Intellicheck Inc (IDN) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Morgan. I will be your conference facilitator today. Welcome to Intelli-Check's fourth quarter and 2003 year-end earnings conference call. Following remarks from the company, there will be a question-and-answer session. If you have a question, please press the star key followed by the number 1 on your telephone keypad. And your line will be unmuted in the order received.

We would like to ask that questions be brief so that all telephone participants will have the opportunity to ask questions. If you have additional questions you are certainly invited to press star 1 again. Copies of the press release have been faxed or E-mailed to you. If you have not received a copy please contact Gillian Angstadt at The Abernathy MacGregor Group, at 212-371-5999. This call is being recorded and is copy-righted.

Therefore, please note that it cannot be reported, transcribed, or rebroadcast without Intelli-Check's permission. Your participation implies consent to our recording this call and placing it on our website. If you do not agree to these terms simply drop off the line. I will now turn the call over to Gillian Angstadt of The Abernathy MacGregor Group,who will introduce the company and read the forward-looking language.

Thank you, Morgan. Good afternoon everyone and thank you for joining us today to discuss Intelli-Check's financial results for the fiscal year ended December 31st, 2003. Before we get started I'd like to read the following statement. Certain statements on this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

When used on this conference call words such as expect, believe, intend, will, and similar expressions as they relate to the company or its management as well as assumptions made by and information currently available to the company's management identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.

Additional information concerning forward-looking statements is contained under the heading of Risk Factors listed from time to time under the company's filings with the Securities and Exchange Commission. We do not assume any obligation to update the forward-looking information. With that aside I'll turn the call over to Frank.

Thank you, Gillian, and thank you everyone for joining us on today's call. With me are Ed Winiarz, our Senior Executive Vice President and Chief Financial Officer, who will discuss the financials, Russ Embry, our Senior Vice President and Chief Technology Officer who will go over recent technological advancements, and Ralph Thomas, our Senior Vice President of Sales and Marketing who will discuss our current and future sales and marketing initiatives. I will now turn the call over to Ed, who will take you through the financials.

Thank you, Frank. Good afternoon everyone. I'd like to discuss some of the information financial that is contained in our 10-K which we filed earlier today. Revenues increased in 2003 by 8.5% from the prior year to a total of 1,235,000. Included in the revenues for 2003 were royalty fees of approximately $65,000.

Ralph will walk you through some of the details of our current sales initiatives later in the presentation. During the fiscal year we took a write-down of our inventory of $990,000. This write-down was taken to comply with our established inventory evaluation policy as described in the 10-K. However, we believe that a sufficient market exists to sell our current inventory with margin over a period of time.

Without said write-down our gross profit percent would have increased to approximately 63.3% for 2003, compared to 56% for 2002. Resulting from a shift in our sales mix comprising of licensing and software sales at very high margins compared to lower margins on the sale of our software and hardware products. We expect this trend to continue in 2004.

Our total operating expenses decreased by approximately 1.2 million from $6,573,000 for the year ended 2002, to 5,329,000 for the year ended 2003. This decrease resulted primarily from the reduction in legal expenses including the reversal of a legal accrual established for litigation matters that were recently settled. Additionally, operating expenses decreased as a result of reduction of expenses from the hiring of professional consultants primarily relating to the recognized non-cash expense of the granting of options to this group in the prior year.

We also incurred a non-recurring charge of $950,000 in 2003 resulting from litigation matter that was recently settled and paid for from the cash reserve during the second quarter of 2003. Our cash expense burn rate has remained constant for the past year at approximately 400,000 per month including payments required under our convertible redeemable preferred stock agreement.

We expect operating expenses to incrementally increase in line with increases in the growth of our business. For the reasons prior stated we reported a net loss for the year ended December 33, 2003 of $6,451,000 or 74 cents per share which includes non-cash expenses of approximately $2,314,000, or 25 cents per share, compared with a net loss of 64 cents per share or $5,550,000 for the year ended December 31, 2002, which included non-cash expenses of $1,773,000, or 20 cents per share.

