UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2006 -------------------------- OR ( ) 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 1-11601 ------- IDNA, INC. ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1816760 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 555 Madison Avenue, 29th Floor, New York, New York 10022 ---------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) (212) 644-1400 ---------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------------------------- (Former name, former address and former year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act). Yes ( ) No (X) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act) Yes ( ) No (X) Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date: Class Outstanding at June 12, 2006 ----------------------------- ---------------------------- Common Stock, $0.05 par value 9,078,364 IDNA, INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Report of Independent Registered Public Accounting Firm 3 Condensed Consolidated Balance Sheets as of April 30, 2006 and January 31, 2006 4 Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2006 and 2005 5 Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) for the Three Months Ended April 30, 2006 6 Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2006 and 2005 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 1A. Risk Factors 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits 29 Signatures 30 Certifications 31 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of iDNA, Inc. and Subsidiaries New York, New York We have reviewed the accompanying condensed consolidated balance sheet of iDNA, Inc. and Subsidiaries as of April 30, 2006, the related condensed consolidated statements of operations for each of the three-month periods ended April 30, 2006 and 2005; the related condensed consolidated statement of stockholders' equity and comprehensive loss for the three-month period ended April 30, 2006 and the condensed consolidated statements of cash flows for each of the three-month periods ended April 30, 2006 and 2005. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the Public Company Accounting Oversight Board ("PCAOB"). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with standards of the PCAOB, the consolidated balance sheet as of January 31, 2006, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated April 26, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Grant Thornton LLP Cleveland, Ohio June 7, 2006 3 IDNA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) April 30, January 31, 2006 2006 ------------ ------------ (unaudited) ASSETS Cash and cash equivalents $ 364 $ 1,144 Accounts receivable, net of allowance of $93 and $105, respectively (Note 1) 2,332 2,045 Inventory (Note 1) 298 247 Prepaid expenses 190 277 Other current assets 71 22 ------------ ------------ Total current assets 3,255 3,735 Property and equipment, net of accumulated depreciation of $2,271 and $2,029, respectively (Note 1) 2,707 2,919 Investment in AFC (Note 3) 7,603 7,822 Goodwill (Notes 1 and 2) 5,879 5,879 Other intangible assets, net of accumulated amortization of $1,585 and $1,430, respectively (Notes 1 and 2) 8,197 8,352 Other assets 141 140 ------------ ------------ $ 27,782 $ 28,847 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current maturities of long term obligations (Note 4) $ 1,061 $ 1,111 Accounts payable 1,620 1,463 Accrued income taxes 314 358 Deferred revenue (Note 1) 1,081 891 Due to former OTI Members 204 530 Self-insurance claims (Note 5) 235 235 Other liabilities 1,831 1,746 ------------ ------------ Total current liabilities 6,346 6,334 Long term obligations (Note 4) 10,106 10,116 Convertible promissory note (Note 4) 2,825 2,825 ------------ ------------ 19,277 19,275 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 5) - - STOCKHOLDERS' EQUITY Preferred stock - - Common stock - $.05 par value, authorized 50,000,000 shares, issued 39,949,589 and 39,949,589 shares, respectively 1,997 1,997 Additional paid-in capital 174,559 174,479 Retained deficit (145,187) (144,034) Deferred compensation (59) (65) Treasury stock, at cost, 30,913,225 and 30,913,225 shares, respectively (22,805) (22,805) ------------ ------------ Total stockholders' equity 8,505 9,572 ------------ ------------ $ 27,782 $ 28,847 ============ ============ See accompanying notes to condensed consolidated financial statements. 4 IDNA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended April 30, ------------------------------ 2006 2005 ------------ ------------- Service revenues $ 3,432 $ 2,864 Cost of service revenues 2,334 1,497 ------------ ------------- Gross profit 1,098 1,367 Selling, general and administrative 2,138 1,728 ------------ ------------- Loss from operations (1,040) (361) Interest income 3 4 Income from AFC investment 68 159 Interest expense (174) (165) ------------ ------------- Loss from continuing operations before income taxes (1,143) (363) Provision for income taxes (11) (11) ------------ ------------- Loss from continuing operations (1,154) (374) Income from discontinued operations, net of tax 1 2 ------------ ------------- Net loss $ (1,153) $ (372) ============ ============= Basic and diluted loss per share Continuing operations $ (.13) $ (.04) Discontinued operations - - ------------ ------------- Net loss per share $ (.13) $ (.04) ============ ============= Weighted average number of shares outstanding Basic and diluted 9,036 10,083 ============ ============= See accompanying notes to condensed consolidated financial statements. 5 IDNA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS THREE MONTHS ENDED APRIL 30, 2006 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Preferred Stock Common Stock ------------ ------------------- Additional Deferred Comprehensive Par Par Paid-In Retained Treasury Compensation Income Shares Value Shares Value Capital Deficit Stock Expense Total (Loss) ------ ----- ---------- ------- ---------- ---------- -------- ------------ ------- ------------- Balance at January 31, 2006 - $ - 39,949,589 $ 1,997 $ 174,479 $ (144,034) $(22,805) $ (65) $ 9,572 Net loss (1,153) (1,153) $ (1,153) Share-based compensation expense 80 80 Deferred compensation expense 6 6 ------ ----- ---------- ------- ---------- ---------- -------- ------------ ------- ------------- Comprehensive income (loss) $ (1,153) ============= Balance at April 30, 2006 - $ - 39,949,589 $ 1,997 $ 174,559 $ (145,187) $(22,805) $ (59) $ 8,505 ====== ===== ========== ======= ========== ========== ======== ============ ======= See accompanying notes to condensed consolidated financial statements. 