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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended September 30, 2005 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 1-9641
 IDENTIX INCORPORATED
  Delaware
    
    94-2842496(State or other jurisdiction of
incorporation of organization)
    
    (IRS Employer Identification No.)
 5600 Rowland Road, Minnetonka, Minnesota
(Address of principal executive offices)
    
    55343
(Zip Code)
  þ o
 þ o
 o þ




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PART I FINANCIAL INFORMATIONItem 1 Unaudited Financial StatementsCondensed Consolidated Balance Sheets  September 30, 2005 and June 30, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended September 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4 Controls and Procedures
    
    
    29PART II OTHER INFORMATIONItem 6 Exhibits
    
    
    30Signature
    
    
    31CEO CertificationCFO Certification906 Certification
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IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except
share and per amounts) 
(Unaudited)
 September 30,
    
    
    June 30,2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,561
    
    
    $
    22,445Marketable securities
    
    
    9,720
    
    
    
    9,753Restricted cash
    
    
    2,649
    
    
    
    2,649Accounts receivable, net
    
    
    19,792
    
    
    
    15,376Inventories
    
    
    6,661
    
    
    
    6,340Prepaid expenses and other assets
    
    
    891
    
    
    
    928Total current assets
    
    
    60,274
    
    
    
    57,491Restricted cash
    
    
    933
    
    
    
    933Property and equipment, net
    
    
    1,879
    
    
    
    1,738Goodwill
    
    
    141,213
    
    
    
    141,213Acquired intangible assets, net
    
    
    12,423
    
    
    
    13,363Other assets
    
    
    296
    
    
    
    317Total assets
    
    $
    217,018
    
    
    $
    215,055LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,282
    
    
    $
    6,597Accrued compensation
    
    
    3,266
    
    
    
    3,894Other accrued liabilities
    
    
    4,007
    
    
    
    3,634Deferred revenue
    
    
    9,343
    
    
    
    6,738Total current liabilities
    
    
    22,898
    
    
    
    20,863Deferred revenue
    
    
    1,867
    
    
    
    1,947Other liabilities
    
    
    149
    
    
    
    159Total liabilities
    
    
    24,914
    
    
    
    22,969Commitments and contingencies (Note 14)Stockholders equity:Common stock, $0.01 par value; 200,000,000 shares authorized
89,057,305 and 88,976,326 shares issued and outstanding,
respectively
    
    
    890
    
    
    
    889Additional paid-in capital
    
    
    553,102
    
    
    
    552,507Accumulated deficit
    
    
    (361,738
    )
    
    
    (361,159
    )Accumulated other comprehensive loss
    
    
    (150
    )
    
    
    (151
    )Total stockholders equity
    
    
    192,104
    
    
    
    192,086Total liabilities and stockholders equity
    
    $
    217,018
    
    
    $
    215,055
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IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except
per share amounts)
 (Unaudited)
 Three Months Ended September 30,2005
    
    
    2004Revenues:Product revenues
    
    $
    15,501
    
    
    $
    8,280Service revenues
    
    
    7,166
    
    
    
    8,343Total Revenues
    
    
    22,667
    
    
    
    16,623Cost and expenses:Cost of product revenues
    
    
    7,777
    
    
    
    6,540Cost of service revenues
    
    
    5,874
    
    
    
    6,184Research and development
    
    
    3,055
    
    
    
    2,529Marketing and selling
    
    
    3,315
    
    
    
    2,662General and administrative
    
    
    3,565
    
    
    
    3,089Amortization of acquired intangible assets
    
    
    209
    
    
    
    251Restructuring and other, net
    
    
    
    
    
    
    451Total costs and expenses
    
    
    23,795
    
    
    
    21,706Loss from operations
    
    
    (1,128
    )
    
    
    (5,083
    )Interest and other income, net
    
    
    225
    
    
    
    263Loss from continuing operations before income taxes
    
    
    (903
    )
    
    
    (4,820
    )Provision for income taxes
    
    
    (26
    )
    
    
    (13
    )Loss from continuing operations
    
    
    (929
    )
    
    
    (4,833
    )Discontinued operations:Gain on sale of IPS
    
    
    350
    
    
    
    Income from discontinued operations
    
    
    350
    
    
    
    Net loss
    
    $
    (579
    )
    
    $
    (4,833
    )Basic and diluted loss per share from continuing
operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )Basic and diluted income per share from discontinued
operations
    
    $
    0.00
    
    
    $
    Basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.05
    )Weighted average common shares used in basic
and diluted loss per share computation
    
    
    88,997
    
    
    
    88,439
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IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)

(Unaudited)
 Three Months Ended September 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (579
    )
    
