Intellicheck Inc (IDN) 2001 Q4 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Intelli-Check year-end earnings conference call.

At this time, I would like to inform you that this conference is being recorded for re-broadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference for questions-and-answers after the presentation.

I will now turn the conference over to , please go ahead, sir.

Thank you.

Good afternoon ladies and gentlemen and welcome to Intelli-Check's year-end conference call. On behalf of our senior management, thank you for joining this afternoon.

I am , Chairman and Chief Executive Officer, Intelli-Check Inc. and present with me on this call today are our Senior Executive Vice President and Chief Financial Officer, our Senior Executive Vice President Sales and Marketing, our Director of Corporate Sales, our Senior Vice President and Chief Technology Officer and our Vice President of Jurisdiction Document Systems.

As part of this presentation, Ed will discuss the highlights of our results of operations for the year ended December 31, 2001, which we released earlier today. Bob will give an overview of our sales efforts. Russ will also give an overview on our recent technology enhancements.

After our formal presentation, we will be pleased to answer any questions that you may have. Before I proceed, I will caution you that this conference call will contain forward-looking statements. Actual results could materially differ from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained under the heading of Risk Factors, listed from time-to-time in the company's filing with the Securities and Exchange Commission. We do not assume any obligation to update the forward-looking information.

I will now turn the call over to who will discuss the highlights of the results of operation for the year-ended 12/31/01.

Thank you Frank.

Good afternoon everyone.

Let me highlight some of the financial information that we released this morning and that is contained in our 10K, which we also filed today. We apologized for reporting our numbers so late, but, as you know, our orders are off and it just took a little longer to complete the process.

Revenues increased 542,000 from 343,000 for the year-ended December 31st, 2000 to 868,000 recorded for the year-ended December 31st, 2001. Revenues for the year-ended December 2000 included limited sales from the initial release of our enhanced product during the first three quarters. Sales of our enhanced product really began in the fourth quarter of 2000 and included a large sale to Electronic Corp. under an OEM agreement.

Sales for 2001 was limited due to the recent re-focus of our marketing efforts towards the larger customers, than the retail market in which the sales cycle requires an extended timeframe involving multiple meetings, presentations and a test period, which has been further extended by the rapid slowing of the economy, whereby decisions for capital expenditures are being delayed.

In addition, the rollout of sales and marketing initiatives, which were to begin in April 2001 never materialized. Since met all of its obligations on the original agreement, which was modified in January 2002, we mutually agreed not to renew the contract. did pay us $412,000 in February 2002 and returned to us all previously fully paid for units in their inventory.

We have also begun to market to various government and state agencies, which have long sales cycles including extended periods. will discuss our sales initiatives later in this presentation.

Operating expenses, which include selling, general administrative and research and development expenses increased by 28 percent from 3.523 million for the year-ended December 2000 to 4.497 million for the year-ended December 2001. Included in these expenses were non-compensation expenses in the form of options valued at 200,000 and legal fees of 675,000. Selling expenses increased 7 percent from 890,000 for the year-ended December 2000 to 950,000 for the year-ended December 2001 as a result of additional hiring of employees and professional consultants and higher travel expenses due to the increases in sales activity, which is offset by lower advertising expenses. General and administrative expenses increased 47 percent from 1.59 million for the year-ended December 2000 to 2.332 million for the year-ended December 2001, primarily as a result of an increase in rent expenses as we moved to a larger facility, increased professional fees for accounting and public relations, inventory refurbishing costs and increased legal fees, which accounted for the largest portion of the increase.

As you know, we have settled the lawsuit with in December 2001 and acquired their assets for our common stock valued at $980,000. We are presently involved in three lawsuits that we believe have absolutely no merit and we will defend ourselves vigorously. We do expect to defend our patent vigorously when in March and incur additional legal fees in the process.

R&D expenses increased 17 percent from 1.042 million for the year-ended December 2000 to 1.214 million for the year-ended December 2001. This increase is primarily attributable to increase in salaries and related expenses in hiring of additional programmers.

With the addition of business, expenses relating to this division will increase by approximately $700,000 of which will include non-cash amortization of intangibles of approximately $250,000.

In addition, we expect expenses to increase incrementally in line with the sales growth of our business.

For the reasons just stated we reported a net loss for the year ended December 31st, 2001 of 52 cents per share, which includes a two cents per share effect resulting from the charge for the warrant modifications of $142,000 or $3.963 million excluding this charge compared with a net loss of 47 cents per share or 3.133 for the year ended December 2000.

At this point, I'd like to review the company's liquidity and capital resources. Net cash decreased for the year-ended December 2001 by only $30,000. The main reason for this was that our cash used in operations of almost $3 million and cash used in investing activities was funded by proceeds we received of over $3.2 million from the exercise of warrants, options and our rights. As of year end only 17,500 warrants were outstanding, 7500 at $3 and 10,000 underwriters warrants at 8.40. As the result of the registration of our rights, we reserved 970,000 shares for the exercising of rights. As of March 25th, 2002, about 274,000 rights were exercised. As we have previously reported the company has the right to redeem the outstanding rights for a penny per right after giving 30 days notice. The rights expire on October 4th, 2002. As the current market price is above the 8.50 exercise price, we anticipate receiving additional proceeds from the exercise of outstanding rights.