6 IDNA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended April 30, ---------------------------- 2006 2005 ------------ ------------ Cash flows from operating activities Net loss $ (1,153) $ (372) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 397 337 Income from AFC investment (68) (159) Share-based compensation expense 73 - Stock issued as compensation for services rendered - 33 Amortization of deferred compensation expense 6 6 Changes in operating assets and liabilities, net of acquisition: Accounts receivable (287) 669 Income tax refundable - 826 Accrued income tax (44) 11 Accounts payable 157 (335) Deferred revenue 190 (348) Other operating assets and liabilities, net 79 416 ------------ ------------ Net cash provided by (used in) operating activities (650) 1,084 ------------ ------------ Cash flows from investing activities: Proceeds from AFC distributions 287 208 Purchase of property and equipment (31) (77) ------------ ------------ Net cash provided by investing activities 256 131 ------------ ------------ Cash flows from financing activities: Payments to retire due to former OTI Members (326) - Payments of long term debt (60) (398) ------------ ------------ Net cash used in financing activities (386) (398) ------------ ------------ Increase (decrease) in cash and cash equivalents from operations (780) 817 Cash and cash equivalents at beginning of period 1,144 471 ------------ ------------ Cash and cash equivalents at end of period $ 364 $ 1,288 ============ ============ Supplemental disclosures of cash flow information: Interest paid $ 1 $ 140 ============ ============ Income taxes paid $ 55 $ - ============ ============ Stock issued for services $ - $ 33 ============ ============ See accompanying notes to condensed consolidated financial statements 7 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES General ------- The accompanying unaudited condensed consolidated financial statements include the accounts of iDNA, Inc. and Subsidiaries ("iDNA"). iDNA is a multi-dimensional corporate and institutional strategic communications, technology and entertainment company. iDNA specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate and institutional strategic communication, education and training video and other services for use at meetings, events, symposiums and seminars. iDNA, through its custom wireless communication technology and proprietary software, also facilitates client audience interaction, participation and polling to collect, exchange and/or analyze data and information in real-time during a meeting or event. iDNA's wireless communication services are available as a turn-key service provided by iDNA during a scheduled meeting or event or alternatively, a client can purchase from iDNA the required electronic components and related proprietary software to administrate its needs independently. Additionally, iDNA, through its investment in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition industry (see Note 3). The financial statements are unaudited but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of iDNA's consolidated financial position, results of operations, stockholders' equity and comprehensive loss, and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the rules of the Securities and Exchange Commission applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with iDNA's consolidated financial statements, including the notes thereto, appearing in iDNA's Annual Report on Form 10-K for the year ended January 31, 2006. The results of operations for the three months ended April 30, 2006 are not necessarily indicative of the operating results for the full year. The preparation of financial statements and the accompanying notes thereto, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. iDNA uses a January 31 year-end for financial reporting purposes. References herein to the fiscal year ended January 31, 2007 shall be the term "Fiscal 2007" and references to other "Fiscal" years shall mean the year, that ended on January 31 of the year indicated. The term the "Company" or "iDNA" as used herein refers to iDNA, Inc. together with its consolidated subsidiaries unless the context otherwise requires. 8 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Service Revenues ---------------- iDNA's service revenues are earned within short time periods, generally less than one week. iDNA recognizes revenue from video production, video editing, meeting services and broadcast satellite or webcast services when the video is complete and delivered or all technical services have been rendered. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. iDNA does not have licensing or other arrangements that result in additional revenues following the delivery of the video or a broadcast. Costs accumulated in the production of the video, meeting services or broadcasts are deferred until the sale and delivery are complete. Deferred production costs of $71,000 and $22,000, respectively, are included as a component of other current assets at April 30, 2006 and January 31, 2006. iDNA recognizes revenue from the sale of electronic equipment, proprietary software and related components at the time of shipment. Deposits and other prepayments received prior to shipment are recorded as deferred revenue until the electronic equipment and related software are shipped. iDNA has licensing and technical support arrangements for future software enhancements and upgrades for technical support for previously delivered electronic equipment. Revenues derived from licensing and technical support are recognized over the term of the licensing and technical support period, which generally are sold in increments of one year of coverage. For the three months ended April 30, 2006 and April 30, 2005, electronic equipment sales were $775,000 and $121,000, respectively. iDNA recognizes revenue from website design and development when the customer accepts the completed project. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. These contracts are generally limited to the design and development of websites and the presentation of site library content developed by iDNA. Clients also have the option to engage iDNA to maintain and upgrade their websites. These projects are separate from the website development and design engagements, and the related revenue is recognized over the term of the agreement, which is generally up to one year. iDNA recognizes revenue from developing and maintaining websites pursuant to the requirements of Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, iDNA determines that the arrangement fee is not fixed or determinable or that collectibility is not probable, iDNA defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable or, when collectibility is uncertain, as cash is collected. Cost of Service Revenues ------------------------ Cost of revenues consists of direct expenses specifically associated with client service revenues. The cost of revenues includes direct salaries and benefits, purchased products or services for clients, web hosting, support services, shipping and delivery costs. 9 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Research and Development Costs ------------------------------ As a consequence of the acquisition of Option Technologies Interactive, LLC ("OTI") on November 18, 2005, iDNA incurred certain research and development costs. Research and development costs are comprised principally of personnel costs incurred for enhancements, modifications, updates, service and support expenditures for iDNA proprietary software. Research and development costs are charged to operations as incurred and are included as a component of costs of service revenues. iDNA charged $80,000 to research and development expense for the three months ended April 30, 2006. Accounts Receivable ------------------- Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is iDNA's best estimate of the amount of probable credit losses in iDNA's existing accounts receivable. iDNA determines the allowance based on analysis of historical bad debts, client concentrations, client credit-worthiness and current economic trends. iDNA reviews its allowance for doubtful accounts quarterly. Past-due balances over 90 days and specified other balances are reviewed individually for collectibility. All other balances are reviewed on an aggregate basis. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. iDNA does not have any off-balance sheet credit exposure related to its clients. Inventory --------- Inventory is comprised principally of electronic equipment and related components held for sale to clients. Inventory is valued at the lower of cost or market using the first-in - first-out inventory cost method. Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from eighteen months to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related improvements. Goodwill and Other Intangible Assets ------------------------------------ Intangible assets with indefinite lives, including goodwill, are not subject to amortization but are subject to testing for impairment at least annually or whenever there is an impairment indicator. In its acquisition of OTI on November 18, 2005 (see Note 2), iDNA acquired certain intangible assets including client relationships and lists and a non-competition agreement with an initial estimated aggregate fair value of $300,000. The useful lives of these intangibles are estimated to be 5 years and 7 years, respectively. The intangible assets with definite useful lives are amortized using the straight-line method over those lives. For the three months ended April 30, 2006, iDNA charged to operations $13,000 for the amortization of these intangible assets. iDNA has engaged an independent valuation firm to assist in the final determination of the fair value of the acquired assets of OTI in order to finalize its purchase accounting allocation. In its acquisition of The Campus Group (as defined below), iDNA acquired certain intangible assets including client relationships and lists and a non-competition agreement with an initial aggregate fair value of $9.5 million. The useful lives of these intangibles are estimated to be 17 years and 9 years, respectively. The intangible assets with definite useful lives are amortized using the straight-line method over those lives. For each of the three months ended April 30, 2006 and 2005, iDNA charged to operations $142,000 for the amortization of these intangible assets. 10 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Impairment of Long-Lived Assets ------------------------------- iDNA reviews the carrying value of its long-lived assets (other than goodwill) whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, iDNA would determine whether the estimated undiscounted sum of the future cash flows of such assets is less than its carrying amount. If less, an impairment loss would be recognized based on the excess of the carrying amount of such assets over their respective fair values. iDNA would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, iDNA would discount the expected estimated future cash flows. Income Taxes ------------ Deferred income taxes are provided for all temporary differences between the book and tax basis of assets and liabilities. Deferred income taxes are adjusted to reflect new tax rates when they are enacted into law. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is anticipated that some or all of a net deferred tax asset may not be realized. Reclassifications ----------------- Certain Fiscal 2006 amounts have been reclassified to conform with Fiscal 2007 presentations. Revised Consolidated Statements of Cash Flow -------------------------------------------- In Fiscal 2007, iDNA has separately disclosed the operating, investing and financing portions of cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount. The principal cash flow component of iDNA's discontinued operations are changes in connection with iDNA's self-insurance claims. New Accounting Pronouncements ----------------------------- In December 2004 the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after December 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. iDNA is required to adopt SFAS 123R at the beginning of Fiscal 2007 (effective February 1, 2006). Under SFAS No. 123R, iDNA must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retrospective adoption options. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption while the retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. iDNA has adopted the prospective method of adopting SFAS No. 123R and as a consequence, iDNA recorded a charge to operations for stock-based compensation expense for the three months ended April 30, 2006 of $73,000 for the prospective adoption of SFAS 123R and to record stock-based compensation expense for the period. 11 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED In May 2005, FASB issued Statement No. 154, Accounting Changes and Error Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements, and establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 applies to all voluntary changes in accounting principles and to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. iDNA adoption of SFAS 154 did not have a material impact on iDNA's consolidated financial position or results of operations. NOTE 2 - OPTION TECHNOLOGIES INTERACTIVE, LLC ACQUISITION On November 18, 2005, iDNA consummated the acquisition of 100% of the membership interests of OTI from Flexner Wheatley & Associates ("FWA") and MeetingNet Interactive, Inc. ("MeetingNet"). OTI is a technology company providing interactive software and hardware systems and services that facilitate audience interaction, participation and polling to collect exchange and/or analyze data and information in real-time for use in live events, training and education satellite videoconferencing and corporate or institutional meeting services. Prior to the acquisition of OTI, iDNA's subsidiary Audience Response Systems, Inc. ("ARS") also provided similar services. With the acquisition of OTI, iDNA (i) gains access to important new clients, industries and market segments, (ii) acquires a fully developed and integrated propriety software that is an "add-in" application module with Microsoft(R) Office PowerPoint(R) which, among other attributes, allows clients to develop and self-administrate audience interaction programs at smaller and other venues not previously served by iDNA and (iii) expands its solutions-based communication product offering to meet dynamic demands of current and potential clients. The significant value in the acquisition is principally its (i) industry position, (ii) assembled workforce, (iii) proprietary software, (iv) trademarks and (iv) client lists and client relations. In exchange for the acquisition of all of the outstanding membership interests of OTI, iDNA (i) paid $744,000 at closing from iDNA's available cash balances, (ii) issued to FWA and MeetingNet promissory notes in an aggregate principal amount of $1.5 million ("OTI Promissory Notes") and (iii) issued an aggregate of 496,250 shares of iDNA Common Stock to FWA and MeetingNet valued at $258,000, representing the fair value of the iDNA Common Stock at the date of the acquisition. For financial reporting purposes, the transaction was treated as a purchase with an effective date of November 18, 2005. The purchase price is subject to an upward and downward adjustment not to exceed $412,500 based upon OTI's meeting, or failing to meet, certain minimum financial performance criterion for Fiscal 2007 and Fiscal 2008. As part of the OTI acquisition, Mark Fite entered into an employment agreement with OTI under which he has agreed to serve as President of OTI for an initial term of three years. Under the terms of the employment agreement, Mr. Fite will be entitled to base compensation of $150,000 per year, a grant of stock options to acquire 60,000 shares of iDNA Common Stock, subject to vesting in three equal annual installments over the term of the employment agreement and a performance bonus based upon the operating results of OTI. iDNA also granted to all active OTI employees stock options to acquire an aggregate of 66,500 shares of iDNA Common Stock, subject to vesting over a three year period and subject to OTI's meeting certain minimum financial performance criterion for Fiscal 2007 and Fiscal 2008. The exercise price for the stock options granted to Mr. Fite and the OTI employees was set at the fair value of iDNA's Common Stock as of the date of the OTI acquisition, $0.52 per share. 