Intellicheck Inc (IDN) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Jamie; I will be the conference facilitator for today. Welcome to Intelli-Check's 2004 second quarter earnings conference call. Following remarks from the Company 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 the call and placing it on our website. If you do not agree to these terms, simply drop off the line.

Before I turn the call over to Intelli-Check I would like to read the following 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 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 the forward-looking information.

With that aside, I turn the call over to Mr. Mandelbaum. Please go ahead, sir.

Thank you, Jamie. And thank you, 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 we released earlier today; Russ Embry, our Senior VP and CTO, who will discuss recent developments in our technology; and Ralph Thomas, our Senior Vice President of Sales and Marketing, who will discuss our current and future sales and marketing initiatives.

All of us will be pleased to answer any calls that you may have 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. Ed?

Thank you, Frank. Good afternoon, everyone. I'd like to discuss some of the financial information is contained in our 10-Q for the second quarter ended June 30, 2004, which we filed earlier today.

Sales in the second quarter are $320,000, down from the prior year's quarter by approximately $54,000 but up from the prior quarter by approximately $45,000.

However, reported revenues, based on our revenue recognition policy, decreased in the second quarter of 2004 by 82,000 from the prior year's quarter to a total of approximately $260,000. Included in revenues for the second quarter of 2004 were royalty licensing fees of approximately $14,000. Ralph will walk you through some of the details of our current sales initiatives later in the presentation.

Our gross profit, excluding the inventory write-down of $800,000 in the second quarter of 2003, as a percentage of revenues decreased to 55.5 percent in the 3 months ended June 30, 2004, compared to 59.8 percent for the 3 months ended June 30, 2003.

Our gross profit percentage was impacted by a change in our sales mix that included increased sales of our software and hardware products, which are at lower margins as compared to sales and pure licensing of our technology.

We still have left in inventory about 2300 ID-CHECK units. We still feel confident that we will be able to sell a good portion of our units for at least the remaining carrying value in inventory as of June 30, 2004.

Total operating expenses increased by 1,342,000 from the prior year's quarter to $2.8 million for the 3 months ended June 2004. 1.3 million of this increase resulted from an increase in non-cash expenses from the extension of stock options and the balance from increased legal fees resulting from our patent litigation will TRICOM.

Our cash expense burn rate is estimated to be, on average, for the year no greater than approximately 410,000 per month, excluding the 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 second quarter ended June 30, 2004 of 2,642,004, or 27 cents per share, of which 13 cents per share relates to the non-cash charge, compared with a net loss of 2,050,000 or 24 cents per share for the quarter ended June 30, 2003, of which 9 cents per share relates to the inventory write-down.

Without these non-cash expenses, the loss for the current period would have decreased to 14 cents from 15 cents in the prior period last year.

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 six months ended June 30, 2004 by $1.3 million. The principal reason for this decrease resulted from the net cash used in operating activities caused by our cash expense burn rates exceeding cash received from revenues.

As of August 1, we had approximately $6.4 million in cash, cash equivalents and marketable securities. Our cash is invested in short-term, high-grade commercial paper, CDs and bonds. Our current ratio stands at a strong 7.35 to 1 compared to 1.78 to 1 in the same period last year.

We anticipate that our current available cash in hand, cash resources from expected revenues from the sale of our products, including the sale of our units in inventory, and licensing of our technology will be sufficient to meet anticipated working capital and capital expenditure requirements for at least the next 12 months.

At the current sales level and cash expense burn rate, we have enough capital to last at least 20 months, which we believe is enough time to effectively implement our sales plan. As Ralph will explain, we have been actively marketing our newly announced products and technology for licensing and integration into our complementary systems and technologies. These potential markets could result in additional cash flow for the property.

I will now turn the discussion over to Russ Embry, our Senior VP and Chief Technology Officer.

Thank you, Ed. Good afternoon, everyone. I am pleased to report that the Company has completed development work on 2 new software products since our last teleconference, and is in the process of completing development work on several new software products.