    $
    (4,833
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    1,493
    
    
    
    1,702Realized gain on sales of marketable securities
    
    
    (51
    )
    
    
    (19
    )Gain on sale of discontinued IPS operations, pre-tax
    
    
    (350
    )
    
    
    Stock-based compensation expense
    
    
    339
    
    
    
    14Bad debt expense, net
    
    
    
    
    
    
    6Inventory obsolescence provision
    
    
    177
    
    
    
    214Restructuring and other, net
    
    
    
    
    
    
    451Changes in assets and liabilities:Accounts receivable
    
    
    (4,415
    )
    
    
    (1,015
    )Inventories
    
    
    (498
    )
    
    
    891Prepaid expenses and other assets
    
    
    58
    
    
    
    777Accounts payable
    
    
    (315
    )
    
    
    (738
    )Accrued compensation
    
    
    (628
    )
    
    
    (29
    )Other accrued liabilities
    
    
    163
    
    
    
    (425
    )Deferred revenue
    
    
    2,525
    
    
    
    1,448Net cash used in operating activities
    
    
    (2,081
    )
    
    
    (1,556
    )Cash flows from investing activities:Net proceeds from the sales of marketable securities
    
    
    4,000
    
    
    
    6,000Purchases of marketable securities
    
    
    (3,916
    )
    
    
    (5,964
    )Cash proceeds related to final payment on the sale of IPS
    
    
    350
    
    
    
    Additions of Intangible Assets
    
    
    (100
    )
    
    
    Capital expenditures
    
    
    (394
    )
    
    
    (252
    )Net cash used in investing activities
    
    
    (60
    )
    
    
    (216
    )Cash flows from financing activities:Proceeds from sales of common stock
    
    
    257
    
    
    
    190Net cash provided by financing activities
    
    
    257
    
    
    
    190Net decrease in cash and cash equivalents
    
    
    (1,884
    )
    
    
    (1,582
    )Cash and cash equivalents at period beginning
    
    
    22,445
    
    
    
    35,944Cash and cash equivalents at period end
    
    $
    20,561
    
    
    $
    34,362
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IDENTIX INCORPORATED
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1.
    
    Basis of Presentation
   2.
    
    Revenue Recognition Policy
   Product Revenues
   6




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Service Revenues
    3.
    
    Stock Based Compensation
  7




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8




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Three monthsended September30, 2005Expected volatility
    
    
    70.96
    %Expected dividends
    
    
    Expected term (in years)
    
    
    4.01Risk-free interest rate
    
    
    3.99
    %
  Weighted AverageWeighted Average
    
    Remaining Contractual
    
    AggregateOptions
    
    Shares
    
    
    Exercise Price
    
    Term (Years)
    
    Intrinsic ValueOutstanding at July 1, 2005
    
    
    7,058,681
    
    
    $
    6.09
    
    
    
    6.87Granted
    
    
    52,800
    
    
    $
    5.26
    
    
    
    9.84Exercised
    
    
    41,276
    
    
    $
    1.70
    
    
    
    Forfeited or expired
    
    
    55,392
    
    
    $
    6.77
    
    
    
    Outstanding at September 30, 2005
    
    
    7,014,813
    
    
    $
    6.11
    
    
    
    6.69
    
    
    $
    12,155,000Exercisable at September 30, 2005
    
    
    6,394,196
    
    
    $
    6.23
    
    
    
    6.26
    
    
    $
    11,997,000
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Weighted AverageGrant Date FairNonvested Options
    
    Shares
    
    
    ValueNonvested at July 1, 2005
    
    
    701,927
    
    
    $
    3.36Granted
    
    
    52,800
    
    
    $
    2.94Vested
    
    
    123,262
    
    
    $
    3.58Forfeited
    
    
    10,848
    
    
    $
    3.23Nonvested at September 30, 2005
    
    
    620,617
    
    
    $
    3.28
    For the Three Months EndedSeptember 30, 2004Net Loss as reported
    
    $
    (4,833
    )Add: Employee stock-based compensation
expense included in reported
net loss
    
    
    14Deduct: Total employee stock-based compensation
expense determined under fair value
based method for all awards
    
    
    (1,207
    )Proforma net loss
    
    $
    (6,026
    )Basic and diluted net loss per share:As Reported
    
    $
    (0.05
    )Proforma
    
    $
    (0.07
    )Shares
    
    
    88,439
 4.
    
    Discontinued Operations
  5.
    
    Reclassifications
  10




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6.
    
    Credit Facility
 
  7.
    
