Intellicheck Inc (IDN) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is a Erin; I will be the conference operator today. Welcome to Intelli-Check's 2005 third-quarter earnings conference call. Following remarks from the Company there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). We would like to ask that the questions be brief so that all telephone participants have the opportunity to ask questions. (OPERATOR INSTRUCTIONS).

This call is being recorded and copyrighted; therefore it cannot be rerecorded, transcribed or rebroadcast without Intelli-Check's permission. Your participation implies consent to our recording of this 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'd 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 forward-looking information. What that aside, I'd like to turn the call over to Mr. Mandelbaum. Sir, you may begin.

Good morning, everyone, and thank you for participating in the third-quarter conference call. I'm Frank Mandelbaum, Chairman and CEO of Intelli-Check, and with me on the call today are Ed Winiarz, our Senior Vice President -- Senior Executive Vice President and CFO; Todd Liebman, our VP Marketing & Operations; and Vince McGeary, a partner in Gibbons Del Deo, our IP council who is lead counsel in the Tricom litigation.

Ed will highlight the financial results that we filed last evening with the SEC and Todd will give you an overview on the sales results for the quarter as well as the current status of our sales and marketing initiatives, after which we will answer any questions that you may have. I will now turn the call over to Ed.

Thank you, Frank. Good morning, everyone. I'd like to discuss some of the pertinent financial information that is contained in our 10-Q for the third quarter ended September 30, 2005 which we filed last night, as Frank mentioned. Reported revenues for the third quarter of 2005 increased 85% to approximately 430,000 compared to approximately 233,000 for the same period last year. Actual sales bookings in the second quarter increased 113% to approximately 486,000 from last year's sales bookings of 228.

However, at the end of the third quarter of 2005 there were additional orders that were received but not yet shipped of approximately 20,000 which, had they shipped, would have brought the sales bookings for this quarter to 506,000 and to the 2,023,000 for the nine-month period. This increase in the third quarter was primarily from sales to new and existing customers of our bundled software and hardware solutions.

Due to the unpredictability of when some of the large opportunities will develop into sales, it is difficult to compare period-to-period results as we still face long sale cycles particularly in the government sector. Todd will walk you through some of the details of our current pipeline of sales opportunities and successes and why we remain extremely optimistic about our expected future sales growth later in the presentation.

Our gross profit percentage decreased slightly and amounted to 58.9% for the third quarter of 2005 compared to 61.3% for the third quarter of 2004. This percentage decrease resulted primarily from a large portion of our 2005 sales from bundled hardware and software products that have lower margins than our software only products and services as compared to our mix of sales in the same period last year.

Total operating expenses decreased by approximately $570,000 net of the prior year's quarter to $1,066,000 in 2005. This overall decrease was primarily related to a decrease of our legal fees of approximately $668,000 relating to the Tricom patent litigation. For the reasons prior stated we reported a net loss for the third quarter ended September 30, 2005 of $765,312 or $0.07 per share compared with a net loss of $1,668,884 or $0.17 per share for the order ended September 30, 2004. Non-cash expenses for the third quarter of 2005 were approximately $20,000 compared to 256,000 in 2004.

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 increased for the nine months ended September 30, 2005 by $2,431,000 primarily as a result of the successful completion of our private placement where we received net proceeds of approximately 4,423,000 offset by our net cash used in operating activities of 2,012,000 resulting mostly from the net loss of approximately 2.5 million for the nine-month period.

We announced last quarter during August 2005 we issued 1,255,000 shares in a private placement and received gross proceeds of $5 million. We also issued a total of 625,000 warrants to the investors and our investment bankers at an exercise price of 5.40 per share. As of November 4, 2005 we had approximately $6,660,000 in cash, cash equivalents and marketable securities. Our cash is invested in short-term high-grade commercial paper, CDs and bonds. Therefore our current ratio of current assets to current liabilities for the period ended September 30, 2005 remains strong at 4.41 to 1.

We expect our cash expense burn rate for the remainder of 2005, which excludes any margin on sales and the resulting commissions due on such sales and excluding capital expenditures, which has been minor, on average to be approximately 350,000 per month. We anticipate that our current available cash on 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 our anticipated working capital and capital expenditure requirements for at least the next 12 months.

As Todd will explain, we have been actively marketing our newly announced products and technologies for licensing and integration into other complementary systems and technologies as well as standalone applications. The potential opportunities in these markets could result in additional cash flow for the Company. I'll now turn the discussion over to Todd, our Senior VP of Marketing & Operations.