Let me give you the highlights of the functionality of these products. C-Link 3.1 is the Company's networkable data management software and it is ready for shipment. It has been enhanced so that it's capable of being used with our new DCM and is, additionally, now capable of reading the smart chip contained on the military common access card.

ID-CHECK PDA, which is designed to run on handheld personal data system devices, such as the AXIM and iPAQ, is now also available. ID-CHECK PDA has similar functionality to the desktop version, ID-CHECK PC.

However, by loading this product on a PDA, it provides a user with a smaller footprint and also provides the advantage of portability, depending upon the configuration chosen by the end-user. A beta version was released last month and performed very well in its testing and was accepted by our beta test customers.

We are currently developing a new product that combines the capability of reading passport, Visa and border crossing cards that comply with the standards with our driver’s license and military ID document verification.

This product reads the machine-readable zone of a passport, Visa or border crossing card and then, where 2 government-issued documents are required, in the credentialing process compares information against the information encoded on the drivers license, station-issued identification card or a military ID and produces a match/no match result.

This product not only will be capable of comparing passports with drivers’ licenses or military IDs, but will also be capable of matching a military ID with a driver’s license when those are the documents provided.

We also will be introducing a new product sometime in the fourth quarter for in-person proofing, which is becoming an important part of homeland security, that we believe will create a suite of products that will have a role to play in security applications.

We are continually evaluating the potential of porting our patented ID-CHECK technology to other operating systems, such as UNIX and its derivatives, and have successfully ported our ID-CHECK technology to the AIX operating system and will be releasing it to our customers shortly.

As new jurisdiction formats are made available and are changed, they are being incorporated into our technology. Currently, there are 48 states and 8 Canadian provinces that have encoded drivers licenses. We are expecting the remaining 2 states to begin encoding sometime 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 AMBA (ph) standard requires at least a two-dimensional bar code to be present on the document. We also received frequent inquiries from companies interested in licensing our technology for use in their applications. We will continue to strategically evaluate license fee opportunities.

I will now turn the call over to Ralph Thomas, our Senior Vice President of Sales and Marketing, who will share with you the Company's sales prospects as well as some of the opportunities now presented to Intelli-Check with the introduction of our new products.

Thank you, Russ. I would like to begin by sharing with you that our new PDA-based product has successfully completed its first beta installations at a major convenience store chain with over 5000 locations. The primary result of this successful trial is a formal recommendation to nearly 250 franchisees in New York State endorsing and sponsoring our new ID-CHECK PDA product.

Because of the proven value that their management now sees in our technology, they have additionally agreed to absorb a substantial part of the cost to each franchisee in further support of this initiative. We have also been informed of their intention to do this in other states within the Northeast region and then possibly go nationwide.

We are optimistic that the majority of the New York franchisees will avail themselves of this opportunity to protect themselves from the risks associated with the sale of age-restricted products to underage purchasers and that we will continue to proceed in a similar fashion on the state-by-state basis.

One of the key places where events relating to the reason Democratic National Convention in Boston were being held, we showcased a complete working integration of ID verification, visitor management and risk banding (ph) that was very well-received, and the use was covered by the media on national television.

This positive press followed the recent television coverage of our ID-CHECK PC product's successful deployment by the Arlington, Virginia Police Department to verify identity using the driver’s license.

Concerning our new visitor management solution, approximately 20,000 direct-mail pieces will be sent out this week to security professionals and executives at major corporations, building management firms, utility companies, ports and other high-profile buildings. Follow-up will consist of online interactive Web demonstration, phone calls and and/or mail fulfillment, CD-ROMs containing visual explanations and illustrations about our technology and its benefits.

I am also very excited about the new product briefly mentioned by Russ in his report. It will be a real-time, Web-based offering which will complement and work seamlessly with our ID-CHECK products to validate the true identity of the actual IDs being presented at the time of verification.

We strongly believe this new addition will increase opportunities in the homeland security market and also create additional customers for us, primarily in the area of fraud prevention, financial services and retail credit authorization.

Upon introduction of this product, we believe that we will be capable of offering a fully comprehensive solution for the end person proofing process. The pricing model for the service to our existing and future ID-CHECK customers will be transaction-driven, and exact pricing will be based on the volume of monthly transactions.