At this point, I'd like to review the company's liquidity and capital resources. Net cash, including cash equivalents and short-term marketable securities and investments increased for the year ended December 2003 by $6,253,000. The principal reason for this increase resulted from the net cash we received from the $3 million financing closed in March, and the net proceeds of $7,906,000 from the secondary public offering completed in October.

Our balance sheet remains strong with a current ratio of 5.54 to 1. As of March 1st, we had approximately $7.7 million in cash, cash equivalents, and marketable securities. Our cash is invested in short-term high-grade quality commercial paper and bonds.

We anticipate that our current available cash in hand and cash resources from the expected revenues from the sale of our products, including the sale of our units in inventory and the licensing of our technology, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. As Russ will discuss and Ralph will elaborate on we have been actively marking our newly announced products and techonology for licensing and integration into other complimentary systems and technologies.

Sales to these potential markets should result in additional cash flow for the company. Lastly, I would like to update you on the statement that we made during our last conference call wherein it was stated that we believed we would be cash flow positive for the first quarter 2004.

Due to the delay we have experienced in the awarding of contracts for some large potential sales initiatives in both the government and commercial markets, for which we had reasonable expectations that there had been funded in the first quarter, which belief was based on certain information that was presented to us, we will not be cash flow positive for the first quarter of 2004. However, all the initiatives upon which this belief was made are still viable and we still feel very confident that we will be successful in our efforts bring these opportunities to a positive conclusion. I'll now turn the discussion over to Russ Embry, our Senior VP and Chief Technology Officer.

Thank you, Ed. Good afternoon everyone. We recently announced three new additions to our ID-Check Verification technology product offering which we believe will greatly enhance our market position. Many of our target end markets are more frequently demanding hardware-independent software so that it can be used on a variety of data processing devices.

With the introduction of our DCM, or data capture module, which is a small, compact self-contained two-dimensional barcode and magnetic stripe reader; customers will now be able to use Intelli-Check's technology on a wide variety of platforms ranging from desktop workstations, tablets, notebooks and TDAs. I'll give you a just brief overview on the functionality of each new product, all of which are designed for use with the DCM.

The first office solution is ID-Check PC which is designed to run on desktop computers. ID-Check PC is designed for those customers not requiring network capabilities and is also capable of reading the smart chip contained on the military common access card. It is to install, set up, and use and will be commercially available within the next couple of weeks. The second of the software solutions is ID-Check PDA which is designed to run on hand-held personal data assistant devices, such as the IPAC and Axon.

ID-Check PDA will have similar functionality to the desktop version, ID-Check PC, but will have a smaller footprint and the advantage of mobility depending upon the configuration chosen by the end user. Third new application is the next version of C-Link. The company's networkable data management software. This is being enhanced for use with our new DCM and will also be capable of reading the smart chip on the military common access card, and is expected to be available in the latter part of the second quarter of this year.

Additionally, we will -- we are always evaluating the potential of porting our patented ID-Check technology to other operating systems such as Unix and its derivatives. As new jurisdiction formats are made available and interchanged, they are being incorporated into our technology. Currently there are 48 states and eight Canadian provinces that have encoded driver licenses.

We are expecting the remaining two states to begin encoding some time this year. Most of the Canadian provinces that do not encode are currently in the early planning stages for the new rotation. It should be noted that the new AAMVA standard requires at least a two-dimensional barcode to be present on the document.

We also receive frequent inquiries from companies interested in licensing our technology for use in their applications. We will continue to strategically evaluate licensing opportunities. I just want to add that we're very excited about the feedback received concerning the significant developments that have recently taken place internally at Intelli-Check.

We get feedback everyday from people impressed by the robustness of our technology. We look forward to continueing to refine and enhance our current applications as well as building new solutions that best address market interest. I will now turn the call over the Ralph Thomas, our Senior Vice President of Sales and Marketing, who will share some of the opportunities now accessible to Intelli-Check with the introduction of our new solutions.

Thank you, Russ, and good afternoon everyone. Our new DCM and software have been very well received in the marketplace. Our ability to now offer a product line with new price points and user selected computer platforms has made a major difference for us in the sales process.