Thanks, Ed. Good morning to everyone. I'm very pleased to say that we had a strong third quarter for sales bookings and that we are gaining significant momentum in the marketplace. I wanted to quickly touch upon three important topics that are helping to shape our future -- our expanding customer base; our diversified revenue model and our strategic focus. It is obvious that not only is our customer base expanding, but the quality of our customers is dramatically improving.

I believe this all began in the first quarter when we announced the signing of the Certegy agreement and continued in the second quarter with the significant retailer. Then came our announcement of the Verifone partnership in the third quarter and most recently with the announcement of the contract we signed with the financial services division of a fortune 25 company.

I like to refer to these accounts as light house accounts. These are all market leaders in their given verticals that help shape the strategic and, more importantly, the technological direction of their respective industry. Every one of these agreements has already produced revenue for the Company which is a critical element to any successful partnership. We believe all of these partnerships will gain significant momentum in 2006. As a matter-of-fact, we brought on yet another potential significant customer just this past week for the use of our technology in the retail and productivity enhancement markets. We expect that we will be able to announce this partnership in the near future.

As for our revenue model, as I've mentioned in previous calls, we are continuing to transition our business model from that of a onetime sale with yearly recurring maintenance to that of a model that is centered around either a per transaction or monthly subscription model. I am very happy to report that this strategic transition is moving ahead as we have planned. Our two most recent agreements call for this new model as our source of revenue as do many of the opportunities that are in our pipeline.

I would like to touch base on our strategic focus for a moment. Based on the number of recent successes we've had, it is clear that our focal point must continue to be on the commercial side of the business with our value add proposition focused on productivity enhancement and data collection. This market coupled with our patented process of document verification should prove to be a very successful strategic model for the Company.

I thought I would take this opportunity to discuss some of the key accounts in a bit more detail so you can better understand the progress we have made to date. I am pleased to announce that we have gone live with Certegy and we are now processing live transactions using our technology. We are optimistic about the ramp up of transactional volume over the next several months.

Also we continue to work with other Certegy divisions who are utilizing our technology for various applications. In addition we are looking to expand our product offering to Certegy customers for additional applications such as age verification. We have already made several joint presentations with Certegy to key accounts.

We continue to make excellent progress with Verifone. We have completed our final value add partnership certification and are beginning the initial launch of the product through the Verifone distribution channel. We will be attacking both the direct and indirect sales channel of Verifone through a detailed marketing campaign. In addition, Verifone is finalizing all of the collateral material and website marketing info to begin to promote us through their value add partnership marketing channels. This should be completed within the next few weeks. We expect to see a significant ramp up of Verifone's sales beginning early next year.

I thought I would take a few minutes to discuss the most recent contract we announced with the financial services division of a fortune 25 company. The contract guarantees certain minimum payments over the next 18 months for software revenues based on the transactional sales model. More importantly, it provides us with the access to the Who's Who in the retail space. Although by terms of the agreement, we are prevented from disclosing the name of the fortune 25 company or their customers, please be assured that their customer base includes many of the biggest and best known retailers in the market. This agreement continues to solidify our strategy of partnering with market leaders so that we can leverage their expertise and clout in the market that they serve.

I also want to point out that many of these new agreements provide us with the opportunity to offer various hardware components to our customers. This provides us with an opportunity to grow our revenues with margin in the short-term while we wait for the transactional revenue to kick in. We continue to work with the major cellular provider we have discussed in the past. The project is moving forward, but we have had a time slippage that has had to do with their decision to find an input device that has multiple functionality such as being capable of reading both 1-D and 2-D bar-codes. It is not our software or the benefits it would provide that has caused this time slippage.

We have now provided the customer with a new version of our software which is capable of handling inputs from multiple hardware devices. This new software was delivered in late October to the customer and is being tested internally. We are still optimistic about this account and expect to see orders from this account in 2006.

In addition to the signed and announced contracts, we also have had several other high-profile accounts we have been working with who have placed orders for (sic) us for products and services. These accounts include one of the largest auto rental companies in the United States and another financial services company for data collection and application processing. Both of these accounts were recent bookings that we believe have excellent potential in 2006.

On the pure business development side we've had a number of solid opportunities for 2006 that include two of the largest shipping companies in the U.S., various point-of-sale integrators, financial institutions and security companies. We continue to work these accounts closely as they are the future of Intelli-Check on the commercial side.