We continue to see ongoing orders from earlier-established customers. However, several forecasted opportunities were delayed or abandoned due to circumstances beyond our control. In particular, a major bank retained an investment banking firm to seek a buyer for it, which has now happen. This firm eliminated all plan for system changes right after a successful test of our product, and just before the planned network rollout phase. Another temporary delay at a major university also contributed to us not meeting anticipated revenue targets in the quarter.

On the positive side, we have received our first order for 40 systems from a major merchant processor that we have signed a letter of agreement and intention with and are in the process of completing our formal agreement. This large public company processed over 35 billion transactions last year, and our pricing model beyond our revenue sharing fee per transaction basis.

We continue to make good progress toward a full rollout in 20 selected stores by a major nationwide mass merchandiser with approximately $50 billion in sales. We are also working on several security-driven opportunities at East Coast ports of entry and have met with several major food retailers and a major manufacturer of spirits.

At those meetings, we successfully demonstrated our new PDA product, and we will be proposing pilot programs for field implementation this year. We also plan to be deployed this month in our first trial for state fair concessionaires.

Lastly, we're actively involved with a major telecommunications company in developing a solution for the new account application, screening and authorization process at their retail stores, of which there are approximately 10,000.

The quality of these potential customers speaks fairly positively about the current value and benefits of our newly released products as well as our future core competencies. We also continue to build upon adding new SDK, which is short for software development kit-driven partnerships, in a variety of vertical markets with several new potential customers.

One worth mentioning here today deals with a major supplier of law-enforcement software which is now capable of utilizing our DL verification technology in their current product demonstrations.

Additionally, we have signed an agreement with a secondary channel distributor engaged in selling ATMs to small and midsize businesses, and we recently held trading session last week for five of their new-hire salespeople brought on board to sell our ID-CHECK solution products.

Lastly, as to our ongoing federal and DMV selling activities, I will turn it over to Frank Mandelbaum for his update to you.

Thank you, Ralph. Just a quick update on where we stand in some of these major government initiatives that will be funded or have been announced as funding or were anticipated rollout.

The DOD DeCA's (ph) program -- we remain extremely well embedded in that program. The pilot is continuing to move forward, where they are now testing the system of not allowing people to hit databases and violate their firewalls. But that thing is moving along. We are very positive as to how we are looked upon in that area. For those of you who have seen it, there have been published papers of how well we are embedded in that particular program.

The US-VISIT was announced earlier this year. It was awarded to Accenture. Even though it's a $15 billion long-term project -- that's the number everybody has seen -- they announced a $10 million award for this year, which is a lot different than what they stated in the total number. And I was in Washington the latter part of last week for several days, and I've now heard they have cut that back to $6.5 million in funding.

So the reason we haven't really seen any great revenue is that the revenue stream will not really start in these programs into the beginning of 2005. On the Registered Traveler program, here's another very large program.

It was interesting that -- in that they originally had 40 bidders. They culled it down to 5. 3 of 5 bid it with our technology, and we are gratified that in every single government initiative that we've seen, when people bid with verification technology, the only one we ever see is ours. So we have multiple partners bidding us.

The Registered Traveler -- they just announced 3.7 million for this year, even though that will turn out to be a very big program. They have also announced the TWICK (ph) program last week was awarded to a company.

That is going to be a major program, but they changed to the original integrator and just now awarded to another one, but they have only announced that they are going to be awarding $10 million. It's in what they call Phase III. They have already gone phase I, Phase II. Phase III involves going into 40 ports, and we believe we have some pretty good initiatives there.

On the state side we, of course, have announced prior that we integrated our technology fully into the State of Maryland, to all their issuing offices. We have, additionally, shipped to other states. And we have bids out for additional states where they are looking to us to prevent the use of fake breeder documents -- in this case, out-of-state drivers’ licenses being turned in for valid licenses.

But we in the Company are very, very pleased that on every single one of these bids that we have seen go in, there has never been any other technology but ours bid when they ask for driver license, reading and verification, and authentication are the words they use, of the bar-code with a magnetic stripe.