12 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - OPTION TECHNOLOGIES INTERACTIVE, LLC ACQUISITION - CONTINUED The components and allocation of the purchase price were as follows (in thousands): Amount ----------------- Components of purchase price: Cash paid at closing $ 744 Promissory notes issued at closing 1,489 Common stock issued at closing 258 Transaction costs 268 ----------------- Total purchase price $ 2,759 ================= Allocation of purchase price: Current assets $ 1,303 Property and equipment 1,228 Goodwill arising in the acquisition 959 Other intangible assets 300 ----------------- 3,790 Accounts payable and accrued expenses (497) Due to former OTI Members (534) ----------------- Net assets acquired $ 2,759 ================= As a consequence of the OTI acquisition and in accordance with SFAS No. 141 Business Combinations, iDNA initially recognized goodwill and other intangible assets of $959,000 and $300,000, respectively. iDNA has estimated lives for these intangible assets of 5 to 7 years. For the three months ended April 30, 2006, iDNA charged to operations $13,000 for the amortization of these intangibles. iDNA has engaged the valuation services of an independent third party appraisal company to assist iDNA with respect to the final determination of the fair value of tangible and intangible assets acquired in accordance with SFAS No. 141, Business Combinations, and may, depending on the results of that valuation, adjust the preliminary allocation of the purchase price. iDNA does not expect amortization of goodwill or other intangibles, if any, to be deductible for income tax purposes. 13 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - OPTION TECHNOLOGIES INTERACTIVE, LLC ACQUISITION - CONTINUED The following sets forth the pro forma condensed results of operations of iDNA and OTI for the three months ended April 30, 2005 as if the acquisitions were consummated on February 1, 2005. Prior to OTI's acquisition, OTI used a December 31 year end, and accordingly the pro forma results have been prepared by combining the historical results for iDNA for the three months ended April 30 with the historical results of OTI for the three months ended March 31. These pro forma results have been prepared for illustrative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been in effect for the periods indicated or the results that may occur in the future. Pro forma revenues, net loss and loss per share are as follows (in thousands): Three Months Ended April 30, 2005 ---------------------- Service revenues $ 4,181 ====================== Net loss from continuing operations $ (235) ====================== Loss per share from continuing operations $ (0.02) ====================== NOTE 3 - INVESTMENT IN AFC On April 5, 2000, iDNA, through its wholly owned subsidiary National Cinemas, Inc., acquired a 50% membership interest in AFC. AFC is the owner and operator of the Angelika Film Center, which is a multiplex cinema and cafe complex in the Soho District of Manhattan in New York City. AFC is currently owned 50% by iDNA and 50% by Reading International, Inc. ("Reading"). The articles and bylaws of AFC provide that for all matters subject to a vote of the members, a majority is required, except that in the event of a tie vote, the Chairman of Reading shall cast the deciding vote. iDNA uses the equity method to account for its investment in AFC. iDNA's initial investment exceeded its share of AFC's net assets and that portion of the investment balance is accounted for in a manner similar to goodwill. AFC uses a December 31 year-end for financial reporting purposes. iDNA reports on a January 31 year-end, and for its fiscal quarters ending April 30, July 31, October 31 and January 31 records its pro-rata share of AFC's earnings on the basis of AFC's fiscal quarters ending March 31, June 30, September 30 and December 31, respectively. For the three months ended April 30, 2006 and 2005, iDNA recorded income of $68,000 and $159,000, respectively, representing its share of AFC's net income. 14 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - INVESTMENT IN AFC - CONTINUED Summarized income statement data for AFC for the three months ended March 31, 2006 and 2005, respectively, is as follows (in thousands): Three Months Ended March 31, 2006 2005 -------- ------- Revenues $ 1,465 $ 1,411 -------- ------- Film rental 517 307 Operating costs 603 544 Depreciation and amortization 166 198 General and administrative expenses 42 42 -------- ------- 1,328 1,091 -------- ------- Net income $ 137 $ 320 ======== ======= iDNA's proportionate share of net income $ 68 $ 159 ======== ======= NOTE 4 - CURRENT AND LONG TERM OBLIGATIONS As a consequence of iDNA's acquisition of OTI effective November 18, 2005, iDNA issued to FWA and MeetingNet the OTI Promissory Notes in an aggregate principal amount of $1.5 million. The OTI Promissory Notes bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from OTI's operations. The OTI Promissory Notes are secured by the membership interests of OTI. At April 30, 2006, iDNA had outstanding obligations under the terms of the OTI Promissory Notes of $1.5 million and accrued interest of $34,000. As a consequence of iDNA's acquisition of The Campus Group effective July 31, 2003, iDNA issued to Mr. Steve Campus and certain family trusts promissory notes of $9.9 million and a convertible promissory note of $2.8 million. Of the $9.9 million in promissory notes issued by iDNA, $6.6 million of the promissory notes ("Base Notes") bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed seven years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued by iDNA bear interest at 5% per annum and are repayable in quarterly installments, commencing upon the retirement of the Base Notes, according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years subsequent to the retirement of the Base Notes. The $2.8 million convertible promissory note (i) bears interest at 5% per annum, payable quarterly in cash or accumulating as principal at the election of iDNA, (ii) requires principal payments to commence upon the retirement of the Base Notes and Trailing Notes and is then repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years and (iii) is convertible at the option of the holder into shares of iDNA common stock at a base conversion price of $1.50 per share. The holder may not convert the convertible promissory note into iDNA common stock prior to repayment of the Base Notes and Trailing Notes. The promissory notes are secured by the capital stock of the companies comprising The Campus Group. At April 30, 2006, iDNA had outstanding obligations under the terms of the Base Notes, Trailing Notes and the Convertible Notes of $6.0 million, $3.3 million and $2.8 million, respectively, and accrued interest of $625,000. 