I want to switch gears for a moment and discuss the government opportunities. We have two key initiatives that are under way. The first one is the first responders program which is part of the DHS. This is the program that will involve handheld devices running our software as additional applications. We are still working closely with the government and various partners on this opportunity. We expect that we will see revenue from this opportunity some time in 2006.

The second initiative deals with the requirements of FIPS 201 which is resolved from HSPD 12 or Homeland Security Presidential Directive 12. This program calls for all government employees to be issued a new interoperable credential that will allow them access to any government facility. There are approximately 90 million new government IDs that are required to be issued starting in June 2006.

We have partnered with Anteon to provide them with our technology for the front-end credentialing. Anteon will issue the credentials. Our revenue model is predicated on a percentage of the sale price of each government ID, therefore we only need to capture a small percentage of the 90 million IDs for this program to be very successful. RFPs for the various departments are beginning to hit the street. We believe we could potentially see revenue from this program beginning in 2006.

As we have previously stated, our bookings goal for 2005 is $3 million. Through 9/30/05 we have booked just over 2 million. In order to meet the $3 million target we must book just under $1 million in the fourth quarter. The pipeline by customer exists today to achieve this goal. We believe that we are still on course to hit this milestone. There always remains a risk that we could see a slight slippage in customer timelines; however, we are working closely with our customers in growing pipeline opportunities to meet this goal.

I believe it is evident on the commercial side that we have made significant progress this last year. We expect this momentum to continue and we are very optimistic about the future. On the government side we need to continue to work with our current partners to try and tap these large opportunities that exist out there. You have my word that our sales team will continue to press ahead as diligently and efficiently as possible.

Because of the announced wins and the potential revenue that can evolve from the business models associated with each one, together with the growing pipeline of new opportunities in government programs in which our technology is an important component, we will remain optimistic that 2006 will be a year of significant growth. I would like to turn the call back over to Frank now.

Thank you, Todd. Before I open the conference to questions, in response to many calls that the Company has received, based upon comments as to the status of the Tricom litigation and our patents, I have asked Vince McGeary to bring you all up-to-date on the actual facts of the matter and what actually took place at a conference that was held on November 3rd in the Eastern district of New York. Vince?

Thanks, Frank. To fully understand what occurred on November 3rd I would like to just give you a short procedural history of the case. Intelli-Check filed its second amended complaint on May 17, 2004. In response to the second amended complaint the defendants made a motion to dismiss which was filed on September 15, 2004. The defendants did not file an answer or a counterclaim respecting the second amended complaint. The discovery went on its normal course and on November 30, 2004 the party submitted a proposed joint pretrial order to the trial judge effectively closing out discovery in the case at that point in time.

On July 19th, this past summer 2005 we were before the court at a settlement conference. At that conference the court ordered the defendants to file an answer to the second amended complaint. We posed an objection at that point in time. The court ordered us to present our objection by way of formal motion. Pursuant to the court's order, Intelli-Check filed a motion to preclude or strike any new defenses that had not been pled prior to the close of discovery and submissioned of the proprosed joint pretrial order.

On November 2, 2005 the court heard oral argument on Intelli-Check's motion to preclude or strike defendant's inequitable conduct and (indiscernible) defenses and ruled that such defenses could be brought at this time. To avoid any prejudice to either party the court reopened discovery only as to the new defenses for a period of 90 days. On the motion the court did not consider the merits of the defenses and made no rulings in that regard.

The status of the case at this point is therefore that discovery is opened as to the new defenses, that discovery has to be completed by January 30, 2006 and any supplements to the joint pretrial order must be filed by February 28, 2006. The court's order regarding the motion is posted on the court's docket at document 145 and I'd refer anybody interested to that order.

Subsequent to the court's order on November 3rd, the district of New Jersey issued an order relevant to the case. That order was respecting subpoenas that had been previously served upon Intelli-Check's trial counsel in the Tricom litigation. Those subpoenas were at least in part allegedly directed to the inequitable conduct defense which was later pled.

The court quashed (ph) those subpoenas in a decision rendered on -- and filed with the court on November 10, 2005. The opinion and order of the court in the district of New Jersey quashing defendant subpoenas on Intelli-Check's trial counsel is posted on a docket in District of New Jersey as document number five. I would refer the listeners who are interested, they can read the opinion, it's approximately 13 pages long.