Now, we have that one other initiative we spoke about, which is the underage drinking proposal that that legislation is scheduled to be introduced into Congress sometime in September. We don't know what the timeline, what the expectations are of how quickly that would get through, but as we stated before, because of the language currently in the bill, we believe that would open up a multibillion dollar market for the Company's technology.

So what we're saying here is, again, as we said many, many times, these programs, amounting to billions of dollars, have not yet been fully funded. And it's very difficult for us to project what quarter or what month or when it's going to hit. We are seeing a lot of interest where they want to roll it out sometime next year in the big dollars. However, there are some pilot programs going on, and we have discussions with all of them.

I will say one thing, that on one particular state that put a bid out very recently for an initiative, they called for driver license verification including the reading of the ID. We had everybody who proposed the bid contact us. There was nobody else used in that bid but us.

It just proves to us internally, and we hope it proves to the shareholders, the value of our technology -- that in any one of these government initiatives we have never, ever seen anybody bid with any other technology but ours when driver license verification technology was part of the solution.

And that brings you up-to-date to the best that I can on the government initiatives. At this particular point, we will conclude the formal presentation be pleased to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Robert Lambert, RLR Capital.

Hi, Frank -- very nice to see all these initiatives. Can you give us a little update on -- I know you spoke at the Epson conference -- how that works in our future? If you can speak to that at all --?

And then I have a second question about what I have been reading about here in New Jersey. I know Jersey is just getting into the new licenses, and I just saw that the Taj Mahal casino is no longer going to allow any 18-year-olds to come in unless they are registered as a guest.

So I don't know if you seen that or heard of that. But it looks like the casino industry is starting to get into this 18-year-old age in the casino. Have you heard of that?

Bob, I'll answer the question no, I have not. But we have our technology in over 100 sites just that the Mohegan Sun. We have it in probably 30 sites at the Foxwoods casino, and we have it in quite a few sites around the country.

But we have not yet seen the big push to prevent mostly -- except for the Mohegan Sun and partially Foxwoods, the initiative was to prevent losses in their casino cage. We have numerous casinos that are using it for that purpose. As a matter of fact, quite a few of the Trump properties in Atlantic City do have our technology.

So I don't know; I have not seen that.

Yes; that was new. I just got a mailing of that, actually, Saturday.

Okay. But if they wanted to, we did give it -- we've had it in the Trump marina, we've had it in Trump Plaza -- to prevent not only the prevention of economic loss from identity theft, et cetera; but they were using it -- who got into their clubs at those places. So I don't know anything about this one particular change.

On your first question, as to the Epson initiative, I stated before, we're working with Epson. They are interested in integrated it for their Proof Plus Check 21 solution. That takes a long time, because there owned by a Japanese company called Seiko. But we continue to have ongoing conversations with them to utilize our technology as part of the verification process for Check 21.

(OPERATOR INSTRUCTIONS). Sudir Kakar (ph), a private investor.

Yes; good afternoon. Thank you very much. I am wondering what is going on with this retail outfit that you have been speaking about that did the test phase that you talked about at the annual meeting, or some such date.

And what is going on with this transactional program that you are talking about, where you're saying there is something like 50 million transactions or some such number such as that? What is the story with that, and what are the possibilities? And what are you looking for as total potential revenue that might come from something of that nature?

Okay, I'll take that question. It is a 2-part question, I gather. The first part had to do with the age verification at the retail level to prevent the sale of restricted products. It's going very, very well. And the people there find that it is excellent insurance against prosecution as well as fines or possibly being shut down.

Could you, before you explain, could you tell me, are you talking about alcohol? Are you talking about tobacco? And what is the implication for that particular merchant? Say I owned some type of store that you’re talking about, selling something like tobacco or alcohol. What is the problem on my side from the point of view of state regulations?

You can be fined, and finds in New York State alone are in the millions of dollars. You can be closed, and/or your license to sell those products can be taken from you. And in New York we have very, very active Attorney General, as we all know, by the name of Elliot Spitzer, who takes this very, very seriously.