Further evidence of this is that we have shipped more SDK's, which stands for Software Development Kits, this month than in any previous month in the company's history. Additionally in one to one or head to head competitive evaluations we have been selected hands down as the superior offering. Personally I find this to be an excellent testimonial in its own right to our technology.

As to sales in the quarter, in addition to reorders from established customers like Mohican Sun, Synoco, et cetera, we have added to our customer base accounts like Precision Dynamics, Goddard Technology, Jay Alexanders, a major state agency, Michael Jordan restaurants, Epress Casinos, Williams Distributing, Coyote Ugly, Yves of the Same Movie, Co-America Bank the Global Payment Division. And in addition have submitted several significant proposals to new prospects. For example, a well recognized bank in the Northeast, a large convenience store chain, a major merchant card processor, a national automotive retailer, a major Southern university, and a transportation agency in the Northeast.

These current proposals we believe will lead to measureable sales orders. On a similar note, modifying our current agreement with CUNA, the Credit Union of North America Association, should also add measureably to this perspective. Concerning sales and marketing relationships in general. All preexisting and channel distributor agreement and representative agreements have been nullified and will be renegotiated.

Our new working agreements will fall into three separate and distinct categories. A solution partnership dealing with application software within a particular vertical, system integrator for a total solution hardware and software, and on the reseller side, the value-added reseller agreement will now be the agreement of choice for individual sales representatives.

We expect to announce several new strategic agreements in Q2 and particular they will deal with visitor management, public safety in particular, law enforcement, and age verification. In the age verification marketplace the company has maintained market share. Growth, however, has not been explosive for anyone attempting to sell into this market because of the fact that regulations regarding sales of age-restrict product are not being uniformly enforced.

As an example, per the Division of Alcoholic Beverage Control in the State of New York only 271 licenses were actually canceled or revoked since 2001. We believe this will become a larger market opportunity as enforcement increases. In our last conference call I was asked about making personal changes -- or personnel changes, excuse me, and we have made several.

We have added in customer service a new individual. We have added a Western Regional Sales Manager, and we have reorganized our business development function and divided it into two separate categories, government and commercial. Regarding government initiatives in particular, and which we are very actively involved, it should be noted that we are not the prime contractor on any of these opportunities.

However, we are important component players but do not control these initiatives, allocation of funding or pending legislation. The length of time for these initiatives to bear fruit is increasingly long. We are encouraged, however, by the March 2004 policy issuance regarding smart card systems for identification and credentialing of employees which states, "binding the identity to the federal agency smart card at issuance", in person proofing "that binds the verified identity", of, the intended bearer to the FASC to the credential issued by the agency.

The agency process will require that the bearer present [breeder] documentation that will be electronically verified and validated by the issuing agency in an in-person process prior to issuance of the FASC. It is our experience that most [breeder] documents presented with a photo ID are, in fact, driver's licenses. This regulation which is in the final stages of being adopted can have a significant beneficial impact upon us since electronic verification is what we are known for and will become a requirement for credentialing across all government agencies.

Lastly, as to infrastructure. We have signed an agreement with Web-X for planned web seminars and also for web demos. We have also obtained target market programs that are in development for launch in Q2. Over the past four months I've had chance to evaluate and understand our primary markets, this their needs and potential competition.

It is my opinion the company is now very well positioned to take full advantage of the marketplace opportunities presented to it We have a broad product line today. We have multiple price points, a better channel strategy and the right personnel to move forward even though the results for the year ended December 31, 2003, which we released earlier today, were disappointing, I remain optimistic that changes taking place in our sales and marketing efforts will prove rewarding as the year progresses. Now I'd like to turn it over to Frank for his closing comments.

Thank you, Ralph. Before we open the conference to questions, I would like to address two issues about which the company has received numerous inquiries. The first is the issue of liquidity. Which Ed clearly described. It is obvious from his remarks and our filing that the company's balance sheet is strong and we are in no danger of running out of funds for the foreseeable future.