As of March 27th, 2002 we had approximately $4.1 million in the bank invested in secure short-term securities. To date, we have received significant cash from the exercise of rights. Additionally, the company has available for sale about 3300 fully paid for units that, if were sold, would bring between $5 and $8 million, depending on whether we were to sell through distributors or direct. These amounts do not include sales of any of our ancillary products such as seal ink or any warranty programs.

As you may know, we announced today, the signing of our agreement with KPMG Corporate Financing to advise us on strategic alternatives including mergers and acquisitions. Because of the recent high level of interest in the company and its technology, we believe that they will prove of substantial value in sorting through our strategic options.

As you can see, contrary to opinions voiced to us after our release this morning, the company remains in strong financial condition. Our available cash resources and the expected revenues from the sale of our units in inventory, combined with either the exercise of outstanding rights before expirations or the exercise of rights should we elect to redeem them and the potential cash to be realized from the exercising of options, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. Engagement of KPMG Corporate Finance was not for the sole purpose of raising capital.

Russ will now highlight and summarize for you some of the current technology projects that the company is working on. I will now turn the discussion over to .

Thank you Ed.

Good afternoon. I am Senior Vice President of Information Technologies and Chief Technology Officer.

I would like to give you a quick update regarding recent enhancements to our patenting technology. As a result of many requests from users and potential users a new network beta version of is now available for evaluation. This version permits multiple to be deployed throughout a site, that all share the same customer and transaction database. This new version also includes new features that take advantage of this network capability such as watch list, alerts, reoccurring entry and customer diary. This will substantially enhance the technology for security purposes.

The is currently being upgraded to output all jurisdiction document fields, which will allow third party applications to integrate ID technology into their system using the as the hardware front end. For those applications that do not the input devices the offers, a software-only solution is available with ID check DLL. As new jurisdiction formats are made available, they are being incorporated into our technology.

We have had had many inquiries from companies that would like to license our technology to utilize in their applications for security purposes. We continue to evaluate these inquiries for licensing our technology to them.

Thank you. I would now like to turn it over to our Senior Vice President of Sales and Marketing, .

Thank you Russ and good afternoon.

We are making encouraging progress on a number of fronts. These are the opportunities being worked that provide the greatest potential for profitable volume sales. First airports and airlines. We have a test in progress at Boston's Logan Airport with units at ticket counters, boarding gates and their employee badge issuing office. At a recent meeting at the headquarters of major airlines, we were told they would put in a test at another airport to combat ticket fraud, enhance security and increase passenger throughput.

We just competed a successful test at a major drugstore chain where our product was compared to some competitors. The store operations personnel preferred our device. It is now being considered for funding along with a number of other competing projects and do not know what the outcome of this will be.

Credit card fraud is a huge and growing problem. We were contacted by and met with two major credit card issuing companies and some of their customers. We expect a test at six stores and a major retail chain in the near future, with others likely to follow.

The State Departments of Motor Vehicles we met with see the value of our system to stop fraud, enhance customer service and provide quality control in their license production process. We have provided several with quotations so we were able to get into their appropriation process.

We have ongoing discussions with two major point-of-sale OEMs about adding our functionality to the systems they provide.

At a major convenience store chain, the product is the only one authorized. There are currently hundreds of units installed in this chain consisting of 4,000 locations.

Our announced relationship with Imaging Automation will result in the product that authenticates both the documents we currently read as well as passports. This will have great appeal at border crossings, airports, seaports and the INS.

We also have quotations out to several other companies who want to license our technology for integration into the products they currently provide their customers. One company does background checks, one specializes in portable handheld devices and one makes access control systems. The recent enhancements to Russ mentioned, including all the capabilities, fill the requirements of a number of our customers that have requested this from us. We are very optimistic about the opportunities ahead of the company.

Now I'd like to turn this back to .

Thank you Bob.

This completes the formal presentation that we will make and every one of us on the management team is prepared and would like to answer any questions that you may have.

The question-and-answer session will begin now. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press one, followed by four on your push button phone. If you would like to withdraw your question, press one, followed by three. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Mr. . Your question, sir.

Good afternoon, gentlemen and as far as congratulations on a great year.

As far as things with your company got very interesting starting in February where you got a major gas retail chain that gave you an order and they started off, I believe, from reading the news in the State of Ohio and then your discussions now, obviously, enhanced that because the original order that you put out in a press release was about 75 units.

As far as, then you also put out in February that you installed at Logan Airport with two undisclosed airlines for testing. Question I have for you on and I have many questions but this is one of them, how long is that test for? Was it a 30, 60 or 90-day trial?

Bob, you want to answer that?

The test will probably continue for between 60 to 90 days to prove the concept. We are in the process, now, of helping them develop an analysis technique so they can determine the viability of the equipment. The encouraging thing is that the people we've talked to there who are using the equipment are very enthusiastic about its results, its performance and what it does. So, the initial input from Boston Logan is very positive about our product.

The next question, you also installed at an undisclosed airport -- now the two major airlines that you installed at Logan, is it the same two airlines that are using it at the undisclosed airport?

No. The applications are different. The second airport, which is really still in process, is at the security checkpoints, which do not basically relate to an airline.

