Intellicheck Inc (IDN) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Leo and I will be your conference facilitator today. Welcome to Intelli-Check's 2004 first quarter earnings conference call. Following remarks from the Company, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). This call is being recorded and is copyrighted. Therefore it cannot be recorded, 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 turns simply drop off the line.

Before I turn the call over to Intelli-Check, I would like to read the forward-looking language. 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 in the Company's filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking information.

With that aside I will turn the call over to Mr. Mandelbaum.

Thank you and thank everyone for joining us on today's call. With me today are Ed Winiarz, our Senior Executive VP and Chief Financial Officer who will discuss the financials; Ralph Thomas, our Senior Vice President of sales and marketing who will discuss our current and future sales and marketing initiatives; and Russ Embry. And all of us will be pleased to answer any calls at the end of the formal part of the presentation.

I will now turn the call over to Ed who will take you through the financials.

Thank you, Frank. Good afternoon, everyone. I would like to discuss some of the financial information that is contained in our 10 Q for the first quarter of 2004 which was filed earlier today. Revenues increased in the first quarter of 2004 by $34,000 from the prior year's quarter to a total of approximately 298,000. Actual sales or shipments in the first quarter were 275,000, up from the prior quarter by approximately 85,000. Included in revenues for the first quarter 2004 were royalty payments of approximately 22,000 from the three-year royalty license we signed with Cardcom Technology back in March of 2003.

Ralph will walk you through some of the details of our current sales initiatives later in the presentation.

Our gross profit percent has been positively impacted, increasing to about 65.3 percent for the first quarter of 2004 compared to 60.8 percent for 2003 resulting from a shift in our sales mix comprising of licensing and software sales at very high margins compared to our margins on hardware sales. We expect this trend to continue during the rest of 2004.

We still have left in inventory about 2400 ID-CHECK units. We still feel confident we will be able to sell a good portion of these units for at least the remaining carrying value in inventory as of March 31st, 2004. Total operating expenses increased slightly by $40,000 or 3.2 percent from the prior year's quarter to $1,301,000 for the three months ended March 2004.

This overall increase resulted primarily from increases in employee salaries and benefits and related expenses and increases in insurance and fees relating to compliance with Sarbanes-Oxley. Our cash expense burn rate including the payments required under our convertible redeemable preferred stock agreement is estimated to be no greater than an average of approximately 400,000 per month.

We expect operating expenses to incrementally increase in line with increases in the course of our business. For the reasons prior stated we reported a net loss for the first quarter ended March 31st, 2004, of $1,075,000 or 12 cents per share compared with a net loss of 23 cents per share or $2,018,000 for the quarter ended March 31st, 2003.

At this point, I would like to review the Company's liquidity and capital resources. Net cash including cash equivalents and short-term marketable securities and investments decreased for the first quarter ended March 2004 by $879,000. The principal reason for this decrease resulted from a net cash used in operating activities caused by our cash expense burn rate exceeding cash receipt from revenues.

As of May 1, we had approximately $6.9 million in cash, cash equivalents and marketable securities. Our cash is invested in short-term high-grade commercial paper and bonds. We anticipate that our current available cash in hand, cash resources from expected revenues from the sale of our products including the sell by units and inventory, and licensing of our technology will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months.

However, at the current sales level and cash expense burn rate, we have enough capital to last about 24 months which we believe is more than enough time to effectively implement our sales plan. As Ralph will explain, we have been actively marketing our newly announced products in technology for licensing and integration into other complementary systems and technologies. Additional sales to these potential markets could result in additional cash flow for the Company and lower our cash burn rate.

I will now turn the discussion over to Ralph Thomas, our Senior VP of sales and marketing.

Thank you and good afternoon. I would like to bring you up-to-date on current activities on our progress over the past few weeks since our last conference call. Along with shipping our new SDKs, our DCM ID-CHECK PC product began shipping this month. Our DCM ID-CHECK for PDA product will begin shipping in late July. Our C-Link for DCM and networking should also begin shipping this June.

We continue to generate new prospects in customer interest. There remains a lot of work to be done. But I am regularly encouraged by the level of acceptance in our respective markets and customers regarding our new product direction. We successfully completed a month-long installation of consequence to a major state for all their motor vehicle issuance -- issuing offices last month.