The next question that has come up is the issue of our relationship with Northrop Grumman. There has been no change in the company's relationship with Northrop Grumman. It remains strong and is continuing to evolve in a positive manner. With that, I will turn it over to the conference operator who will open the meeting to questions.

Thank you. Once again, if you have a question, please press the star and one on your telephone keypad. We will pause for questions to register. We'll take our first question from [Tray Snow] of Priority Capital. Go ahead, please.

Hi. Regarding your cash flow targets, you said that first quarter is no longer possible, but is there some other date that you could give us or does it just really depend on sort of the flow of contracts?

This is Ed Winiarz. As you know, it's very difficult to predict when certain initiatives are going to hit. We've made the projection back in November as we -- it was pretty much one of our first projections of cash flow. We felt very confident at the time. As I've discussed, certain things happenrf where delayed -- certain initiatives and fundings of programs that were beyond our control, so it's very difficult to kind of repredict.

We still feel very confident that it's going to happen. It's just hard to tell you when, in what quarter.

Okay. Do you have any guidance for the full year in terms of other metrics in sales or profitability or anything?

Well, we are going to -- this is Ralph Thomas. We are going to continue to try to hit our number, and try by the end of the year certainly to be cash flow positive if at all positive.

Okay. And now that you are deploying sort of the next generation of hardware, who is manufacturing the devices for you?

This is Ralph Thomas again. A company on the West Coast that we OEM the product from.

Thank you. We'll take our next question from Richard [Karpf of Gunn-Allen] Financial. Go ahead please.

Good afternoon. Good afternoon gentlemen.

Hi.

Couple of questions. On your earnings release, under Other Income Expense, there's a $921,730. What does that represent?

That related to the litigation matter for Early Bird Capital.

That's the money you put aside?

Right that we put aside back in April or May of 2003. So we finally settled with them and we paid it out, so that matter is concluded and gone.

Ralph, welcome aboard. I know this is your second conference call with Intelli-Check. As far as you, you've got a long list of companies that you've shipped to that we haven't seen any press on this over the last quarter. You said a lot of clients ordering more product or reordering. Half the list that you've given I never heard any original order come off on any kind of news. As far as -- that's one.

Number two, over the past year, I've been on every conference call where we've heard about quasi-government, major retail testing, Department of Defense, but yet we've never seen a closing date. I know on the government you have no control, but as far as on the commercial, the two major retailers that you've done testings for, are they still viable clients, potential clients, or where are we at? Is the testing all done? Where are we at on these stages?

Well, the testing -- the first phase of testing has been done at both. I have an appointment with one in a matter of a couple of weeks. We're going to try to re-energize that situation. They are, in fact, buying product. Not at the level we want them to. We do have the other retailer that we have to get involved with the company that is managing the paper for the instant credit card verification and issuance process, and there are three companies that we are pursuing in that area.

Thank you. Our next question will come from Arthur [Vandelay of Vandelay] Capital. Go ahead please.

Hi guys. You started the call by stating that the revenues are up by 8.5%. Excluding the impact of deferred revenue accounting were sales actually down?

Instead of actual shipments?

Right.

The actual shipments, as we sated in the 10-K, were down a little bit.

All right. So sales really weren't up?

Well, you have to separate shipments and --. revenues were up.

Would revenues from the actual physical shipments have been up or down excluding accounting for deferred revenues?

If you recognize shipments as they leave the building, they were down a small amount.

Okay. On a dollar basis --.

Relatively stable. But at these levels, you know, it's -- we're not at high sales revenues, so any small change you get big percentage shifts.

Okay, and you stated in one of your periodic filings, I can't remember which one, that you would be able to sell your remaining inventory, "over time with margins". Is that true without any further write-downs?

Well, the write-downs, when we say margin, as long as sell it over your cost, you're making a margin, so that's what we believe, that we're going to be selling these units above our original cost, which would be at margin.

Thank you. Again, at this time, if you do after question, please press the star and 1 on your telephone keypad. We have a follow-up question from Richard [Karpf] of Gunn-Allen financial. Go ahead please.