I'll add something to that Rich. I was up at Logan about two weeks ago and in talking to the various people there, it seems the passengers like what they're doing utilizing our equipment because by-in-large, the reservation clerks and the supervisors and the people involved in the test, when they query the, when passengers ask what they're doing, they tell them, they feel safer and perception is one of the important things to get passengers back on the airlines.

Another question. As far as, pertaining to the agreement, which is now ended, obviously distribution is important for a company are you in relations with any other distribution companies at this time? If so, as far, has there been any signing? Who is your distributor now?

Well, they were never an exclusive distributor and Bob, he may . Nobody has an exclusive from the company. We had private branded it for them. They were an OEM distributor but they weren't the distributor, I mean, that's a misnomer. They were one of several. We thought that they would have the capability of marketing it because of their sales force. They never really rolled it out per se as we would have liked and when the agreement was up, they had certain obligations, which they settled with the company on what we deemed to be very favorable terms to the company and we are signing on new distributors all the time. But they were the only OEM. We private labeled it for them.

As far as, you know, obviously I'm sure you guys don't read the chat rooms because it's probably, you know, beneath most but as far as a broker you read everything. Lot of comments about the KPMG was that, they were hired because of the company's need for money. Obviously with the numbers you just put out, that's not true at all. The question I have, which hopefully you can answer, was it you who approached KPMG or did they approach you?

Well, let's just say that the company and I'll let Ed answer that. We get inquiries every day from companies looking to give us money. We don't need any money. We're in very strong financial condition. Anybody who'll take a look at the balance sheet, our current ratio is quite high and we've evaluated several investment bankers, all of which came to us like to. We believe everyone that we looked at that KPMG, which concentrates on the middle market where we are, was the one that gave us the best opportunity for moving us forward either with strategic partners who are helping us to evaluate all the inquiries that Bob and Russ alluded to. So, it was not with the idea of raising capital. Whoever that came up with I don't know. We have, if we were to, let's say, redeem the warrants tomorrow, that's another six. We have four in the bank. We have paid for units, so we have the potential of between 15 million in cash. I don't believe that we should dilute the shareholders equity by selling stock or raising capital unless somebody came to us and they were a strategic partner and that they could enhance our opportunity to move forward in the marketplace or whatever, we could consider a minority, a small minority investment but we're not in this to raise capital.

Well, I want to congratulate you on a strong year especially with the end of the third quarter horrific things that took place in the U.S. and as far as how it hurt businesses, as far as congratulations on a good year.

The last thing, I asked in the second quarter when you foresee being in profits and originally you were looking for the fourth quarter to turn profitable, obviously, with the events took place that didn't happen. You've put out a lot of solid news in February of a lot of testing, which quarter do you foresee turning a profit?

Well, I don't think at this particular point -- we have so many initiatives out there and some of them are quite large, it could happen in a day, it could happen in a week or it could happen in the next quarter. Until we see, we have seen an easing up on the, let's call it budget restraints for capital expenditures in the last several weeks as Bob alluded to, because the losses from fraud are getting so huge a lot of companies that had frozen their cap ex budget have contacted us and we're in ongoing discussions with them.

Thank you very much gentlemen.

I'll repeat what we've said before, if the company were to sell 3300 units directly, we would be profitable for the entire year.

Thank you.

Our next question comes from . Please state your firm followed by your question.

Firm is . Frank, congratulations, I know you've been doing, you've been busy.

Question I had regarding the KPMG announcement today. In every relationship both parties have hopes or expectations, could you expound a little bit on what KPMG will do for us, you know, pretty vague as far as the stated goal but will there be, are they looking at specific offers that we received? Are they going to be introducing us to funds or money managers and the other side of that, what are they looking for from us both in terms of, what have we given up, if anything very much to get them and, I guess this is a validation in my opinion of our technology that somebody of their stature has teamed up with us, could you kind of discuss those issues?

Well, I don't know what you mean by give up. Quite frankly if you wanted to explain what you mean, what we gave up, we didn't give up anything.

OK, that's great. I just didn't know if we had to pay them a bunch of money up front or give them stock or anything, I just wanted, I guess I'm asking that because I don't want to see misinformation put out that you've given up the ranch to get somebody of that stature to deal with us and I don't think that's the case but I want you to address it so people don't get the wrong idea about how we got a relationship with these people.

Well, one as far as fee goes, we pay them a very nominal fee and everything else is a success fee, depending upon what enhances. Whether -- we have as Ed could tell you, we get inquiries and many of them in the course of the day, that we're in a field that has attracted a lot of interest from an awful lot of companies, investment banking, et cetera. We have become so busy, we didn't want to stretch ourselves that thin on the manpower side because we believe the opportunities on the sales side are really starting to gel and we believe that with their expertise, if you look up KPMG Corporate Finance, you will find out by looking that from 1997, I think until 2000, they closed the most transactions of any banking firm in the world and then with the merger of CFSB and , that combination only beat them out by 10 or 20 last year. So, they are very strong in the mid-market field. We will show them opportunities that are sitting here for us for them to help us evaluate and they will bring us opportunities that they believe there is interest out there.

And, this is Ed, what we liked about them was they took a strong interest in the security industry and were very knowledgeable, came up with the same information and statistics that we did over the years and we feel that firm with that kind of knowledge, will bring us the best value.