Additionally I mentioned several opportunities on the last call that should now enter into the final pilot phases. For example, we have two scheduled for September. One is with a nationwide retailer and the other a noteworthy financial transaction company catering to over 100,000 independent retailers. We are also hoping to start pilots this quarter for a noteworthy chain of convenience stores, a Northeast bank of some reputation and a major university having over thirteen campuses.

Our salespeople are now being trained to give Web-based demonstrations that operate corporate presentations over the same media. They are also being trained with new productivity tool software programs for contact management, for example. They have all received a new PC-based product and have been trained to demonstrate them on their lap tops.

Our first marketing campaign including direct-mail, CDs, and a web seminar is due out this quarter as well. The emphasis will be on security, access control, and visitor management. We signed an addendum to our existing CUNA (ph) agreement for our new products and plan to call up on all major branch office locations within their organizational structure in the very near future and that number is over 10,000.

Our recently signed strategic alliance with EasyLobby has produced orders from them and we received recently a $50,000 order from Discover card for a night team visitor management systems at five separate corporate locations and additional orders have also been received by recent addition to the customer base like Precision Dynamics, Goddard Technology and Mohegan Sun.

We are also in the process of reengineering our collateral materials and Website to include all our new products, services, and relationships. And, lastly, Intelli-Check has also recently entered into several new partnership and teeming agreements and our technology has been included in several government bids and proposed legislative efforts.

For more details in those subjects I'm going to turn this over to Frank Mandelbaum.

Thank you, Ralph. Before we begin the questions, I would just like to comment on what Ralph said. We find ourselves increasingly included in multiple bids for some of the recent programs that have been put out for RFIs by the government, such as the registered travel card, the visit program, and these are getting into the pilot funding stage, the visit program will be awarded, we believe, next month. And one of our partners is very involved in that. They're down to three potentials and we're in one of them. On the registered travel there were multiple bidders. We were in four separate proposals.

They're going to cull that down to about 3 or 4 and we expect the partners that we have to survive that process and that is supposed to begin a pilot next month according to government standards. So we're very very encouraged as to how our technology is now being looked at as the technology of choice by some major integrators.

We have announced Northrop. There are others we have not yet announced. As soon as we can we will tell the public who they are. But we don't have the permission on the other site as yet to put out who they are. Just say that multiple companies are now using our technology as part of their solution when they bid on these Homeland Security initiatives.

Having said that we will now open this up to questions.

(OPERATOR INSTRUCTIONS). Trey Snow. Priority Capital.

Just thumbing through the Q real quick, looks like you guys bought some stock back in the first quarter. Is that related to the old stock repurchase program you had a few years ago?

Yes. Part of that program we purchased back 10,000 shares.

And are you actively buying back shares now?

Only when the need arises.

Okay I was just trying to figure out what motivated you to buy at that point.

I think we are motivated. We felt that the stock was at a level. We're using some of the capital we have to repurchase shares would be a very good investment.

Okay, and also could you give any detail on the changes you made with CUNA (ph)?

Yes, we incorporated with our new agreement pricing for the PDA product as well as the PC product. And they were quite excited about having both of those added to the mix. There is a much smaller footprint involved there in a much lower cost, and we're looking forward to having a much more rewarding relationship going forward.

Gus Allen of GA Financial.

Good afternoon gentlemen. Ralph Thomas mentioned in his comments something about legislation. I had heard on the grapevine that there is some proposed legislation coming either toward the end of this month or early June. If this requires verification of identities why haven't we heard anything from Intelli-Check about this sort of thing?

Well, I will answer that for you, Gus. There is legislation that has been sponsored by one of the largest and best known public interest groups in Washington. They have sponsors. It is going to be kicked off I believe on May 27th, and we are very much a part of it.

How will that work, Frank?

It has not hit the floor of the Congress or the Senate. The kickoff is going to be at the end of this month. I know it will be a financial press club. We will be there. This will require -- it is the underage drinking act of 2004. This legislation or this projected legislation would require electronic verification throughout the country. And there are various funding mechanisms and what would be the penalty if the state did not do that. All we know is we're pretty encouraged because the size of that market, there are 575,000 liquor licenses in the U.S. with what these folks call 2 million pouring stations.