15 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 - CURRENT AND LONG TERM OBLIGATIONS - CONTINUED As a consequence of iDNA's acquisition of OMI Business Communications, Inc. ("OMI") effective April 1, 2003, iDNA assumed $814,000 in bank debt and capital lease obligations to financial institutions and issued a promissory note payable to Mr. Dean Thompson in the principal amount of $153,000. During 2001, OMI obtained a $300,000 bank term loan (the "Term Loan") to finance certain capital expenditures. The Term Loan is payable in monthly installments of $6,000, comprised of principal and interest, over a five year term, expiring in July 2006. The Term Loan bears interest at the rate of 8.25% per annum. The Term Loan is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. The outstanding balance of the Term Loan at April 30, 2006 was $9,000. On April 25, 2002, OMI obtained a $402,000 loan guaranteed by the U.S. Small Business Administration (the "SBA Loan") to finance losses incurred as a result of the September 11, 2001 terrorist attacks in New York City. At April 30, 2006, the remaining balance of the SBA Loan of $348,000 is repayable in monthly installments of $3,309 with the last payment due in April 2017. The SBA Loan bears interest at the rate of 4% per annum. The SBA Loan is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. The promissory note payable to Mr. Thompson was payable in monthly installments of principal and interest over a 36 month period expiring April 2006. The promissory note bears interest at 5% per annum. The promissory note was repaid and retired in April 2006. The components of long term obligations at April 30, 2006 are as follows (in thousands): Amounts --------- Term loan $ 9 SBA loan 348 OTI promissory notes 1,489 Base promissory notes 6,046 Trailing promissory notes 3,275 Convertible promissory note 2,825 --------- 13,992 Less current maturities (1,061) --------- Long term obligations and convertible promissory note $ 12,931 ========= 16 IDNA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 - CURRENT AND LONG TERM OBLIGATIONS - CONTINUED iDNA's current maturities and long term obligations at April 30, 2006 are as follows (in thousands): Amounts ------------ 2007 $ 1,061 2008 1,275 2009 1,524 2010 1,806 2011 1,648 Thereafter 6,678 ------------ $13,992 ============ NOTE 5 - COMMITMENTS AND CONTINGENCIES Self-Insurance Reserves for Property Damage and Personal Injury Claims ---------------------------------------------------------------------- iDNA, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental and Automate Auto Rental, previously engaged in the rental of automobiles on a short-term basis, principally to the insurance replacement market. In Fiscal 1996, iDNA disposed of its rental fleet business through the sale of certain assets and through certain leases to a national car rental company. All liabilities related to the discontinued rental business, principally self-insurance claims, were retained by iDNA. iDNA is subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. iDNA estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, iDNA's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of iDNA's sale of its automobile rental operations in 1995, iDNA believes that all incurred claims have been reported to iDNA and that there are no longer any incurred but not yet reported claims to be received by iDNA. iDNA's self-insurance liability at both April 30, 2006 and January 31, 2006 was $235,000. Other Litigation ---------------- In the normal course of its business, iDNA is periodically named as defendant in legal proceedings. It is the policy of iDNA to vigorously defend litigation and/or enter into settlements of claims where management deems appropriate. In the opinion of management, the amount of ultimate liability with respect to any current actions, if any, is unlikely to materially affect our financial position, results of operations or liquidity. 17 ITEM 2. IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL iDNA, Inc. ("iDNA") began operations in 1969 and was incorporated in Delaware in 1971. iDNA is a multi-dimensional corporate and institutional strategic communications, technology and entertainment company. iDNA specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate and institution strategic communication, education and training video and other services for use at meetings, events, symposiums and seminars. iDNA, through its custom wireless communication technology and proprietary software, also facilitates client audience interaction, participation and polling to collect, exchange and/or analyze data and information in real-time during a meeting or event. iDNA's wireless communication services are available as a turn-key service provided by iDNA during a scheduled meeting or event or alternatively, a client can purchase from iDNA the required electronic components and related proprietary software to administrate its needs independently. Additionally, iDNA, through its investment in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition industry. CRITICAL ACCOUNTING POLICIES iDNA's consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require iDNA to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses of iDNA. iDNA's significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. However, certain accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. These accounting estimates and disclosures have been discussed with the Audit Committee of iDNA's Board of Directors. A discussion of iDNA's critical accounting policies, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows: Service Revenues: iDNA's service revenues are earned within short time periods, generally less than one week. iDNA recognizes revenue from video production, video editing, meeting services and broadcast satellite or webcast services when the video is complete and delivered or all technical services have been rendered. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. iDNA does not have licensing or other arrangements that result in additional revenues following the delivery of the video or a broadcast. Costs accumulated in the production of the video, meeting services or broadcasts are deferred until the sale and delivery are complete. Deferred production costs of $71,000 and $22,000, respectively, are included as a component of other current assets at April 30, 2006 and January 31, 2006. iDNA recognizes revenue from the sale of electronic equipment, proprietary software and related components at the time of shipment. Deposits and other prepayments received prior to shipment are recorded as deferred revenue until the electronic equipment and related software is shipped. iDNA has licensing and technical support arrangements for future software enhancements and upgrades for technical support for previously delivered electronic equipment. Revenues derived from licensing and technical support are recognized over the term of the licensing and technical support period, which generally are sold in increments of one year of coverage. For the three months ended April 30, 2006 and April 30, 2005, electronic equipment sales were $775,000 and $121,000, respectively. 18 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED iDNA recognizes revenue from website design and development when the customer accepts the completed project. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. These contracts are generally limited to the design and development of websites and the presentation of site library content developed by iDNA. Clients also have the option to engage iDNA to maintain and upgrade their websites. These projects are separate from the website development and design engagements, and the related revenue is recognized over the term of the agreement, which is generally up to one year. iDNA recognizes revenue from developing and maintaining websites pursuant to the requirements of Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, iDNA determines that the arrangement fee is not fixed or determinable or that collectibility is not probable, iDNA defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable or, when collectibility is uncertain, as cash is collected. Cost of Service Revenue: Cost of revenues consists of direct expenses specifically associated with client service revenues. The cost of revenues includes direct salaries and benefits, purchased products or services for clients, web hosting, support services, shipping and delivery costs. Accounts Receivable: iDNA extends credit to clients in the normal course of business. iDNA continuously monitors collections and payments from clients and maintains an allowance for doubtful accounts based upon historical experience and any specific client collection issues that have been identified. Since accounts receivable are concentrated in a relatively few number of clients, a significant change in the liquidity or financial position of any of these clients could have a material adverse impact on the collectibility of the accounts receivable and future operating results. iDNA does not have any off-balance sheet credit exposure related to its customers. Valuation of Long-lived Assets and Goodwill: iDNA reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable and it annually assesses whether goodwill has been impaired by comparing the carrying amount of the goodwill to its fair value. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset's estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with iDNA's business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors. 19 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Management has determined that there was no impairment to our long-lived assets and goodwill on the basis of a review of a discounted cash flow analysis, which for goodwill is performed at the level of the subsidiaries to which the goodwill relates. If there is a material change in the assumptions used in the determination of fair value or a material change in the conditions or circumstances influencing fair value, iDNA could be required to recognize a material impairment charge. Self-Insurance Claims: iDNA maintained and continues to maintain self-insurance for claims and associated litigation expenses relating to bodily injury or property damage from accidents involving the vehicles rented to customers by its discontinued automobile rental operations occurring in Fiscal 1996 and prior. iDNA was, when required by either governing state law or the terms of its rental agreement, self-insured for the first $1.0 million per occurrence, and for losses in excess of $5.0 million per occurrence, for bodily injury and property damage resulting from accidents involving its rental vehicles. iDNA was also self-insured, up to certain retained limits, for bodily injury and property damage resulting from accidents involving iDNA vehicles operated by employees within the scope of their employment. iDNA is subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. iDNA estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, iDNA's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of iDNA's sale of its automobile rental operations in 1995, iDNA believes that all incurred claims have been reported to iDNA and that there are no longer any incurred but not yet reported claims to be received by iDNA. iDNA's self-insurance liability at both April 30, 2006 and January 31, 2006 was $235,000. Because of the uncertainties related to several residual small claims and legal proceedings involving iDNA's former rental operations and self-insurance claims, it is difficult to project with precision the ultimate effect the adjudication or settlement of these matters will have on iDNA. As additional information regarding iDNA's potential liabilities becomes available, iDNA will revise the estimates as appropriate. Income Taxes: iDNA recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Loss carrybacks, reversal of deferred tax liabilities, tax planning and estimates of future taxable income are considered in assessing the need for a valuation allowance. At the time it is determined that iDNA will more likely than not be able to realize deferred tax assets in excess of the recorded amount, net of its valuation allowance, an adjustment to reduce the valuation allowance would be recorded that would increase income in the period such determination was made. Likewise, should management determine that iDNA would not be able to realize all or part of net deferred tax assets generated in the future, increase to the valuation allowance would be charged to and reduce income in the period such determination was made. 20 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED APRIL 30, 2005 Service Revenues: Revenues for the three months ended April 30, 2006 and April 30, 2005 were $3.4 million and $2.9 million, respectively. Revenues increased $568,000 due principally to the net effects of (i) revenues derived from Option Technologies Interactive, LLC. ("OTI"), acquired November 18, 2005, of $1.2 million, (ii) an increase in revenues of OMI Business Communications, Inc. ("OMI") of $35,000 offset by (ii) a decrease in the aggregate revenues of Audience Response Systems, Inc. ("ARS") and Campus Group Companies, Inc. ("Campus") (collectively known as "The Campus Group") of $708,000. For the three months ended April 30, 2006, revenues for The Campus Group were $1.9 million as compared to revenues of $2.6 million for the three months ended April 31, 2005. For the three months ended April 30, 2006, revenues for OMI were $277,000 as compared to revenues of $242,000 for the three months ended April 30, 2005. The decrease in revenues for the Campus Group of $708,000 for the three months ended April 30, 2006 as compared to revenues for the three months ended April 30, 2005 was principally due to a decrease in the number, scope and value of client assignments, principally for medical symposiums and seminars, scheduled and completed during the three months ended April 30, 2006. The nature of OMI's and The Campus Group's business is such that the nature and timing of assignments completed for clients, and the resulting revenue, will vary from period to period. Recently, iDNA has hired senior marketing strategists and is forming a new integrated marketing group for corporate communication services to develop new marketing initiatives, create new project opportunities, seek new clients for its services and expand existing client relationships to generate new revenues. Although no assurances can be made, iDNA will seek revenue expansion through the retention of these new marketing strategists as a means to reduce year-to-year and quarter-to-quarter fluctuations in its revenues as well as ultimately to increase revenues. Generally, there is a six to twelve month investment period before iDNA expects to realize the benefits from the addition of such personnel in the form of new projects and/or clients. Cost of Service Revenues: Cost of revenues for the three months ended April 30, 2006 were $2.3 million and were comprised principally of cost of revenues derived from operations of The Campus Group, OMI and OTI, with (i) The Campus Group's cost of revenues of $1.5 million, (ii) OMI's cost of revenues of $178,000 and (iii) OTI's cost of revenues of $607,000. Cost of revenues for three months ended April 30, 2005 were $1.5 million and were comprised principally of (i) The Campus Group's cost of revenues of $1.3 million and (ii) OMI's cost of revenues of $147,000. The average gross margin for the three months ended April 30, 2006 and April 30, 2005 was 32.0% and 47.7%, respectively The aggregate decrease in gross profit of $269,000 for the three months ended April 30, 2006 as compared to the three months ended April 30, 2005 is due principally to the net effects of (i) an increase in revenues due to the acquisition of OTI, offset by (ii) a decrease in revenues at The Campus Group and (iii) a decrease in production gross margin realized. The aggregate average gross margins for The Campus Group decreased by 29.4%, which can be principally attributed to (i) a decrease of revenues realized to offset fixed production overhead costs and (ii) a decrease in general production margins as a consequence of an unfavorable production mix during the three months ended April 30, 2006 The aggregate gross 21 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED margins for OMI decreased 3.4% as a consequence of