Are they in a position to be doing anything in terms of introduction to money managers or funds that might be large purchasers of the company stock?

They are very capable of doing a lot of things and I don't want to talk specifically ...

OK.

What it is, but they are a member broker dealer recognized by the SEC and they've closed more transactions globally than any firm in the last five or seven years so.

OK.

Just let it go at that.

OK, that's fine.

Hired to raise to money because we're in tight financial condition.

That's great.

When do you expect to hear something back from the Transportation Safety Administration about the letting of their orders for the security at the airports and, in conjunction with that, have you gotten a specific idea of an order size from them when they start doing that and also, what's the status of the business with the tobacco company that was discussed on, I think, the last call that you had, those two issues?

I'll answer the first one.

Any time you deal with the government in evaluations, they set their own timetable but as everybody probably reads in the paper, that when they set their timetables as witnessed the bomb detection, they said it would be fully deployed in the U.S. in February this year and then they came out and said, they won't be able to meet their own deadline. So we don't take any dates that they say at face value although they do have meaning for us. It is hard to say how the government operates. We do know from all the input we've gotten at Logan, that people are very pleased with what the technology is doing and as far as the tobacco Bob, if you would like to respond that.

Yes, we did receive the order from the tobacco company that I had mentioned in the last teleconference and they're deployment is working on schedule.

And you don't have -- they haven't given you any timeframe as far as follow up and what possible order size would be from that on a follow up order?

They have but it's not something that I can disclose right now but we're very encouraged by the progress.

OK. Very good. Thank you both. Great job guys.

Thank you Ed.

Thank you.

Our next question comes from . Please state your question followed by your firm.

Thank you. I'm with .

Just one quick clarification, what percentage of Q4 sales did you say were through ?

What you mean, in 2001?

In Q4 of 2001?

None.

OK and I'm sorry versus 2000?

2000 is a large percent.

OK.

Of quarter of 2000.

OK and my next question is, I guess your Q4 sales maybe were just a little bit below what I was looking for given the size of the remarkable opportunity here in the market, was just curious, were there any orders that maybe slipped out at the end of the quarter there or if you could just provide a little bit of color on Q4 sales and then, now that Q1 is also complete here, should we -- what kind of rebound should we expect in Q1 in terms of sales?

On that side in the Q1, of course, the quarter will be favorably impacted by the revenue we received from in this quarter and that was over $400,000 in the quarter just from and we have additional sales coming in now from the side. So, we have not yet reported it but will certainly be an improvement over the last quarter, last year, quite a material in bottom line numbers.

And were there any sales that maybe that slipped out of Q4 that we'll be getting in Q1?

We don't use anything and move one from any to the other. If they're in the first quarter, they're there in the first quarter but not because of the fact that we slipped them from one to the other. I mean, these kind of orders, quite frankly, the way we see it, we have been dealing -- the onesies and the twosies, they come in whenever, but the kind of markets and the potential size of the order, which are potentially very, very large from any one kind of customer normally take time. Now, the evaluation could end a lot quicker than we saw and hit a quarter that we never expected or could defer to a quarter but it is very difficult here until the first real one comes in for us to determine at what level they will flow. We could have several flow all at one time and we just, I don't think -- Bob would you like to expand on that any?

No, I think you've summed it up very well, Frank, that the size of the enterprises that we're dealing with and the budgeting process and the evaluation process and the fact that our product competes with other initiatives and the decisions take time, is very hard to predict. But we have so much going on right now that it's a very exciting time for us.

OK. Great and ...

Just remember also that, you know, we defer a large percentage of our sales over the year and if we have a sale today a large percentage of that would be deferred.

Right.

To comply with the app , of course.

Right. OK, great and my last question for you, it sounds like you certainly have adequate inventory on hand for when these large orders start rolling in. Of the 3300 units that you have, just curious, at what stage of development those are? Are any of those older models and, you know, is there any potential risk of having to take an inventory write down for any of those units?

All these units are state of the art, the latest units that we have.

OK. Great. Well thank you very much for your answers.

You're welcome.

Thank you.

Our next question comes from . Please state your firm followed by your question.

Hi. , afternoon guys.

Hi, Howard. How are you?

OK.

How many units do you currently have installed out there? What is your install base, I guess?

Bob, do you know the number of, or Ed?

Well, if you ...

About a thousand or so.

Yeah.

OK and I guess you talked about, you know, a number of quotations and there are a number of tests out there. What is, if you can maybe just roughly estimate, what is the universe of potential revenues from that pool, which, you know, probably not all come to fruition but and what is the potential out there that you sort of have and are working on right now?

Bob, do you want to answer that to your ability?

Well, all I can say is that one of the industries that we're working on right now, if the implementation's across the industry, it would be between 60 and 85,000 units. I mean, you know, these are the kind of customers we're working with right now.

OK.

Now that doesn't mean, you know, we get it or anything.

Right.

But that would be, you know, the kind of potential volume that we have in some of these big folks that we're going after.

OK and then that, I guess, leads the next question, what is your capacity of producing, I guess, number of units per month can you produce?