Sorry, guys, I got cut off before I could ask another question. When you started talking about these retailers that you were re-visiting and you started talking about who's covering their paper my question was, are we at mid-field, or are we coming towards the end zone? How far out do you foresee I mean it's been a long testing process. How long of a process do you see from this point?

Well, as far as the first one I mentioned to you I think that we are past the midpoint, okay, if that addresses your question, Richard. As far as the second, I believe that we have to reinvigorate that one because the people that we're carrying the paper which happened to be GE Capital, are no longer on the account, and we have to begin the relationship all over again with the people that now have the account, which is Citi Bank, and we're in the process of doing that.

Thank you.

We have a follow-up question from Arthur Vandelay of Vandely Capital.

Sorry, I got cut off as well. I just want to confirm, you still believe you will be able to sell the remaining inventory above the price you originally paid for it back in 1999?

That's correct.

Do you guys compete with Veri-Phone on the hardware side?

Who do you want to address the question to?

Frank is fine.

Would you repeat that question, please.

Yes. Does Intelli-Check compete with Veriphone?

We don't consider Veri-Phone a competitor, no, we do not. I mean, Veri-Phone in some of their products offers some age verification but we do not consider them a competitor.

But if you put legal age software on a Veri-phone phone platform would that combined product be a competitor.

We consider legal age a competitor, yes, we do.

On a Veri-phone phone platform?

Ralph? Do you want to address that?

I would just like to comment on that. I think no matter what the platform, I do believe, and I believe this sincerely, that we will outperform any competitor that we have out there today. And we have in our laboratory proven that and we have proven that in the field so I don't feel that that combination would be terribly exciting for any customer.

I guess the confusion arises when I talk to legal aid and they state that they have 7,000 units in the field. Just looking at what you guys originally purchased, there's no way you can that have many units in the field.

Well, we do. This is Ralph Thomas again. We do have some information that we have obtained regarding the successes or so-called success of some of our competitors. And I would be hard-pressed to buy that figure of 7,000. But, you know, the truth of the matter is that I don't even consider them to be a competitor I run into.

Okay. Last question. I just noted that over the years insiders, including management and the board, have sold stock, when you add up the dollar amounts, it's several times the amount of product sales. And I'm just curious if the management would be willing to pledge that they would restrict their stock sales to be no greater than product sales?

Could you rephrase the question, please?

Sure. I was wondering if could I get management to pledge that they would restrict their sales of stock personally to be no greater than the company's sales of product. So, in other words, if the company sold a million dollars of product, management would sell no more than $1 million of stock collectively.

Well, I think if you take a look at what management has sold, management bought stock last year. There were no sales. I don't think that anybody here, if you're talking about management, I personally have never voluntarily sold a share. Never. And I have the most recent is I purchased stock.

So I think to ask the company to state that, it doesn't really make sense, because we've never done that. I mean, I don't know, Ed, do you know of anybody that's ever sold any kind of stock?

There's been some option exercised in 2001.

Did they sell it?

A little bit. Yeah. They flipped it.

The amount of shares, as a matter of fact, the management of the company, I do not believe, has sold any shares at all in months.

2003 there was nothing.

Nothing. So --.

2002, I don't recall much.

I mean, that's an easy thing to say, but I can't commit what anybody else was going to do, but I'll just say that I know of nobody's plans at this time to sell any shares, nor has anybody sold shares. If you take a look, management has bought shares. If that answers your question. Are you there? Have we lost this?

You're saying that your previous sales in '02, Frank, were involuntary?

That is correct. When I sold mine I did not file a 144. That was sold under a pledge agreement before I had the chance to correct it. Take a look at it. It says sold by X. It was not initiated by myself.

When I add up all the form 4's I see that management and the board had sold well over three times, in dollars, what the company sold in product. And if anyone -- if the company believes that's false, please put out a press release tomorrow to prove prove me wrong.

I can't address that issue. I don't have the numbers in front, but I don't believe that's accurate.

Okay. I look forward to your press release.