    Inventories
  September 30,
    
    
    June 30,2005
    
    
    2005(In thousands)Purchased parts and materials
    
    $
    3,814
    
    
    $
    3,403Work-in-process
    
    
    2,212
    
    
    
    2,008Finished goods, including spares
    
    
    635
    
    
    
    929$
    6,661
    
    
    $
    6,340
  8.
    
    Restructuring and other, net
  Three Months Ended September 30,2005
    
    
    2004(in thousands)Charges related to restructuring actions initiated in 2002:Lease exit costs
    
    $
    
    
    
    $
    451Total
    
    $
    
    
    
    $
    451
 2005 Restructuring Actions
  2002 Restructuring Program
 
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##### Table of Contents



RestructuringTotal Charges from
    
    
    
    
    
    
    
    
    
    
    Liability as ofContinuing
    
    
    
    
    
    
    Cash
    
    
    September 30,Operations
    
    
    Non-Cash Charges
    
    
    Payments
    
    
    2005(in thousands)Severance and benefits
    
    $
    8,604
    
    
    $
    900
    
    
    $
    7,623
    
    
    $
    81Disposal of property and equipment
    
    
    1,664
    
    
    
    1,664
    
    
    
    
    
    
    $
    Lease exit costs
    
    
    10,558
    
    
    
    388
    
    
    
    9,932
    
    
    $
    238Internal merger costs and other
    
    
    3,684
    
    
    
    
    
    
    
    3,684
    
    
    $
    Total
    
    $
    24,510
    
    
    $
    2,952
    
    
    $
    21,239
    
    
    $
    319
  RestructuringRestructuring
    
    
    Total Charges
    
    
    
    
    
    
    Liability as ofLiability as of June
    
    
    from Continuing
    
    
    Cash
    
    
    September 30,30, 2005
    
    
    Operations
    
    
    Payments
    
    
    2005(in thousands)Severance and benefits
    
    $
    108
    
    
    $
    
    
    
    $
    27
    
    
    $
    81Lease exit costs
    
    
    361
    
    
    
    
    
    
    
    123
    
    
    $
    238Total
    
    $
    469
    
    
    $
    
    
    
    $
    150
    
    
    $
    319
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9.
    
    Earnings Per Share
   10.
    
    Comprehensive Loss
  11.
    
    Reportable Segment Data and Significant Customers
  Three Months Ended September 30,2005
    
    
    2004(in thousands)Total revenues:Biometric systems
    
    $
    20,073
    
    
    $
    14,499Finger Printing Services
    
    
    2,233
    
    
    
    1,832Other
    
    
    361
    
    
    
    292$
    22,667
    
    
    $
    16,623Operating income/loss:Biometric systems
    
    $
    (1,179
    )
    
    $
    (5,049
    )Finger Printing Services
    
    
    166
    
    
    
    196Other
    
    
    (115
    )
    
    
    (230
    )$
    (1,128
    )
    
    $
    (5,083
    )
 September 30,
    
    
    June 30,2005
    
    
    2005(in thousands)Identifiable assets:Biometric systems
    
    $
    209,543
    
    
    $
    208,441Finger Printing Services
    
    
    6,603
    
    
    
    5,756Other
    
    
    872
    
    
    
    858$
    217,018
    
    
    $
    215,055
   13




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12.
    
    Foreign Operations Data
  Three Months Ended September 30,2005
    
    
    2004(in thousands)Total revenues:United States
    
    $
    20,083
    
    
    $
    14,907International
    
    
    2,584
    
    
    
    1,716$
    22,667
    
    
    $
    16,623
 September 30,
    
    
    June 30,2005
    
    
    2005(in thousands)*Identifiable long lived assets:United States
    
    $
    1,862
    
    
    $
    1,712International
    
    
    17
    
    
    
    26$
    1,879
    
    
    $
    1,738
 
 *
    
    Long lived assets consist of property and equipment. 13.
    
    Indemnification Arrangements and Product Warranties
    Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004(in thousands)Balance at beginning of year
    
    $
    1,416
    
    
    $
    921Warranty Expense
    
    
    156
    
    
    
    496Closed Warranty Claims
    
    
    (63
    )
    
    
    (323
    )Balance at end of year
    
    $
    1,509
    
    
    $
    1,094
 14.
    
    Commitments and Contingencies
  14




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the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability
has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate available
current information to determine whether such reserves should be adjusted.
 During the three months ended September 30, 2005, we entered into an agreement to purchase
certain technology with an estimated life of 5 years. The agreement provides for additional
contingent consideration totaling $950,000 if certain milestones are met in the future. If and
when we determine that successful completion of these certain milestones is probable we will
record an additional intangible asset for $950,000 if and when the contingent consideration
becomes payable.
 We recorded reserves for the estimated cost to terminate or sublease excess facilities. We will
continue to evaluate the commercial real estate market conditions quarterly to determine if our
estimates of the amount and timing of future sublease income are reasonable, based on current
and expected commercial real estate market conditions. If we determine that the estimate for
sublease activities has significantly changed, an adjustment to the restructuring liability
would be charged to income in the period in which such determination was made.
 15.
    