Should this legislation take effect and there is some and there is some pretty specific language that I have seen in it, it would open up over $1 billion market and the technology that they are requiring is pretty rigid and we certainly comply with the language that I have seen.

John Bendl. Hermitage Capital.

I think it was early May that you all announced something with Epson (ph) partner agreement. I did not know what they really meant. Do you have an alliance with Epson (ph) or were you just the speaker at a conference they gave? I was not clear on how far or what you could be hard if you're doing anything with Epson?

Let me respond to that. And I was just returned from a trip to the West Coast were I was a co keynote speaker with Tom Peters at the Epson Strategic business. We put out in our press release that I would be discussing at that particular setting our current initiatives with Epson.

Whereas we have not yet signed a formal agreement, I will say because it is in the press release, we have been working with Epson to integrate our technology into their printer solution particularly with Check 21, which is the Check Truncation Act that comes into effect at the end of the year. We have had several meetings with them. We have had their engineers come in here to figure out how to do it. We are working with them to integrate our technology into every one of their printer solutions that appear in POS systems, register systems. They have about 85 percent of the market for the printers that appear in the system.

So we're pretty excited about it. It is not formal as yet but it is certainly moving along. And we have been working with them to integrate our technology.

What you talking about if you were to get 10 percent on that rather than put it in all the systems (multiple speakers) would be charging there?

I don't have the specific numbers of how many POS systems and register systems are out there, but what they supply is the printer that prints the register tape. If you can figure out how many of those are out there and they have 85 percent of the market, just a small percentage would be quite significant in numbers. And we're working with them to integrate our technology into these systems. Hundreds of thousands I would think that are out there probably maybe millions of register systems. Ralph from your experience how many hundreds of thousands --

Hundreds of thousands from point-of-sale. Registered. (multiple speakers)

And they're one of the initiatives. They came to us because one of the mass merchandisers told them they had to. So we're pretty pleased with that relationship. But it is not formal as yet.

Who came to you all? Epson came to you or --?

That is correct. They came to us.

Thomas Edmund. Private investor.

A while back you had said something about I believe it was a program with Home Depot. I just wanted to know about that. Secondly,well -- go ahead and see if you can answer that first, please?

Well we won't specifically talk about the specific names of any program. We have many programs and many initiatives going with some fairly large mass merchandisers without being specific to the name. And these things all have their own sales cycle and I think Ralph, if you wanted to --

I think that takes the same form as the instant credit application process that were working with the September pilot on which is a different company. And we're talking to GE Capital as well as Citicorp and Household Retail Services about possibly working with them to integrate into a variety of additional retail chains. All with the same application push.

You started a program you started down in Orlando with one of your recent press releases can you discuss that in general? What is the potential market for similar types of locations?

Are you talking about our work with Goddard and there work with the airports down in Florida?

Yes I cannot seem to find Goddard anywhere. Are they part of somebody else's company?

They are a small company in Carolina. You can find them on the web. Goddard technology. They are in Greenville, I think that is South Carolina. But don't quote me on that it just might be over the border in North Carolina. Nonetheless they are in the badging business, predominantly, at airports. And they have a significant interest in the printing side of the business. And they have a very nice quality product that produces at a higher rate of speed compared to all their competitors. And we're not only talking with them about what is going on in airports but we have a couple of other initiatives we're going to undertake. One in particular has to do with healthcare.

Daniel Morris. RF Lafferty.

I don't know if you noticed but in today's Financial Times there was an interview done with Ron Sugar who is the Chief Executive of Northrop Grumman, who stated in the interview that he thought the homeland defense budget was going to grow tremendously. In the interview he did specifically mention the Becus (ph) program. I wonder if you can give us an update how that is going and when you expect that to be launched?

Well, as far as the Becus program we're one of the core technologies in the Becus program. The tests have been going on. They are going very well. We believe, well, we have been led to believe, that that will be put out for an RFI in the very near future. But knowing what has happened here where they just came out with a bid proposal for the TWIKs (ph) -- transport workers and registered traveler, it is interesting that these according to all of the Washington people and the Congress, was not supposed to be led to the beginning of the year, and now they have already quickly the RFI out on the register traveler, and the TWIK.