Thank you. Our next question comes from the site of Robert [Lampert] of time of RLLR Capital.

Hi, everybody. I'm really late to the phone call. This may have been answered twice already, but I understand in April the Homeland Security is going to assign or give out a contract. Did you address this already, Frank?

No, we have not addressed what we expect, because certain of the expectations on which we had based the prior statement have slipped. However, it is also our understanding that sometime in April, beginning of May, a major letting of contract, it will be for the Visit Program. That's the visitor immigrant status indicator technology will be funded and awarded, and that's a ten-year program that allegedly is going to be in the multibillions of dollars, and that should be one of the first contracts let other than for the prior contracts from the TSA and Homeland Security went for visitor screening first. Then it went where that money went, then it went for bomb detection. And we now believe on every indication that we've had from government that this will be let and awarded sometime in April, beginning of May. That was one that was supposed to be awarded last November.

Okay.

But there's no guarantee that that will happen.

And we're sort of rooting for is that correct computer sciences? Is that correct to win it?

Well, there are three bidders in that. The three remaining bidders are Accenture, CSC, and Lockheed Martin. We would be pleased if CSC was awarded that because Northrop Grumman is a sub of CSC and because of our involvement with Northrop Grumman. So we would consider that a very positive, if that were to take place.

That would be great. And if Lockheed wins, do we have a chance with Lockheed?

If the technology is specifically speced, of course, we have a chance with anybody who wins, but you can't go in with multiple on the same bid.

I see. Okay. Well, thank you. That answers my question.

You're welcome.

We'll take our next question from [Tray Snow] of Priority Capital. Go ahead, please.

Thanks. Visit sounds like it could be a real growth driver for '04 and probably '05. I'm not familiar with the program in its entirety but how much of that could be set aside for sort of ID-Check technology, just back of the envelope?

The question is the Visitor award.

Well, there are a couple of things that come into play on the Visit award. The technology is part of it, but then there are other initiatives coming out such as the transport worker identiry cards, the quick card we expect it all to be funded in the next year. We have seen projections out of government that will be $7 billion in funding in the next 24 months, where our sort of technology would have applicability.

Doesn't mean the 7 billion for Intelli-Check. We would be a part of it, but with the small amount of shares outstanding, even 15 or 20 million out of that 7 billion would be very, very significant to the company. But we believe that the spigot of funding will begin certainly with the visit program, and that is now projected and as Ed had indicated, some of the things on which we make our internal projections are predicated upon the best intelligence we receive from our partners and from government agencies at which we are in contact with.

When they slip, unfortunately it impacts us but that doesn't mean that they've gone away. These are very, very viable programs, and we do believe, based upon the latest, that it will come within the next 60 days.

Okay. And I have a quick follow-up for Ed. Balance sheet question. It looks like receivables are about the same level, a little bit higher than they were in September, and I recall from that conference call that most of that was driven by Northrop Grumman. If you could update us on what the sort of realization of that might be and then your payables look like they took a big drop in the fourth quarter. Just wondering what was going on there.

Right. On the receivables, from 2002 to 2003, went up from about 94,000 to 250,000. We had some large sales in the fourth quarter 2003. That's why receivables went up. As respect the payables, as I mentioned, we had some significant legal accrual reversals that weren't payables and some expenses to the tune of about 513,000 that were reversed. We had a lot of litigation matters settled.

So that's where those were sitting.

Yes.

Okay. Thanks.

If you have a question, please press the star and 1 on your touch-tone phone. We will take our next question from John [Huff] of CSFB. Go ahead, please.

Hello, gentlemen.

Hi, John.

Hi, John.

Couple questions. The first is, can you bring us up to speed on any of the lawsuits that you have outstanding for the patent dispute. And then the second question is in regards to some of the partnerships you signed over the years can you illustrate any traction you've been receiving in regards to the likes of , AAAE, AAMVA, Cisco, Imaging Automation, BioScript, any of those, CUNA, type announcemets. Are they actively marketing your product and can you give us a sense of what these new product developments that you've been able to bring to the market might have on those relationships?