Well, I'll answer that question. That came up at one of our meetings with one of the government agencies is how many could we produce a month because one, in any test that we've heard of about and none of them been done in the government side, side-to-side, we end up, from what we hear from people who are doing that, the we're the clear winner on the technology side, however, we also have a big advantage. Our is the only of these products that's made in the U.S. and there's lots of made America or buy America clauses in a lot of these contracts and with a ramp up, would take us probably 60 days, we could probably build, or maybe even 90, with a ramp up 20,000 a month in the U.S. but that would be, but it would involve a period of time to ramp up because we do have in inventory, in stock what we consider long lead items to protect us for several thousand more units that we've pre-purchased in anticipation of a potential large roll out from any one of the people that we're quoting to.

OK and does, I guess, the new product also give you a little bit of flexibility in selling a unit and then, maybe have it, you know, sort of networked a little bit down the road?

Bob you want to?

Oh, absolutely, absolutely. There are entities that we're working with that have multiple either points of entry or points of control where they want our devices communicating with a central database and the enhancements that Russ's team has put into the new version of where we can import watch lists, we can put alerts on, we can have multiple entry warnings or a customer diaries, it is of extreme interest to some of the large customers who instead of having a PC sitting next to each unit working independently, that they can all access a central database and many even of the big government institutions we've talked to that is an extremely important feature that they want in the product.

OK, one, I guess, last question is regarding the, I guess, the licensing agreement that you recently made with Imaging Automation and what type of impact that potentially could be to the top line?

The Imaging Automation could have a substantial positive impact on both our companies. Imaging Automation is the only technology that we've seen being tested at the airports beside ours to do some form of document verification. However, they only do document verification from what we've seen by the passports and other forms of documentation where they work with Interpol and other areas to get the data so that through their very sophisticated internal camera systems and light systems, whatever, they know the inks, they know the papers, they know the watermarks, et cetera and they get this information either from the foreign countries or other areas where they're available from and their device verifies documents other than what we verify and then by putting them both together on one platform, we believe, it will close the loop because in the statistics that we have seen and that's always more or less confirmed to us, when people fly, 97 percent of the time, they present a state issued i.d. or a driver's license, the other 3 percent they would show a passport. However, in some areas, particular, points of entry whether it's in New York Kennedy Airport or Boston airport or Miami or the west coast where you have lots of people coming in from overseas jurisdiction, the number probably skews a little higher where as in middle America, you'd see very few passports. But we believe that for border crossings et cetera that putting the two technologies together creates a very good opportunity to be the, let's say, product of choice for security and transportation, particularly, at border crossings.

OK and you'll gain revenue per device that they sell that your technology is in?

Correct.

OK.

The license and the technology per seat. That's absolutely correct.

OK. Thanks guys.

You're welcome Howard.

thank you.

Our next question comes from . Please state your firm, followed by your question.

Yes, this is . Good afternoon gentlemen.

Can you make some projections on what you think the possibility for revenues for the year could be and can you discuss recent insider selling or the fact that the selling that's been reported as insiders is or is not insider selling related and then I have a follow up?

Well, projections nor will we on this call.

As far as the insider selling, there has been very limited, if any, insider selling. The only sales that take place, from time to time, are from former officers or founders of the company who are no longer with the company or people who from time to time have participated in private placements that go back several years ago where they have stock. They have no affiliation with the company. We have had very, very -- if you look at the insider selling based upon insiders that are filed on form fours, you will see very, very little. I would say on the people who are actually in the company, the sales in the past year, they're probably under 30 to 40,000 considering how much stock is outstanding and what percentage of stock is held by the insiders it's really the minimist. If you wanted to consider from time to time, some of the former founders, one of which has sold a great deal of stock, he's no longer an insider. He's left the company. He's been gone, next month is a year. There has been no real insider selling from the company. Matter of fact if you look at my personal position, you'd see it gone up in the last year, not down.

All right. You were talking about the potentials for sales from the tobacco company and the possibility of airlines. Back in February when the TSA was created they said they were going to do a test for about six weeks and come back and give their results to a congressional hearing. Have you folks actually been speaking to anybody in Washington about that situation?

We have ongoing meetings. We spent a great deal of time in Washington. We stay abreast of it. There has been no determination, as yet, that I'm aware of, Bob or Ernie, have you heard of anything I haven't.

No.

All right. You also disclosed, I think, on a couple of occasions that you were at, I think, Frank you said that on your conference call with the American Stock Exchange or at the one that you did in New York that you were in the MI or Baltimore airport, is that correct?

We are in an additional airport, correct.

OK. Can you tell us any of the public buildings that you might have units in right now, any of the other locations that you might have units that we might be familiar with?

We have units in some major facilities in Delaware. We have units in the most high profile buildings in New York City. There are units being utilized in military bases. Bob what else?

.

Well, the reason that we don't mention them is that we've been asked for security reasons not to disclose where they are in these locations.

Right.

Are those tests or actual sales?

Those are sales.

Sales.

So they're actual sales. All right, thanks very much.

You're welcome Ernie.

Thank you.

Our next question comes from . Please state your firm, followed by your question.

. Hi guys.

Couple of clarifying questions. You said you cash balance at the end of the quarter was 4.1 million?

As of March 27th.

As of March 27th. All right and you're cash flow from operations for 2001?

Cash flow from operations for 2001 was little less than $3 million cash used.