higher production costs during the three months ended April 30, 2006 as compared to the three months ended April 30, 2005. OTI's aggregate gross margin for the three months ended April 30, 2006 was 51.1%. Selling, General and Administrative ("SG&A"): For the three months ended April 30, 2006, SG&A expense increased $410,000 to $2.1 million as compared to $1.7 million for the three months ended April 30, 2005. The increase in SG&A expense was due principally to the net effect of (i) $413,000 in new SG&A expense due to the acquisition of OTI, (ii) an increase in iDNA SG&A of $33,000 relating principally to the cost of its marketing and branding initiatives, (iii) an increase in OMI SG&A of $81,000 as a consequence of an increase in personnel costs, offset by (iv) a decrease in The Campus Group SG&A of $117,000. Income from AFC Investment: iDNA accounts for its investment in AFC using the equity method. For the three months ended April 30, 2006 and 2005, iDNA recorded income of $68,000 and $159,000, respectively, representing iDNA's share of AFC's net income for the three months ended March 31, 2006 and 2005 respectively. The following sets forth summarized operating results for AFC (in thousands): Three Months Ended March 31, 2006 2005 ----- ----- Revenues $1,465 $1,411 Film rental 517 307 Operating costs 603 544 Depreciation and amortization 166 198 General and administrative expenses 42 42 ----- ----- 1,328 1,091 ----- ----- Net income $ 137 $ 320 ===== ===== NAC's proportionate share of net income $ 68 $ 159 ===== ===== AFC's revenues increased $54,000 for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005, principally as a result of the net effects of (i) a 3.5% increase in average ticket prices, (ii) an increase of $36,000 in other, concession and cafe revenues offset by (iii) a decrease of 1.8% in attendance period-to-period. The attendance, and at times the ticket prices, at AFC will vary depending on audience interest in, and the popularity of the films it exhibits and other factors. Film rental expense, as a percentage of revenue, increased 13.5% to 35.3% from 21.8% for the three months ended March 31, 2006 and 2005, respectively. Film rental expense generally is a factor of a fixed percentage rental rate per film multiplied by the number of tickets sold. AFC experiences fluctuations in film rental expense, as a percentage of revenue, depending upon the rental rate per film and the popularity of the film. Operating costs, as a percent of revenue, increased 2.5% to 41.1% for the three months ended March 31, 2006, as compared to 38.6% for the three months ended March 31, 2005 due principally to an increase in advertising and personnel costs for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. The nature of AFC's operating costs tend generally to be more fixed overhead-related costs and advertising expenses. 22 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Income Taxes: Due to net operating losses and the availability of net operating loss carryforwards, iDNA's effective federal income tax rate was zero for the three month periods ended April 30, 2006 and April 30, 2005. iDNA has provided a full valuation allowance against its net operating loss carryforward and other net deferred tax asset items due to the uncertainty of their future realization. LIQUIDITY AND CAPITAL RESOURCES Throughout the three months ended April 30, 2006 and as of June 14, 2006, iDNA had no external source of financing and has operated on its existing cash balances, cash flows from operations and distributions from its investment in AFC. iDNA will continue to pursue reductions in its operating expenses, invest in marketing initiatives and seek new debt or equity financing (though there can be no assurance iDNA will obtain such financing) as means of supplementing iDNA's resources available to pursue new acquisitions, joint ventures or other business development opportunities. At April 30, 2006, iDNA had cash of $364,000, which together with any cash flow derived from its investment in AFC and the operations of iDNA's corporate communications business will be used to pursue such opportunities. As a consequence of iDNA's acquisition of OTI effective November 18, 2005, iDNA issued to FWA and MeetingNet the OTI Promissory Notes in an aggregate principal amount of $1.5 million. The OTI Promissory Notes bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from OTI's operations. The OTI Promissory Notes are secured by the membership interests of OTI. At April 30, 2006, iDNA had outstanding obligations under the terms of the OTI Promissory Notes of $1.5 million and accrued interest of $34,000. As a consequence of iDNA's acquisition of The Campus Group effective July 31, 2003, iDNA issued to Mr. Steve Campus and certain family trusts promissory notes of $9.9 million and a convertible promissory note of $2.8 million. Of the $9.9 million in promissory notes issued by iDNA, $6.6 million of the promissory notes ("Base Notes") bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed seven years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued by iDNA bear interest at 5% per annum and are repayable in quarterly installments, commencing upon the retirement of the Base Notes, according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years subsequent to the retirement of the Base Notes. The $2.8 million convertible promissory note (i) bears interest at 5% per annum, payable quarterly in cash or accumulating as principal at the election of iDNA, (ii) requires principal payments to commence upon the retirement of the Base Notes and Trailing Notes and is then repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years and (iii) is convertible at the option of the holder into shares of iDNA common stock at a base conversion price of $1.50 per share. The holder may not convert the convertible promissory note into iDNA common stock prior to repayment of the Base Notes and Trailing Notes. The promissory notes are secured by the capital stock of the companies comprising The Campus Group. At April 30, 2006, iDNA had outstanding obligations under the terms of the Base Notes, Trailing Notes and the Convertible Notes of $6.0 million, $3.3 million and $2.8 million, respectively, and accrued interest of $625,000. 23 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED As a consequence of iDNA's acquisition of OMI effective April 1, 2003, iDNA assumed $814,000 in bank debt and capital lease obligations to financial institutions and issued a promissory note payable to Mr. Dean Thompson in the amount of $153,000. During 2001, OMI obtained a $300,000 bank term loan (the "Term Loan") to finance certain capital expenditures. The Term Loan is payable in monthly installments of $6,000, comprised of principal and interest, over a five year term, expiring in July 2006. The Term Loan bears interest at the rate of 8.25% per annum. The Term Loan is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. The outstanding balance of the Term Loan at April 30, 2006 was $9,000. On April 25, 2002, OMI obtained a $402,000 loan guaranteed by the U.S. Small Business Administration (the "SBA Loan") to finance losses incurred as a result of the September 11, 2001 terrorist attacks in New York City. At April 30, 2006, the remaining balance of the SBA Loan of $348,000 is repayable in monthly installments of $3,309 with the last payment due in April 2017. The SBA Loan bears interest at the rate of 4% per annum. The SBA Loan is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. The promissory note payable to Mr. Thompson was payable in monthly installments of principal and interest over a 36 month period expiring April 2006. The promissory note bears interest at 5% per annum. The promissory note was repaid and retired in April 2006. For the three months ended April 30, 2006, iDNA's cash and cash equivalents decreased $780,000 due principally to the net effects of (i) proceeds from AFC distributions of $287,000, offset by (ii) cash flows used in operations of $650,000, (iii) capital expenditures of $31,000 and (iv) the repayment of debt and due to former OTI Members of $386,000. iDNA believes that the available cash and cash equivalents totaling $364,000 at April 30, 2006 and any cash distributions from its investment in AFC and cash flow from operations will be sufficient to pay operating expenses, existing liabilities, fund existing debt repayments and fund its activities through the next twelve months as iDNA explores new strategic business alternatives. Additionally, as previously discussed, iDNA's lack of external financing sources may limit its ability to pursue strategic business alternatives being considered by iDNA's Board of Directors. Such limitations may have an adverse impact on iDNA's financial position, results of operations and liquidity. 