Okay. I'll answer the first part of your question, John. As far as the litigation, we have announced -- and are proceeding with discovery in the patent infringement suit with TriCom. That's the only litigation we're currently involved in as the plaintiff. The rest of our litigation slate is clean. Ralph, if you want to address the second part of his question.

Sure. As far as what our new products will bring to these previously negotiated agreements I think the positive results in particular I was at the Credit Union of North America annual meeting in Washington a few weeks back and the products were received very, very favorably. In addition, we're talking about a considerable reduction in the cost as well as the footprint which is going to be a much more attractive product overall for that particular audience, and in their legal department right now is our modification to our original agreement.

So we have high hopes for that relationship. AAAE, I have not been personally involved in to any great extent I intend to be. MADD, I have contact, and MADD is a continuing supporter of ours but they're not in the business of reselling. They're only in the business of influencing, and we're hoping that once we have the portable products we can make a few available to help us on the reinforcement of the enforcement side of the equation.

Linell Imaging Automation, they have value but they have not yielded material results to date. And I think again, having a new product line, like we described earlier in the conversation, is going to make a dramatic difference in moving those initiatives going forward, and I hope that answers your question.

Yes, does it. Can you speak to Check 21, an opportunity there for your product to be used alongside the electronic processing of checks?

Go ahead, Frank.

I'll address that for you, John. As a matter of fact, Check 21 could be a huge initiative for us. One of the major companies that provides the printers for cash register systems came to see us, recommended they have this check conversion. For those of you who don't know what Check 21 is, society is trying to go to a paperless society where a check will be like a credit card.

You will take your check and present it as a form of payment. They will immediately electronically convert that into an electronic submission of the check. If you back the check, canceled, it will never go through your bank.

However, it opens up the opportunity for major frauds, and this company came to us to talk about integrating their technology with our technology because they want to be able to verify that that person giving you that check is who they are. And it's -- we're in discussions, we've even had some of their engineers from Japan come in to see us and discuss it and I have been invited to their major conference as a co-guest speaker in May to present the initiatives that we have and what it means to them as far as Check 21, Patriot Act Compliance, et cetera. Ralph, if you want to add something to that.

Is that where you're sharing the dance with Tom Peters that particular form, Frank?

That is correct.

No, the only thing I would add to that is we are actively working with several background screening companies in pursuit of a transaction-based relationship and matter of fact I'm going to be meeting with one of those companies this Friday.

Does that answer your question, John? Did we lose you, John?

No, I'm here. Can you hear me? Yes . guess one additional question, you had talked about being cash flow break-even this quarter, Q1 of '04, and now you're not giving any guidance as to when you might go cash flow break-even except, you know, you hope it's in the future.

What can you give us to feel comfortable that the sales process is not going to continue to be delayed, you know, for the foreseeable future? Looks like some of these new sales that you've made are probably direct sales of some of the names that you listed there. Are you seeing more traction in the direct sales, the referral business, or, you know what can you say that can give us some comfort that sales are going to accelerate going forward and that we are going to hit that cash flow break-even by the end of the year?

Thank you for that question. I was glad that you asked it. I think that what we're doing today is we are building significant increases in the pipeline. As you know, our sales cycle is not a short one.

It's somewhat lengthy, especially when we're talking about opportunities outside the traditional age verification venue. And people like Precision Dynamics, the comment was made earlier, who are those folks, those folks just completed a test at the Super Bowl in Houston. Where they basically banded 50,000 people attending the Super Bowl functions there, using a screening process to create an age verified band that would allow the purchase of age-restricted product during that particular event.

And that's another case where they evaluated a competitor product and have essentially been in bed with that competitor before we went to talk to them and have basically abandoned that relationship in favor of us because we out performed them.

John, just to finish that question of yours, the initiatives that the company pursues, since we do not believe that the age verification market has certainly matured to the point where we should throw full effort at it, if you after brand to protect, we've said this before, or you've been stung, they come to us, and they want protection. However, until that we're not throwing major resources, until that market actually matures. On the point, the initiatives that we're going after, particularly in government and in the commercial space, are very, very large.