So we believe that the funding is going to open up and we are involved in multiple bids on many of these through our various partners. And to other partners who have partnerships with third parties that we don't directly have but when we have integrated technologies with passport reading etc. they're involved in some cases with them. So the Becus is moving along very successfully to date, and we have been embedded within the technology.

There are certain websites if you want to go look about the Becus (ph) program you can find the information and you will see us pretty prominently mentioned with Northrop Grumman.

Jonathan Hoot. Credit Suisse First Boston.

I wanted to ask two questions. First on your operating leverage. It looks like well, obviously with more revenues you were able to cut your losses significantly. Now that you have a new product mix with some lower price point products as well as higher margin products, can you give us any guidance on where you think the revenues are going to fall within those products, what the margins are for each of those products? The ultimate goal -- I forgot what your new breakeven is.

We will comment, John, as far as the margins go. And we want to talk about that. We would be more than pleased to talk about the margins. But we're not here at this point to make any projections as to what it is and we will be happy to tell you about where our margins are holding on our product mix.

You know we talked about with the ID-CHECK unit a goal of 50 percent. Now with some of our sell through products and as we integrate our technology, sell through licensing is very very high. You're talking 95 plus percent gross margins. We do add in some applications. Our reader, so the margins come down to 50 to 60 percent on some applications. And, again, we expect on a software model the margins to be very high. But as we were roll out to large applications and the price points can change and if they want hardware -- I mean it really varies, depending on the particular customer application. And their needs.

So it's very hard to determine again which customer is going to order and what application and system they need. So we still achieve -- tried to achieve 50 percent margin and hardware sell through combination, and a lot harder higher in a software solution.

So if we were to look at some of these partnerships for the visit program or the TWIK program, those are software relationships?

In some cases, John, they will be strictly software. But it may include our DCM devices to capture device as the only hardware but these will be fully integrated into other systems. In some cases, I would say in most cases, it would require a capture device to make sure all of the data is being captured by our software so that we can properly evaluate it. If you cannot read all the data what good is it?

Right so the EasyLobby, Precision Dynamics, Goddard, Epson relationships would be a mixture of hardware and software somewhere in the 65 percent margin range, you think?

I would say, yes, let us take EasyLobby John for example. The EasyLobby software is basically all (ph) margin to us because essentially we're not manufacturing that product. Okay, we do have to cover our cost of sales SG&A. But as far as what the discounted software is versus the price they charge us, those are more significant, actually, in terms of contribution than just straight hardware. Also there is a difference in the markets, the retail markets have a lot more pricing pressure, for example, than the fraud and also the access control opportunities.

I have read recently where the DMV is being considered for an IPP type solution. Can you elaborate on your efforts with the DMVs across the country?

One, as Ralph stated, we have our technology in several states in every one of their issuance offices to catch false breeder documents that in this case are the false breeder documents of fake out of state driver licenses that get turned into a foreign jurisdiction if you get a fake driver's license from Iowa a lot, and take it to Mississippi, they won't know the difference. They had been issuing validly encoded by accepting this wonderful high-tech fake that to the human eye, you cannot tell the difference. So we do have several states that have equipped everyone of their issuing officers with our technology to prevent that from happening. Then we have many other states that have not put it into every one of their issuing offices but whatever budget they had they put it in. But more and more states are asking us for bids on equipping all of their issuing officers. We currently have out several bets to several new states for our technology for all of their issuing officers. So the issue of this false breeder documents has become very very powerful and as a matter-of-fact if you talk about it we were very pleased to see the Smartcard Alliance. They put out a change and requirement for credentialing -- they're attempting to issue a Smartcard ID that is standard across all government agencies. If you go look at the Smartcard Alliance, you will see that at the very end of March, since our last call, they sent over to OMB (ph) 45 days till that reg becomes enacted that as part of your credentialing, and the language was put in at the last minute, recognition of what technology exists. It now states that the requirement is electronic verification of false -- I'm sorry I will take that back electronic verification of breed of documents. Before it just said in person proving, you could just look at and get a utility bill, that could be considered. They have been taking that language out of these things, changing it to call for similar to what we do, and that was very very positive.

Because on the credentialing side, you'll have to verify the breed of documents. Well in most cases and United States the breeder document happens to be the driver's license. So, yes, more and more states are leaning in government agencies towards this real proving.