Cash used. All right. Cap ex?

Cap ex was small, about a hundred, I don't remember the number, 150,000 to 200,000 something like that.

All right.

What was your deferred revenue balance?

At the end of the year?

Or if you have it for March 27th.

Think it was about 300,000, something like that.

All right.

I don't have it in front of me. You can see it in the 10K.

OK. All right.

Couple conceptual questions now. How would you say that your system differs from the integrated systems that say, is selling?

How is our system different? Well one, we know that our system works and works accurately. Reads everything that we have. What or other people are doing, they are trying to integrate what we do in licensing our technology into a terminal. The terminal, unless it has very good resolution as far as a capture device, cannot read all of the jurisdictions that are out there because some of the newer jurisdictions have, what would you call them, high density to the bar codes et cetera.

So, where ours is different, we know we can read whatever is out there and read it very well without any problems and it's our belief as we stated before, if somebody is attempting to do what we're doing, we believe with patent counsel that they could potentially violating our patent and as we become aware of this we do protect our patent vigorously.

Oh, OK.

Final question, would it be appropriate to infer that since had a difficult time selling systems, or can you offer another reason why the deal with them was canceled?

Bob, do you want to answer that?

Yes, there are a couple of things. One is that the training of the individual salespeople who had to make it happen sporadic. It took a long time and also, as you're well aware, went through a significant transition last year as a result of the Tyco acquisition. Many of the people that we were dealing with that were championing our product are no longer there. It was a company that had great promise and we firmly believe that could be a fantastic success. I think there were other circumstances going on while we were trying to get the product up and running that just made it difficult for them to make it successful. It was just too big a hill for them to climb.

So you would say none it stemmed from them having difficulty selling the systems?

I think it was more training, motivation, getting the proper information out to the field. It was really just, probably, focus of the company and they were directing their attention in other areas.

Right.

One final question, actually, the $412,000 from that was paid for the cancellation of the contract?

Yes.

OK. All right, that's it. Thanks a lot guys.

You're welcome.

Our next question comes from . Please state your firm, followed by your question.

.

Bob, you were mentioning meeting with a major airline and you had, I think, three drivers that they were interested in ticket fraud security, customer throughput. One, how is that our device one has an impact on customer throughput and two, can you give us a little bit more color on the ticket fraud aspect and what's going on in the airlines with ticket fraud and such. Just, give us some more color on the drivers that interest this airline.

Well, I'm going to ask Ernie after I talk about the throughput issue to discuss the ticket fraud because his vast experience from the FBI and, in fact, being involved in a number of these cases he can talk with firsthand experience about ticket fraud at the airlines.

In terms of throughput, the information that we're getting from Logan where they're using this, is that the device speeds up the operation at the ticket counter and that instead of over license and trying to figure out whether it's OK and so on, they pop it in the machine, they look at the picture, they look at the person and this is all happening while the ticket is coming out of the machine. Their feeling is that it actually improves throughput so that's actual feedback that we got from the users and so it's not our estimate, it's actually what the operators are telling us.

Ernie, do you want to expand a little bit on the ticket fraud issues.

Sure.

Ticket fraud takes two different forms. One is which person committing ticket fraud would get one of the people who is listening to this conference call's credit card number, expiration date through getting a copy of credit card receipt or by stealing it from the mailbox or obtaining it from a variety of means and then ordering a ticket in that person's name by calling either the airline or a travel agent and giving somebody else's credit card number to which the ticket is charged. They then go and get either offering that to other sources a counterfeit driver's license in that person's name and travel using the counterfeit driver's license and the fraudulently obtained credit card information. The legitimate holder of the credit card doesn't know that his credit card number has been used until he gets a monthly statement and then complains to the airline.

The other means that this is done by is blank ticket stock being stolen from a variety of means, either through a burglary or through planned bankruptcy of a travel agent and then the ticket is married with a counterfeit ticket, kind of a driver's license.

In both cases our system is able to address and identify any driver's license that is being presented as an identification that is encoded, that's being used in conjunction with a counterfeit ticket or a fraudulently obtained ticket.

OK. Thanks Ernie.

Thank you.

Our next question comes from . Please state your firm, followed by your question.

Yeah, hi it's John, Frank the question was already answered but I do have one other.

With KPMG on board, were they hired mainly to see if Intelli-Check is saleable opposed to just looking at acquisitions? I'm sure it is saleable but I guess we all have to wonder about what price? But was that the, one of primary reasons they were brought on board, that they approached you with a possible buyer?

The answer to that is a negative. Of course it is a potential. In other words, there are so many opportunities right here, we believe, to enhance shareholder value, that we believe even though there is a lot of interest for something like that and has been, it's a little premature because we think we'll do a lot better for the stockholders by waiting. However, if they were to bring us someone -- there's lots and lots of interest in the security industry right now from a lot of major players, we just don't want to sit here and evaluate it. If something were to come to us, even though that was not their prime focus that we believed would be in the best interest from the shareholders of course we're going to look at it because our role as management is to enhance shareholder value but that was not the prime purpose of hiring them.

I see. Thanks a lot. Good job.

Thanks John.

Once again ladies and gentlemen, should you have a question, please press one, followed by four on your push button phone.

Our next question comes from . Please state your firm, followed by your question.