Some of the excerpts of the opinion are according to the court Tricom asserts that McGeary and McKenna (ph) are subject to the duty of candor because these individuals "have knowledge of the prosecution of the 741 patent application, and accordingly, the standard for inequitable conduct extends to them." "This glib assertion," again I'm quoting the court, "This glib assertion is a misstatement of the law that glosses over the fact that neither McGeary nor McKenna fall within the defined classes of persons recognized by federal regulations to have a duty of candor to the PTO." That appeared on page 7 of the court's opinion.

Later at page 11 the court stated, "This court is mindful of the potential for frivolous indication of an inequitable conduct offense as grounds for seeking oppressive and harassing depositions of adverse counsel. The circumstances surrounding the issuance of the disputed subpoena suggests that such motives are at work with respect to Tricom's subpoenas of McGeary and McKenna. This court finds it extremely incongruous if not downright suspicious that Tricom has advanced in inequitable conduct defense premised on the actions of Intelli-Check and its patent attorneys, without pursuing the deposition of the prosecuting patent attorney, a person whose testimony would be crucial to such a defense."

That's excerpted from page 11 -- page 12 of the opinion of course. I would urge all listeners who are interested to read the entire opinion and look at those quotes in context. So that is the status of the litigation at this point, Frank.

Thank you, Vince. Having given you the overview of the facts in the case, I would like to Erin now to open the call to questions.

(OPERATOR INSTRUCTIONS). Richard Frye, private investor.

Good morning. Regarding the Verifone deal, can you just go over the economics of the deal? We know that Verifone has 10 or 11 million terminals placed and they're selling a million a year. How much are we expecting? And at certain percentages, if you're at liberty to, can you give us an idea of what the revenue would be for Intelli-Check? Thank you.

Todd, do you want to answer that?

Sure. The model is based on a subscription model, a monthly recurring revenue stream. We've gone out and publicly said that the suggested retail price for the monthly subscription is going to be around $30 and that's the model we're starting to move with. They ship, as you saw, millions of terminals a year. They were focusing on one specific brand of the branded Verifone terminal today. It's a multi applicational terminal; it's probably their best-selling terminal or one of their best-selling terminals. So the market potential is very, very large.

You can extrapolate out the numbers that you -- how you feel, but obviously we won't keep the whole $30 because there's multiple pieces of the distribution channel and there's a couple different ways we can sell the product with finders fees versus a revenue share of the monthly recurring subscription fee. But, as we've said, if we can gain some portion of that million terminals shipped a year, even if it's on the small side, we believe that the revenue potential is explosive.

It's definitely going to take some time to ramp up. We're not going to see 10,000 or 15,000 terminals overnight, we've never said that. But what we're trying to do is direct it towards -- there are two channels within Verifone, there's their channel sales and then there's their direct sales. The majority of Verifone sales come through their channel, but they have some very, very large key direct accounts and we think we can get some very targeted penetration in some of their direct accounts.

So really my focus has been how do we go after those direct accounts as quickly as possible because there you can get a large bang for your buck so to speak. We haven't publicly said what numbers could come out of it, but if you take some number of $30 a month and multiply that out times some percentage of the terminal market we expect to capture and, no, I don't think somewhere of 5% is unreasonable over some period of time on a yearly recurring side if -- obviously if the project is successful which we anticipate it will be.

Thank you.

Sam Bergman (ph), Bayberry (ph) Capital Management.

Several questions. First of all, how large is the sales team presently this quarter versus last quarter?

The sales team is the same size. We have four salesmen plus myself plus obviously a support staff, but direct sales is four plus myself.

Are there expectations of adding to that sales staff (multiple speakers)?

Absolutely there are. That's been a topic of discussion with senior management at Intelli-Check and we've talked about it. It's something we're reviewing and I don't think it would be out of the realm of possibility that we add another high-profile sales person sometime in the first quarter.

Okay. Can you tell me with these meaningful alliances that were listed in the news releases, where do you think you're going to get your first amount of large revenue -- from which particular project?

My guess or my gut would tell me that it would probably be the Fortune 25 financial services company that we discussed. We think that we're doing a fair amount of piloting and testing -- piloting is the wrong word because they've signed an agreement, they've bought the technology, they've spent a tremendous amount of money with us just in the last several months getting the project up and running. But they are obviously seeing where it fits in, which solutions is it going to be?