Thank you. Can I ask one more question? It looks like your opportunities are maturing. Can you elaborate on the international efforts, where you are playing in international breeder document verification?

Well the only thing that we do play is with our partners at passport and other verification. So we have the capability. As a matter-of-fact we recently announced that ICTS who has passport reading and we have other partnership with other passport reading companies that have integrated our technology into theirs so if they wanted that we would just bring them the combined integrated solution. But we don't do the verification of the passports ourselves.

I think we lost Mr. Hoot. Stephen Ross of Aurora Capital.

Good afternoon, gentlemen. Could you speak for a moment just a follow-up on the last question? The initiatives with the motor vehicle agencies state motor vehicle agencies, Frank, what can that amount to in terms of revenues in let us say an average state. If year-end all the (multiple speakers) of the medium-size state?

In the motor vehicle -- let us cull an area throughout the country -- there were 15,000 issuing officers. So if you wanted to say -- if they took our stand-alone and they equipped every one of their officers just multiply it 15,000 if it ever got accepted across the board. But we just did one state, I believe it was, Ralph, what -- about 20.

Twenty-seven locations -- .

27 locations in what was about a $70,000 order, I think?

Yes.

If you would just figure out that even at $1000 how big the market is, 15,000, you're talking about a pretty big market just for that. So I cannot quantify because some officers might like more than one or two if it's a very high traffic issuing officer or not but we certainly are recognized in the Amber (ph) community as having the best technology and in the only technology that really works.

These are being sold on a basis of software maintenance contracts as well, Frank. In other words you should get $70,000 from this particular state almost in perpetuity on an annual basis?

No, no, no. That includes the initial order included hardware and software and an extended warranty. So after that extended warranty, there would be residuals as they renewed the extended warranty. They get the first year and then they can buy second, third, and fourth year simultaneously with purchasing in. So the residuals come in on the upgrades after the first year.

I think there are two other things that are probably worth mentioning, on this score store with the AMVs that are important. One, I think it is a testament to the technology and our competitive position that we would even be selected to weed out false reader documents by this particular state. I think that goes without saying. The other is, once we have an installed base at DMVs then the next question is, can we introduce additional transaction based type opportunities to the DMV if we already have the hardware and software in place. So there are two ways to go at the problem. One through the front door and, perhaps, this is going in through the side door.

I see. On that basis, Ralph, can you speak -- the progress and the sales initiative has been remarkable. You have been there only six months or so approximately -- know exactly when. But with all of these initiatives and so many different varied sectors, do you have the manpower to really service the multiplicity of opportunities?

I think we're definitely going to be adding people as we get product in motion. And right now our most important issue is getting those people that we have fully capable and trained, using the tools that we have just given them in addition to getting our new products actually out there in shipping. Because demonstrating is one thing, shipping is another and with shipping we get the revenue so once we start to get some traction I think we will definitely be looking to add people.

Thomas Edmund. Private investor.

Yes, you make it sound like there's a lot of things going in your pipeline that sales could literally explode. Have you had any interest at all from Wall Street? Any serious mutual funds or anyone else? Stock has been very tepid to say the least and has been prone to wild swings. What are you doing on that side of the business?

To answer that question the Company runs the business. We don't pay attention to what the trading and the stock and the volatility. That's not the job of the Company. What our job is is to create the opportunity where the stockholders will see value in what we're doing, and we believe that some of the initiatives that we have currently on the table in some of these government programs will certainly show shareholders the proper atmosphere and why they want to be in our stock. But we cannot comment as to what the trading is because stocks go up, stocks go down for various reasons. And we're not here to monitor the trading of it everyday. Of course we would like to see our shareholders rewarded every day, and we're here to enhance shareholder value. So what we're doing is what we're doing the plain vanilla blocking and tackling right now between Ralph and everybody else on the team, Ed and Russ producing the products so that, the shareholders will start to see the kind of traction that will make this a very attractive investment for them.

There are no further questions, gentlemen. Any concluding remarks?

I would like you all -- thank you, all, for participating with us today. And we look forward to speaking with you and in the future. Thank you all for being present.

This concludes our conference call for today. You may now disconnect your lines and thank you for participating.