Wells Fargo Securities.

My question has to do with check fraud. I know that some chains have or are testing this product with regards to dealing with check fraud. Have any of them shared with you the results of those tests and what kind of money they might be able to save by utilizing our product?

Well, we won't address it as just check fraud. Let's call it check, credit card and debit, they're all the one-in-the-same and Bob, do either you or Ernie want to address the looking at?

Yeah, Ernie. Yeah, Ernie has input from a specific customer that indicated what the bad check was per month, so, maybe Ernie you just want to, in generic terms, talk about that.

Sure, thank you Bob.

One specific retailer in the past 12 months has experienced a 400 percent increase in bad checks at service desks that they operate in several hundred units and so for them that's a pretty profound number. Others are also telling us that they've had an increase in refund fraud and so, our system has the ability to provide a tool for management to address refund fraud, check fraud and credit card fraud.

Yes, I was just wondering to the sense of magnitude, you know, like 400 percent increase. Do you have any sense of what that means in the way of dollars, how much is it costing these companies? Like per store or whatever.

Well, I think that one of the chains told us that their losses due to bad checks was the equivalent of almost the cost of one of our units in month. So, the pay back is less than 60 days if they install our unit.

Laurie, if you saw Business Week, I believe it was a week ago issue, where in that Business Week they had an article where they were discussing Target and Sears, where they were talking about on the amount of losses, if you took that as a percentage, they were huge. They were running, I believe, somewhere like -- Ernie did I send you that article about 6 percent of what they book in credit card sales? And you're talking billions.

That's right sir.

That was in the -- what we have heard from quite a few people and I think Bob and Ernie can back up, is because of the state of the economy, with the rapid slowing and layoffs and people running out of unemployment, you'll find that the honest person who basically has no larceny in his heart he's figured out, he's out of work and whatever, that this fake i.d. where they can get the best looking fake i.d., steal somebody's i.d. is an easy kind of crime to engage in with very little opportunity to be caught because they're so good looking to the naked eye these high tech fake i. d.'s. So I think you've seen and we've heard of huge increases in losses from frauds being perpetrated on retailers and other merchants strictly because of the poor state of the economy. So the number is quite astounding. As a matter of fact, we had always used 25 billion in losses, however, in some of the statistics that KPMG put together for us, they're talking about 400 billion. That in the statistics that they came up is the problem out there right now, which is quite an increase over what we believe to be the number.

Well that would appear to be a major opportunity down the road for us then. Thank you.

You're welcome.

Operator, are there any more questions?

Sir, our next question comes once again from . Please state your question, sir.

Frank, maybe you can address this.

We, obviously, we have a great situation going and I believe but there's been quite a bit of activity on the short side in the last couple of weeks, can you address and any concerns? Do you have any thing you want to say about that?

Well, we notice each month when we get the report from the American Exchange and, of course, when we get the daily reports from trading on the floor that the short position did go up. We believe it's dramatically increased in the last 10 days or so where it's conceivable it could be touching on a million shares. It's a free country. People can buy and they can sell at any time. We, ourselves, remain very encouraged about the opportunity for the future if somebody believes that it's not, they certainly can sell the stock short. Time will tell and we don't think it's going to be that long who is going to be right and who is going to be wrong. We have heard rumors that the company's running out of money. We're in trouble. That's all a lot of hogwash. There's no truth to that whatsoever. We're in a very strong capital position and if we ever needed money, the capability of raising capital at a very non-dilutive manner at this point, remains available as I said. Eddie could spend his whole day just evaluating opportunities from people who want to buy into the company. So I can't really comment. I don't want to crawl into anybody's head and say, why are they shorting it? What do they know that I don't know? I don't think they know anything that I don't know and as witness just by some of the actions, I exercise, pay taxes, stock kept, didn't sell a share. Somebody called me and reported making very small sale, that's and error and we made gifts to my children, my grandchildren and to charities. I haven't sold any share except when I had to for reason that nothing to do in my belief in the company. I don't know why the short sell but that's what makes a game. There's people who are optimistic and they're people who are not. It's still the United States. It's free enterprise. Anybody can do whatever they want. I personally am on the long side and that's where I'll stay.

Thank you.

Our next question comes from . Please state your firm, followed by your question.

Hi, .

I'm very new to the story and I'm just looking at, I guess, what the only analyst report it's from , is that right?

That was one of them. There was another independent report a while back.

OK.

Are you, I mean, obviously, the analyst was on the call. Are you still, you said that you provide guidance, are you still in discussion with him? Will be coming out with an updated report? I guess I'm just trying to get a sense of how, you know, analyst reports are usually modeled off guidance from the company and just trying to get a feel for how reliable the latest November report was, given the revenue was a bit short of projections?

I would suggest that they would probably come up with an upgraded report at the year-end, taking into consideration all the evaluations at the time.

Would you expect to see additional analyst coverage? I noticed there was a Nicholas analyst on the call, have you been in discussions with other outside firms?

As we've said, we've had lots of interest from lots of companies who want to do various things with the company. It was interesting to me that just today after we announced that, that another substantial brokerage firm came to us and wanted to take a look. They've been looking at us. It seems that we're getting on more radar screens than we had before although I can't say who would or would not start to pick up coverage. Very possible that other companies because of the affiliations that KMPG may or may not but I can't say to you that I know for a fact they will. It's a little premature. We just announced it today.