So any one of these, which are out there, could hit at any time. We are expecting to see some major funding out of the government this year. That we could be cash positive and the minute that we have that indication, let's say we don't want to do the same thing that happened where these commitments and expectations were given to us very positively, we ramped up what we believed to be the potential for the first quarter and we made that statement.

We don't want to come out with a statement that we have to retract. We would rather wait until we actually have it, and we will announce, the minute this happens, that we intend -- or we will be cash flow positive for that period, and I think that's the best guidance that we can give at this point.

I can't tell you it's going to happen tomorrow, and I also at the same time cannot tell you that it will not happen tomorrow. We sit here expectations coming, particularly on the government side, which is enormous in the next two years. And we expect to participate very powerfully in these initiatives.

Thank you.

We will take one more question from Dan Morris of [RF Lafferty]. Go ahead please.

Good afternoon, gentlemen.

Good afternoon, Dan.

I was just wondering if you could just bring us up to date on the Northrop initiative with regards to [DKIS].

I'll be very happy to do that. The Northrop intiative with [DKIS] is still ongoing, is very active. As a matter of fact, we have been told, but I haven't seen this directly, that there will be RFP's coming out on that very, very shortly. Northrop is the lead. We're a sub to Northrop.

We've seen in all of the policy initiatives that are coming out that we're in this particular program, and does it not hurt at all. Ralph had mentioned this just came out about less than a week ago, that initial federal initiative for the federal smart card issuance, the credentialing, up until about ten days ago it called for in-person proofing.

That latest language that's now before the OMB, when they change a regulation, it takes 45 days, it has to go to the OMB, and at that point it becomes, let's call it law. That now calls for electronic verification and validation. That's brand-new language that was just put in within the last week.

And these are the kind of things that make us very optimistic for the future, because there is nobody that does what we do as well as we do and we have the patent on validation. So things that are -- have taken place behind the scenes that we've been working on are starting to come to pass. So the [DKIS] is very much alive.

We have ongoing discussions with Northrop with regards to the [DKIS] program and the company is one of the members of the [DKIS] counsel. Even though we're a sub, we are one of the decision makers on that particular panel.

All right Frank. Just a follow-up. Is there any way you can quantify what the revenues would be just on the [DKIS] contract itself?

Well, I can't comment any further than what Northrop said at our annual meeting, where they described their portion. This is going to be a very big initiative. You're talking about 400,000 government contracts that. would be compliant, like we've even gotten a request here, Intelli-Check has thought of that.

We have to credential our own employees. We've gotten that already. And so if you figure a company like Intelli-Check has to credential its employees to be part of the [DKIS], yet to go out 400,000, all that I will repeat for those of you who are at our annual meeting is that for the portion -- the model of whether it's going to be a fee-mold or whether it's going to be a cost-plus model, they had stated, as I recall, that as low for the end that we're involved with of a penny a transaction, their revenue would be over $have 00 million.

You're 50/50 partners on that correct?

We are partners with Northrop on that, on that initiative. The question is we don't look at it because based upon the sales volume we've had today to say that 300 million is flying our way would seem a little bit silly.

Well, we can all dream, can't we?

Right. But I would say if we only got 5% of that we'd be very, very profitable. So we know what the numbers are and that's what encourages us as to what's out there. The number is 7 billion in funding and expectation for that has applicability to our kind of technology as a component.

What we've changed in the last eight or nine months is we've gone out and spoken about the power of our technology, and it is very powerful, as Russ has stated. However, now we go out and we look to get traction by talking about a solution, and we talk about this solution with the various partners that we've gone with.

So when they ask about all of these companies we've partnered, each one in any individual could have applicability, and we believe that by offering a total solution which we now do, for in-person proofing, not only proving that you have a valid ID, but proving who you are, will be invaluable to the company as these initiatives move forward. Did that answer your question, Dan?

I hope so.

I will now turn the program over the management for any closing comments.

This concludes the presentation on the teleconference. We thank you all for participating, and we look forward to speaking with you in the future. Thank you so much.