    New Accounting PronouncementsIn June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting
Changes. SFAS No. 154 changes the requirements related to accounting for and reporting of a
change in accounting principle. This Statement applies to all voluntary changes in accounting
principle and changes required by a new accounting pronouncement, in the unusual instance that
the pronouncement does not include specific transition provisions. SFAS No. 154 requires
retrospective application to prior periods financial statements of changes in accounting
principle versus the previous guidance which allowed the recording of the impact of an
accounting change in the current periods net income as a cumulative effect adjustment. The
Statement is effective for us beginning in fiscal year 2007. Adoption is not expected to have a
material impact on our consolidated earnings, financial position or cash flows.
 
 
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Revenues, and Gross Margins
     16




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Research and Development
  Marketing and Selling
  General and Administrative
  17




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Amortization of Acquired Intangible Assets
  Restructuring and other, net
  Three Months Ended September 30,2005
    
    
    2004(in thousands)Charges related to restructuring actions initiated in 2002:Lease exit costs
    
    $
    
    
    
    $
    451Total
    
    $
    
    
    
    $
    451
  Interest and Other Income, net
  Provision for Income Taxes
  Discontinued Operations
  Share-Based Compensation
 18




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New Accounting Pronouncements
  Liquidity and Capital Resources
   19




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Periods or fiscal years ending June 30:
    
    Occupied
    
    
    Unoccupied or Sublet
    
    
    Total2006
    
    
    1,360
    
    
    
    238
    
    
    
    1,5982007
    
    
    1,600
    
    
    
    
    
    
    
    1,6002008
    
    
    1,309
    
    
    
    
    
    
    
    1,3092009
    
    
    358
    
    
    
    
    
    
    
    358Total
    
    $
    4,627
    
    
    $
    238
    
    
    $
    4,865
    20




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RISK FACTORS
 This report on Form 10-Q contains forward-looking statements that involve risks and uncertainties.
The Companys business, operating results, financial performance and share price may be materially
adversely affected by a number of factors, including but not limited to the following risk factors,
any one of which could cause actual results to vary materially from anticipated results or from
those expressed in any forward-looking statements made by the Company in this quarterly report on
Form 10-Q or in other reports, press releases or other statements issued from time to time.
Additional factors that may cause our results to vary are set forth in the Companys Annual Report
on Form 10-K.
 We face intense competition from other biometric solution providers as well as identification and
security systems providers.
    The biometrics industry is characterized by rapid technological change and requires introduction of
new and enhanced products at competitive prices.
   Our business will not grow unless the market for biometric products and services expands both
domestically and internationally.
  
    
    national or international events which may affect the need for or interest in biometric products or services;
    
    the cost, performance and reliability of our products and services and those of our competitors;
    
    customers perception of the perceived benefit of biometric products and services and their satisfaction
with our products and services;
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
    
    public perceptions of the intrusiveness of these products and services and the manner in which firms are
using the information collected;
    
    public perceptions regarding the confidentiality of private information;
    
    proposed or enacted legislation related to privacy of information; and
    
    marketing efforts and publicity regarding these products and services.
  We derive a significant amount of our revenue from government contracts, which are often
non-standard, involve competitive bidding, may be subject to cancellation without penalty and may
produce volatility in earnings and revenue.
      Our financial and operating results often vary significantly from quarter to quarter and may be
negatively affected by a number of factors.
  
    
    unavailability or delays in authorization of government funding or
cancellations, delays or contract amendments by government agency customers;
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
    
    reduced demand for products and services caused, for example, by product offerings from new competitors;
    
    the inability to timely and successfully (i) complete development of complex designs, components and products,
(ii) complete new product introductions that may result in improved gross margins, (iii) manufacture
in volume or install certain of our complex products or (iv) obtain relevant government agency certifications for newly
introduced products on a timely basis;
 
    
    changes in the mix of products and services we or our distributors sell;
    
    the readiness of customers to accept delivery of new products on a timely basis;
    
    protests of federal, state or local government contract awards by competitors;
    
    unforeseen legal expenses, including litigation and/or administrative protest costs;
    
    expenses related to acquisitions or mergers;
    
    impairment charges arising out of our assessments of goodwill and intangibles;
    
    other one-time financial charges;
    