There's a variety of hardware applications we can provide this market, not only them. Is it kiosk, is it handheld devices, point-of-sale? Obviously point-of-sale is the Holy Grail in the retail space, but (technical difficulty) that's a little more of a time-consuming process. So we have some quick hits where we can distribute our technology and those are potentially where we could see some big hits some time early next year.

In this particular arrangement with this top 25 financial service company, is that in the backlog currently?

No. I mean -- no. We do have bookings and revenues from them in the third-quarter numbers, absolutely. But the contract that we announced last week or whenever it was is not in any announced backlog to date. It will be in the fourth-quarter numbers but not anywhere in the third quarter.

Is there any way you can give us any color on the contract amount?

No. Frank? I don't think we can. Ed? It's confidential to this point. But it will be in the numbers in the fourth quarter when we release those.

Okay.

It's anticipated in the expected projection that Todd has announced to the $3 million target.

Also, are you doing any -- or do you use any software in the automobile business currently like for testing people for DUI when they first walk into a car?

No, we do not as of date, no, we don't.

Is there any potential with your software to do that?

There are. We've actually been contacted by some university students who are working on some of those projects and have inquired and actually bought some of our technology. In a very small way, nothing significant, immaterial. So it actually has come up over the last month or two, but it's nothing we're focusing on today.

Okay, last question and I'll let somebody else get on the line. In terms of your blackout period for inside a device (inaudible), what is it, the next 48 hours?

Ed?

The Company policy is two days after we release earnings.

With the stock being hit so much in the last several weeks, do you expect any insiders to pick up any stock?

What the plans of the insiders, that's what they will do and it's confidential and we're not going to speculate on what could happen in the next few days.

Okay.

Even if we knew we could not possibly disclose it.

Okay, thank you, Frank.

You're very welcome.

Jason Schwartz (ph), Jay Goldman (ph).

How are you doing this morning? How far are we away from profitability? I see that you guys are moving closer and closer in that direction, but how far away are we from turning the corner to showing a profit?

I think at this particular point, based upon the numbers we put up in the last quarter and the numbers we put up in this quarter, which were quite significant when you ex out one large sale comparing apples-to-apples to the past period. And with the stated goal of 3 million this year which would be a $1 million quarter, we're not saying in the gross margin in that quarter will be 88%.

However, because of the things that we have in the pipeline and what we have said internally, Jason, we have not gone out yet to give any kind of projections of forward-looking guidance for next year. But I think if you just extrapolate where we are today and what's in the current pipeline and since a lot of it, like the Verifone, the Certegy, that's all transactional based revenue with very little coming in from hardware at very high margins, you can see we're very much on track to have a very good year for next year.

And also, how much will this Tricom litigation cost you going forward? Do you think most of the significant costs have been incurred already?

Well, we believe so. But, Vince, you're still on the call, what do you think?

It's impossible to say what the litigation is going to cost going forward. Certainly the bulk of discovery has been concluded except for these two defenses. There remains some motion practice to occur prior to the trial date most likely, and then of course there's the expense of the trial. So given that it would be hard to say what the ratio is, but there are some expenses that are in the future.

And just one more question. On this Fortune 25 deal -- congratulations on that, it sounds like a major deal. How long do you think it will be until we start seeing significant revenue from that deal?

I believe that we should see some decent revenue coming from that deal by the midpoint of next year. That's what I would expect or hope to at this point.

Great, thanks a lot, guys.

John Vinwe (ph), private investor.

Good morning, Frank. The question I have is related to the net loss of 2.5 million. It appears to reflect a $1.6 to $1.8 million improvement in the operating expenses. I was wondering how that was achieved and whether or not it's sustainable?

A lot of the expenses are relating to last year were legal fees, as I mentioned. Quarter-to-quarter the primary decrease was from our legal fees. We had some cost-cutting measures that we implemented last November that have come through. So we're pretty much at about a $1 million expense burn a quarter.

Okay. And just one second question. Is in TeleCheck involved with a company called Visage? It seemed to me at one time I thought they were. And I notice Visage has been quite successful penetrating states and raising a lot of business for themselves and I was wondering if Intelli-Check is a beneficiary in any way of those activities?

Let me answer that for you. One, we are partners with Visage, we are partners with Digimarc. They don't really capture a lot of great new business. Even though they do capture business, Visage I believe builds and licenses in 16 jurisdictions in North America and Digimarc 33. And so, because of the realizee (ph) there will be changes in how licenses are issued in credentialing and we are in most cases part of the bids that both of these companies put in and we do receive ongoing revenue from both of them for installation within the states. But independently of that, we are by ourselves in over ten states right now.