OK and looking at the report it looks like though they have gross margins being sort of in the 47 percent range and just given what you said on the call today about your inventory, you know, if you're assuming that 3300 units could sell for somewhere between five and eight million in revenues, I get about 57 to 73 percent gross margins on that. So, is that the kind of area that we're talking about assuming you could get some, you know, some truly significant orders here?

Our margins are, let's call it healthy, it is a patented technology. We don't know of anything, even though there are people that claim they do what we do, we don't know of anybody that actually, if they do it, either one probably doesn't infringe our patent or two doesn't do it as well as we do and if you were to just take the margin and if we say we sell it at full list, $2495 at 3300 sales we would be profitable. What we told you what our expenses are for the year, it's pretty easy to figure out and you pretty close on the margin on what the sales price direct would be.

OK. Well, that's very encouraging.

The other question, I guess, you know, obviously there is a lot going on in your market and I would imagine there ought to be significant interest in your technology but given the fact since I guess did cancel the deal and Tyco is a major player in security, I guess I'm wondering why we should not read that as kind of, essentially a lack of interest by one of the major technology players in the security space and how would you sort of address that?

Bob, you want to answer that and just generally allude to what happened out in Hawaii?

Well, I think what we had there was kind of a unique situation. It had a lot to do with, as I mentioned before, with the focus of the company on core products, probably the timing wasn't right to introduce products that were, let's say outside of the comfort level of the management team and the sales team and so on and I think that was probably the main thing that happened there. It's a fine company, were good people, it just probably was the wrong time to introduce something new to the sales force when they were really trying to improve the sales results and financial condition of the products that they were selling, which were their core products. So, I mean, that's what I think happened there that it was not a negative about and it's certainly with all the things that are going on with us now, is not a negative about our product or our technology. But sometimes, you know, the honeymoon's great and the marriage didn't work out.

OK and a final question, you had mentioned there was one industry with the potential for 60,000 to 85,000 units? What industry is that?

I would not want to make a comment on that but that's just an indication of the size of the opportunities that we're pursuing right now and if the decision was made to implement across the industry, that would be the range of the product installations.

What, I mean, is it retail? Is it government?

No comment.

If I could say, some of the people interested, where we know they're more than interested, when we know it's more than just commentary, they ask for the things that we never asked in the past from other companies that hey we're interested in buying x amount, would you be willing case of a worst case scenario of escrowing your source, where we've done that before, would consider doing it depending upon the size of the potential. So, when Bob alludes to the size of potential, we're even in the point now with some of these people we're preparing more or less escrow agreements for the software, which most reasonable people would want if they're committing to thousands of these units.

OK and, I guess, I do have another question regarding the deferred revenue, I think you said it around 300,000 and just checking the K quickly, it looks like it was 200,000 at the end of December. Has it gone up?

OK, no. I just didn't remember. I didn't have it in front of me?

Yeah, has it gone up as the close of the first quarter since we are -- that's a done deal now?

I can't release those numbers yet.

OK and when would you expect to have the first quarter results?

Usually released at -- it's due, I think, the 14th of May.

OK.

Generally two days before that.

Great. Thanks very much.

You know, for those of you as Ed alluded to, we did not plan on releasing this today. It was always our intent to release this a few weeks ago but Ed told you earlier, you all know what's going on in the accounting profession and, particularly with our current auditor, where they're under all kinds of strictures to get the thing out and they've complied with everything as have we. Everything we've done probably to date has been reviewed and re-reviewed by the SEC and so; our accounting is in very, very formidable shape for SEC purposes. No doubt about that, it's clear cut and so we apologize to you as Ed said earlier for the lateness of the release but, literally, we had no control over it. It isn't something that we planned to do to wait till the last minute; we were just fortunate to get it out because most of you are probably aware that the SEC we're not unique. SEC has permitted those companies who are being audited by Andersen, if they have to, thank god we didn't have to, we got it, to file an unaudited statement and they gave them 60 more days to file an audited. So we're not unique. We didn't sit on it, it's just one of those circumstances. We worked our way through and we have filed audited statements. People have queried us. There is no qualified statement. We're in strong financial condition. It's a clean statement as we fully expected so whatever is alluded before the short, the facts are the facts and the shorts can say whatever they want I've no control over that.

Our next question comes once again from . Please state your next question.

Frank, in the KPMG people, I'm sure they did a considerable amount of homework before they came to us, did they give you any indication of what they felt our potential market was, say a gross number of units or sales and how they valued that or looked at what they thought our company might be worth?

The answer is, they have evaluated the company. They didn't sign us on in a vacuum. I can't disclose what they thought, but, obviously with their success rate they didn't come to us because they didn't think there was ample opportunity within the company and I'll let it go at that.

Ed?

Yeah, that's fine. Thanks, Frank. That's great.

If there are no further questions, I will turn the conference back to Mr. to conclude.

All right that concludes the year-end report. We thank you all for your continued interest in the company and we look forward to our next conference call when we speak to you again.

Thank you all for participating.

Ladies and gentlemen that concludes our conference today. Thank you all for participating and have a nice day. All parties may disconnect now.

Mr. ?

END