    the lack of availability or increase in cost of key components and subassemblies;
    
    competitive pricing pressures; and
    
    unpredictable product installation schedules
  Our results of operations may be harmed by governmental credit and other policies.
   A security breach or failure in systems that we sell could result in the disclosure of private
personal information that could harm our business by adversely affecting the markets perception of
our products and services.
  The terrorist attacks of September 11, 2001, and the continuing threat of global terrorism, have
increased financial expectations that may not materialize.
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We may need to raise additional equity or debt financing in the future.
  Our lengthy and variable sales cycle will make it difficult to predict operating results.
   The substantial lead-time required for ordering parts and materials may lead to inventory problems.
  We rely in part upon original equipment manufacturers (OEM) and distribution partners to
distribute our products, and we may be adversely affected if those parties do not actively promote
our products or pursue installations that use our equipment.
   Loss of sole or limited source suppliers may result in delays or additional expenses.
   Our plan to pursue sales in international markets may be limited by risks related to conditions in
such markets.
    
    
    regional economic instabilities or political conditions;
    
    delays in or absolute prohibitions on exporting products resulting from export restrictions for certain products and
technologies, including crime control products and encryption technology;
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
    
    loss of, or delays in importing products, services and intellectual property developed abroad, resulting from unstable or
fluctuating social, political or governmental conditions;
    
    fluctuations in foreign currencies and the U.S. dollar;
    
    loss of revenue, property (including intellectual property) and equipment from expropriation, nationalization, war,
insurrection, terrorism, criminal acts and other political and social risks;
    
    the overlap of different tax structures;
    
    seasonal reductions in business activity;
    
    risks of increases in taxes and other government fees; and
    
    involuntary renegotiations of contracts with foreign governments, or outright termination of contracts by such governments.
 Individual stockholders owning a significant portion of our stock may have the ability to delay or
prevent a change in control or adversely affect the stock price through sales in the open market.
  We may be subject to loss in market share and market acceptance as a result of performance
failures, manufacturing errors, delays or shortages.
  We may be subject to repair, replacement, reimbursement and liability claims as a result of
products that fail to work or to meet applicable performance criteria.
  Failure by us to maintain the proprietary nature of our technology, intellectual property and
manufacturing processes could have a material adverse effect on our business, operating results,
financial condition, stock price, and on our ability to compete effectively.
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Acquisitions and dispositions of companies, assets or technologies may result in disruptions to our
business.
   
    
    exposure to unknown liabilities of acquired companies or assets;
    
    higher than anticipated acquisition costs and expenses;
    
    effects of costs and expenses of acquiring and integrating new businesses and/or technologies on our
operating results and financial condition;
    
    effects of consolidated revenue loss associated with dispositions of material subsidiaries or assets;
    
    effects of costs and expenses of integrating and introducing new technologies and entering into new markets;
    
    the difficulty and expense of assimilating the operations and personnel of the companies;
    
    disruption of our ongoing business;
    
    diversion of management time and attention;
    
    failure to maximize our financial and strategic position by the successful incorporation, integration and
launch of acquired technology;
    
    failure to realize the potential of acquired technologies, complete product development, or properly obtain
or secure appropriate protection of intellectual property rights;
    
    the maintenance of uniform standards, controls, procedures and policies;
    
    loss of key employees and customers as a result of changes in management;
    
    incurring amortization expenses;
    
    incurring impairment charges arising out of our assessments of goodwill and intangibles; and
    
    possible dilution to our stockholders.
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The manner of accounting for our merger with Visionics Corporation, which was completed in June
2002, may affect our reported results of operations.
  If we are unable to successfully address the material weakness in our internal
controls as described in Item 9A of the Form 10-K for the fiscal year ended
June 30, 2005 and updated for the three months ended September 30, 2005 on our
Form 10-Q, Item 4, our ability to report our financial results on a timely and
accurate basis may be adversely affected. As a result, current and potential
stockholders could lose confidence in our financial reporting which could have
a material adverse effect on our business, operating results and stock price.
  Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
  If we fail to adequately manage the size of our business, it could have a severe negative effect on
our financial results or stock price.
  If we fail to attract and retain qualified senior executive and key technical personnel, our
business will not be able to expand.
    
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Interest Rate Risk.
  Foreign Currency Exchange Rate Risk.
 
  Evaluation
of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
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ExhibitNumber
    
    
    
    Description31.1
    
    
    
    
    CEO Certification31.2
    
    
    
    
    CFO Certification32
    
    
    
    
    906 Certifications
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IDENTIX INCORPORATEDBY:
    
    /s/ Elissa J. LindsoeElissa J. Lindsoe
Chief Financial Officer
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