Okay, thank you.

Frank Bradley, private investor.

I was curious, Anteon International Corp., have they in fact won the contract to do the secure credentialing or is this still several companies vying for this business?

One, the new credential that will be issued to over 90 million people will be issued, there will not be one main contract. It will be issued by the various people affected by it. It could have a separate contract from the Department of the Interior, another one from the Defense Department, etc. They have, based upon the FIPS initiative, they have until June I believe 27th of '06 to be compliant. Each one of these people will put out. Nobody is going to get 100% of the business in our opinion and everybody will bid. But they have been very successful in the government space and we believe they will get their fair share of this business.

But nothing has been out except some RFPs at this point for the government space. But that's something that's coming down the pike, it's mandated, it started, as Todd explained and we've explained on other conference calls, with HSPD 12, the homeland presidential directive -- Homeland Security Presidential Directive, FIPS 201 which came out of NIS, the National Institute of Standards of what you have to do to comply and we are optimistic as are they that they will get their fair share of this business.

Thank you.

Ron Cox (ph), Backel Delau (ph).

Good morning, gentlemen, and congratulations on a great third quarter and great nine months. My key question is there seems to be an inverse relationship towards your progress and the stockprice. I know Mr. Mandelbaum I think addressed that on October 18th, but I wondered if you had any additional thoughts?

One, we believe that what is taking place in the Company will be reflected in the stockprice. But our intent is to certainly enhance shareholder value by putting up as our report card the bottom line. You can certainly see the progress we've made in the last two quarters and what we're anticipating this quarter and based on the pipeline going forward. There was a lot of let's call it -- people took the filing that we did with the registration, they read it wrong quite frankly. I had received multiple calls.

If you look at the format you have to file under to get the shares underlying approved you will see that it shows all the shares including those shares that underly the warrant that the investors got at 540 as being registered. So if you look at the left side whoever it is and invested in the thing, if they bought 125,000 shares and they then got 40% coverage and they then registered 175,000, it showed on the right side zero left after the registration. So I received -- after that was declared effective on a Friday night I received many, many calls saying you didn't tell me that these people would these selling.

Well, I'm pleased to tell you that of the private placement that has been filed. 1,250,000, to the Company's absolute knowledge to date less than 75,000 of those shares have been sold. But I believe that people read it the wrong way and panicked and sold ahead of it which drove the stock under margin requirements and that's why the stock came down as precipitously as it did.

But the things that the Company is doing at this time, I think when people start to analyze where we are it will be more accurately reflected in the price of the stock. Although we do not control the day to day pricing of the stock, we stand only give the facts and let those people that would like to make a determination as to its true value.

I didn't understand -- I heard the explanation on the Tricom patent but it was almost like talking to our own attorneys -- I didn't understand what it meant. Is this a critically important patent? Could this be part of the problem? What if you lose?

One, these patents have been issued by the patent office. We have five U.S., two Canadian and one UK patent on the process. We are optimistic as to the validity and value of the patent and, Vince, do you want to add anything to that?

I can't really speak to the business side of the question. All I can say is with respect to the recent status of the litigation regarding the most recent decisions of the court that they were procedural in nature, not substantive with respect to any of the defenses and that the position of the Company remains confident.

What's the timing on anticipating any kind of a final decision which I know is difficult? But are you looking at six months, a year, three years?

It would be pure speculation to say.

Well, speculate.

My speculation is no better than yours in that regard. And with respect to (multiple speakers). Excuse me, with respect to those speculations in the plannings of the Company regarding the ongoing parts of the litigation, those are strategy decisions that wouldn't be appropriate to talk about on this call.

Well, thank you.

You're welcome.

Bob Edmond (ph), private investor.

In relationship to your fortune 25 company, you've got companies in the fortune 25 that go from Wal-Mart down to Pfizer and there's only a handful of financial companies in there. You said that this was a financial arm of a fortune 25 company?

Yes, a financial services division of a fortune 25 company is I believe the exact wording we used, yes.

So in that respect you could almost -- in there you've got companies like Citigroup, General Motors, Ford, Exxon, IBM, AIG -- you're talking about companies of that nature and specifically a fortune 25 financial arm and they're dealing strictly with the retail.

This division that we deal with deals with the retail sector, yes.