So there is a reason for caution here. And as a merchant, the cost is very minimal. And in the case of this one particular company, they are absorbing over 50 percent to their franchisees.

As to the second part of your question, regarding the transaction-based situation, it's primarily in the check cashing area. And it's proof of the identity of the person presenting the check. And with the additional product that we were talking about earlier for validation, that will take it to the next level.

And we'll be partnering with people like the Epsons of this world to follow up on making sure through Check 21 that good checks are presented by people who really have the money and really have the account. And it will be on a revenue-sharing basis per transaction.

(OPERATOR INSTRUCTIONS). Trey Snow, Priority Capital.

It looks like the growth in your distributor and direct channels sort of reversed course this quarter. Distributors have been sort of declining, and they had a nice quarter. And direct was growing and then kind of fell off here in this quarter. Can you tell us what's going on there and what we might look for, going forward?

I guess that's my question also. Well, 2 things. On the direct side, we are getting more and more involved with what I would classify as business development efforts with major corporations, which is getting to board levels and C-level type executives as opposed to selling more of a turnkey solution, which is what age verification would be or, for that matter, what visitor management would be.

And as we have more of a total solution available, the indirect channel people can avail themselves of that because the proper training can be there, the proper margins can be there. And essentially they will be able to attract better people and generate more sizable revenue.

But for our Company to grow at the level and at the rate we want, we have to concentrate on those name accounts to establish the beachheads in each one of the verticals that we're pursuing, so that once we're successful with one, we can be successful with the next and the next and the next, and become the de facto standard.

And what is the margin differential in those 2 channels, distributor versus direct? Just ballpark --?

You mean the kind of discounts we will be offering our indirect channel people? It can go based on volume, okay, different stair steps. But I really would not want to tell you on this conference call because I don't know what competitor might be listening. But it is based on volume, and it is a discount based on volume commitments.

And last question. Royalties took a sequential dip, basically in half. And am I correct in assuming that's due to the level of activity of the company using the royalty or paying the royalty?

That's correct. It is a direct percent of the competitor sales.

Steven Ross (ph), Aurora Capital (ph).

Good afternoon, gentlemen and --

Can you speak up?

I would just like to see if you can make a comment about the implications on the topic of the franchisee that I think -- Ralph mentioned you had signed up a company, a major company, that 40 of their franchisees have -- you have an order from this company to go to 40 of their franchisees. Could you speak to the potential there vis-a-vis is there a -- can they -- in essence, he said they would help finance their franchisees or pay for part of the cost of the system. But how much revenue could this amount to over time?

Steve, I think you have 2 separate issues a little bit confused. So I'll clarify it, and then Ralph can add in on the clarification. We just completed a very successful test with a major convenience store chain with over 5000 locations.

What Ralph had stated in this particular instance is that they have now recommended the rollout, starting in New York State. And then we expect it to roll across the country. That initiative, if it ever -- when it -- I shouldn't say if; they have already announced and sent out a recommendation to begin. But even if you took 5000 locations, you're talking about revenue on that could be as high as $8 million over the period of 2 years for that initiative.

Then, on the other thing with the 40 that Ralph mentioned -- and I'll let him enhance it -- the 40 he mentioned was we have signed a letter of intent with a major public company. They are big board-listed -- that does $35 billion in credit card approvals in the course of the year, to use us as part of the verification process. And they, even though the formal agreement is not signed, the letter of intent certainly was signed. But now we are moving to a formal contract; they have already bought 40 systems from us. (multiple speakers)

I beg your pardon; okay.

So one was one, and one was the other. And Ralph, I'll let you -- I just wanted to straighten that out. If you wanted to add anything for Steve, you can.

That helps me. Thanks, Frank. I had to get off for awhile, so I had trouble (multiple speakers) getting the question mixed up. Thank you.

(OPERATOR INSTRUCTIONS).

If there are no further questions at this time, I will close the call. I thank you all for listening, and we look forward to speaking to you at the next conference call. Thank you all.

This concludes today's conference call. We would like to thank everybody for their participation. You may now hang up at any time, and have a great afternoon.