24 IDNA, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED OTHER New Accounting Pronouncements ----------------------------- In December 2004 the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after December 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. iDNA is required to adopt SFAS 123R at the beginning of Fiscal 2007 (effective February 1, 2006). Under SFAS No. 123R, iDNA must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retrospective adoption options. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption while the retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. iDNA has adopted the prospective method of adopting SFAS No. 123R and as a consequence, iDNA recorded a charge to operations for stock-based compensation expense for the three months ended April 30, 2006 of $73,000 for the prospective adoption of SFAS 123R and to record stock-based compensation expense for the period. In May 2005, FASB issued Statement No. 154, Accounting Changes and Error Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements, and establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 applies to all voluntary changes in accounting principles and to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. iDNA adoption of SFAS 154 did not have a material impact on iDNA's consolidated financial position or results of operations. Inflation --------- Inflation has not had a material adverse impact on iDNA. 25 FORWARD-LOOKING STATEMENTS Some of the information in this report contains forward looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause us or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. You should not rely on forward-looking statements in this report. Forward-looking statements typically are identified by use of terms such as "anticipate", "believe", "plan", "expect", "intend", "may", "will", "should", "estimate", "predict", "potential", "continue" and similar words, although some forward-looking statements are expressed differently. This report may contain forward-looking statements attributed to third parties relating to their estimates regarding the growth of our markets or other factors. All forward-looking statements address matters that involve risk and uncertainties, and there are many important risks, uncertainties and other factors that could cause our actual results as well as those of the markets we serve, levels of activity, performance, achievements and prospects to differ materially from the forward-looking statements contained in this report. You should also consider carefully the statements under other sections of this report that address additional facts that could cause our actual results to differ from those set forth in any forward-looking statements. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Like virtually all commercial enterprises, iDNA can be exposed to the risk ("market risk") that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes. iDNA does not engage in trading activities and does not utilize interest rate swaps or other derivative financial instruments or buy or sell foreign currency, commodity or stock indexed futures or options. Accordingly, iDNA is not exposed to market risk from these sources. As of April 30, 2006, the interest rates under iDNA's long term and convertible debt are fixed. As a result iDNA has limited market risk associated with market interest rates. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this interim report on Form 10-Q, the Chief Executive Officer and the Chief Financial Officer of iDNA (the "Certifying Officers") have conducted evaluations of iDNA's disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Certifying 26 Officers have reviewed iDNA's disclosure controls and procedures and have concluded that those disclosure controls and procedures were effective as of the end of our most recent fiscal quarter. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of the Certifying Officers executed an Officer's Certification included in this Quarterly Report on Form 10-Q. The Certifying Officers have also conducted evaluations of iDNA's internal control over financial reporting and have concluded that there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Self-Insurance Reserves for Property Damage and Personal Injury Claims ---------------------------------------------------------------------- iDNA, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental and Automate Auto Rental, previously engaged in the rental of automobiles on a short-term basis, principally to the insurance replacement market. In Fiscal 1996, iDNA disposed of its rental fleet business through the sale of certain assets and through certain leases to a national car rental company. All liabilities related to the discontinued rental business, principally self-insurance claims, were retained by iDNA. iDNA is subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. iDNA estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, iDNA's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of iDNA's sale of its automobile rental operations in 1995, iDNA believes that all incurred claims have been reported to iDNA and that there are no longer any incurred but not yet reported claims to be received by iDNA. iDNA's self-insurance liability at both April 30, 2006 and January 31, 2006 was $235,000. Other Litigation ---------------- In the normal course of its business, iDNA is periodically named as defendant in legal proceedings. It is the policy of iDNA to vigorously defend litigation and/or enter into settlements of claims where management deems appropriate. In the opinion of management, the amount of ultimate liability with respect to any current actions, if any, is unlikely to materially affect our financial position, results of operations or liquidity. ITEM 1A. RISK FACTORS Not applicable ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable 28 ITEM 6. EXHIBITS EXHIBIT PAGE NUMBER TITLE OF EXHIBIT NUMBER -------------------------------------------------------------------------------- 31.1 Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 31 31.2 Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 32 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 33 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 34 29 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. iDNA, INC. Date: June 16, 2006 By: /s/ James J. McNamara --------------- -------------------------------- James J. McNamara Chairman of the Board and Chief Executive Officer (principal executive officer) By: /s/ Robert V. Cuddihy, Jr. -------------------------------- Robert V. Cuddihy, Jr. Chief Financial Officer (principal accounting and financial officer) 30