And you're talking about a major company like one of the major banks or General Electric or AIG or Citicorp? Is that what you're saying, something in that nature?

Yes, those are the companies in the fortune 25, so absolutely.

And what was the reason that they asked you not to produce their name? Are they trying to fly under cover or what are they doing?

A lot of these people all believe that our technology provides them with significant benefits and they're not interested in giving their competitors any additional information that is needed. As I'm sure you can understand, this market that they're providing services to the retail environment is very, very competitive and there's only a handful of companies vying for a lot of these major accounts and they want to keep their business practices and processors confidential.

Very similar to the reason we couldn't announce the significant retailer that -- we obviously put a press release out. They believe that this is a competitive advantage and they're not interested in giving us permission to announce it to the world who are using it. We would love to, but we have to respect their wishes and at the end of the day, as Frank has said, our report card is our quarterly report and that's all that's going to matter at the end of the day is bringing these accounts home and producing the revenue and the bottom line.

So with the fortune 25 company as well as the major retailer, I'm assuming that you're using this product for identity recognition with the use of either a credit card or a check, is that correct?

Yes, those types of applications, absolutely.

Isn't that the same kind of business that Verifone is involved in?

No, the Verifone application -- a lot of these retail applications are for productivity enhancement to be able to populate forms instantaneously while verifying the authenticity of the drivers license. That's different than Verifone where it's a self-contained application on their terminal and it's going to be either for age verification or document verification. It doesn't really have much to do with productivity enhancement or populating application forms. So they are very different from that perspective. They use the same technology for different applications, but there are some significant differences.

Then the one sale you spoke about on a transactional basis, what would that mean to us? Every time that they scan a document we would be paid?

Yes, every time that they swiped a drivers license we get a per transactional fee.

Can you tell us how many documents per year that they process? I know Bank of America processes something like 30 billion transactions a year just processing paperwork.

Unfortunately we can't disclose it, but the numbers that we're dealing with are in the many, many, many millions.

In transactions or in the billions?

It depends. We have different customers who have different transactional volumes, but these are not trivial transactional volumes that we're talking about. Unfortunately we can't disclose any more because that's obviously coming under NDAs we have with these customers that we can't disclose the number of transactions unless it's public. Like in the case of Certegy it's public knowledge some of their transactional volumes they've disclose. The fortune 25 company does not disclose how many transactions they do.

Has the retail company that you spoke about, which I think someone has mention their name here a few times -- have they ever disclosed what they lose per year in fraud or in lost revenue from bad documents? I understand in some retail outlets it could be as much as 3 or 4% of total sales.

They've disclosed some of that with us, but I think it's more of a general -- we can't disclose confidential information on what a retailer has told us, especially when names have been talked about on our call and we've not confirmed or denied them, we just can't comment upon them. But we wouldn't disclose specifics, but I think from the retail space just in general those numbers are probably 3 to 4% -- could be accurate numbers just in general of what they lose, could be lower in some companies, could be higher but --.

Well, 1% of 40 billion in sales is a hell of a lot of money.

It absolutely is, but a lot of the losses are coming from shrinkage, people stealing products, that is not what our technology can help with. We can't do anything about customers walking out the door with --.

Right. But have we ever found out what the actual loss due to bad checks or something of that nature is?

Sure, we have some good ideas about that, yes, absolutely. And that's how we predicate some of our pricing models.

Okay.

Absolutely.

All right. Thanks a lot.

I wish I could share more information with you.

I'm just trying to get a grasp of the total size of the marketplace. If you're saying 3 to 4% is loss due to employee theft and shrinkage, etc., etc., I'm wondering out of that 3 to 4% whether 25% of the 3 or 4% is loss due to bad checks or illegal credit cards and I'm just wondering what that kind of number could be.

Right. We don't focus as much on bad credit cards because that's all on-line authorization. Where we really are focusing on the retail side is instant credit applications and what the fraud is to deal with that and that's really where our focus is on the retail side.

That's still got to be a substantial amount of money. They process millions of new credit card applications a year.

Absolutely.

I'll add something. The FTC reported last year they had in 2003 the losses to industry from identity theft and other frauds was $48 billion and that's the only number that we can talk about. As to specifics of any particular count that we have now signed up, even if we know them, and some we do, we cannot disclose it. But there was -- the problem in industry is very huge, as you can see from that published (technical difficulty) at the FTC.

Wouldn't you say then that your potential marketplace that you're going after is over $48 billion in size?

