect your ability to sell your shares at a price equal to or above the price at which you purchased them |
| Decreases in the price of our common stock may also lead to de-listing of our common stock |