Not necessarily because not all those -- we can't stop with our technology all of those frauds.

Absolutely not, but potentially that's the market you're going after.

No, no, no. If you have -- don't get confused with the size of loss with how many transactions. Let's say each average loss was even $500. Well now you've cut the potential to a billion. And I'm not saying it's 500 or not, that doesn't mean that every one is a dollar loss and therefore the market is $48 billion. That's a misnomer. That's the total (multiple speakers) industry.

And I think it's just as important, though, to shift focus for one second -- this is an important statement to make -- is that the loss prevention is definitely a major component of our technology advantages, but just as important if not probably more important is the productivity enhancement and the customer satisfaction, the marketing side of what we bring to the table. Our primary customers to date have been on the marketing side of these organizations.

They see our technology allowing faster transaction times and improved customer experience. And that's their number one goal is how do we move our customers through the process as quickly as possible and obviously to improve the experience as well as to increase throughput. And they do their math, if we can increase throughput by 6% we can add ex number of accounts or whatever it is to our portfolio and that translates into ex number of dollars.

The loss prevention is definitely important, but we have the eyes and ears right now of the marketing people which is a great group to be in because they want to move quickly, get product into the field and how are we going to meet our numbers by adding more applications or customers, whatever it may be, to the bottom line.

Well, let me understand. I feel like Colombo here. Let me understand this. That market is a certain amount of dollars and you've got the government market and you've got the cigarette market and the alcohol market and the age verification market -- your market is in the multi billions of areas potentially.

You could claim that that is the market potential, but that's not the market size today because people aren't spending that kind of money for this technology today for the entire market.

Well, that's because they don't know the solution exists.

Exactly right. And that's why they're going up and signing up these lighthouse accounts that we're doing. We're pushing into unchartered territory where I don't think Intelli-Check has really ever been before and the strategy that we embarked on a year or so ago is now starting to pay off. As I'm sure you guys know, it takes some time to build a pipeline and a strategy and that's what we've been doing.

Then the analogy would be that you're creating a software that 35, 40 years ago never existed for any software and you're creating a new form of software.

We're pushing our application, our technology into new applications within new markets, yes, I think that's absolutely correct.

Thank you very much.

Sam Bergman, Bayberry Capital Management.

On the various hardware arrangements on some of these contracts, do you have one particular supplier for the hardware?

No, we do not. We have multiple suppliers that we're working with and absolutely, it's not a sole source on the retail side. We've put out a press release that people like Symbol are our partners, other competitors of Symbol are absolutely our partners and working just as closely with them. So we've got a number of partners in the 2-D bar-code side and not sole sourced and I think we're well positioned to take advantage of these various partnerships.

What would be the margins on most of the hardware versus the software, how much of a dip is there between both?

Good question. The goal -- there's a couple different business models obviously on the per transactional model. When we sell hardware we're going to sell hardware up-front. We can either resell the hardware directly or it can be sold by the hardware manufacturer company where we may receive a marketing referral for bringing the deal to them if that makes sense. So there's a bunch of different models, but on a direct sale -- Ed, I don't know if you want to comment on this. Obviously the margins decrease, but that's because we are going to be getting pure 100% software revenue margins on the back end.

(multiple speakers) on the hardware, software bundled solutions is about 50% margins, that's the goal. Obviously the software is almost pure profit. That's where you have the blend.

But in this model the hardware could come first and the software would come on the back end.

Okay. The other question I have is your alliance with Anteon where there's a chance or possibility you'd go get a certain percentage of the contract from the government, are you able to align yourself with one or two other vendors so you get the percentages higher?

It is nonexclusive with Anteon. So the answer to that is, yes.

Okay. And the last question is -- well, not a last question. I did some field checks was Certegy and they're very, very happy with your product. So I'm happy to hear that from their people and it seems like you've got a lot of opportunities coming up in the future.

We agree. Thanks. Certegy has been a great partner and we've done a lot of work with them and we're excited about that opportunity.

Good luck in the next quarter. Thank you, guys.

(OPERATOR INSTRUCTIONS). We have no further questions at this time. Please continue.

That will conclude this presentation of our third-quarter conference call. We thank you all for participating and we look forward to producing the kind of numbers that, one, the Company will be proud of and will be rewarding to the shareholders. And we wish to thank you all for the patience of staying here so that we can deliver on the promise the Company has now that the market is starting to mature and our pipeline is so full. Thank you all for participating.