Intellicheck Inc (IDN) 2008 Q4 法說會逐字稿

Good day and welcome to the Intelli-Check - Mobilisa Fourth Quarter and Fiscal Year 2008 financial results Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. James Carbonara of The Investor Relations Group. Thank you, you may begin.

Thank you very much, and welcome, everyone. Thank you for joining us today for our 2008 fourth quarter and end of year conference call to discuss Intelli-Check - Mobilisa's results for the fiscal quarter ending December 31, 2008. In a moment I will call upon our CEO to lead today's call. Before I do that, I will take a few minutes to read the forward-looking statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. When used in this conference call words such as will, believe, expect, anticipate, encourage, and similar expressions as they relate to the Company or its management, as well as assumptions made by an information currently available to the Company's management identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and beliefs about future events. As with any projection or forecast, they're inherently susceptible to uncertainty and changes in circumstances. And the Company is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. 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. With that out of the way, I would now like to introduce Dr. Nelson Ludlow, Intelli-Check - Mobilisa's Chief Executive Officer to preside over today's call. Dr. Ludlow?

Thank you, James, and welcome shareholders and potential investors. On the call with me today is Pete Mundy, our Chief Financial Officer. We issued a press release this morning formally stating our fourth quarter and end of year financial results and as we said last week our financial results were solid. We had revenue of approximately $10 million for the year, over $11 million if you include the slightly more than $1 million of Mobilisa revenue from the pre-merger, and we had a positive cash flow from operations for the third quarter in a row. We've had no burn of cash. We have no debt and we've increased the cash position to approximately $3.4 million for December 31st. Now, what is new is that we completed our annual impairment testing of goodwill and other intangible assets.

Due to the decrease in the market price of Company's common stock, the Company recorded a non-cash impairment adjustment or a write-down of goodwill of approximately $32 million for Q4. Now let me emphasize this is a non-cash expense, so while it does affect P&L for 2008, it does not change our revenue or that we brought more money in than we spent or that we increased our cash position. Other companies, such as Google, L1, performed similar accounting housekeeping of writing down goodwill and/or intangibles in Q4. So my personal view is this is a good thing. If it was only a write-down of goodwill, I would view it as a neutral event, but in this case, we also were able to reallocate a mix of the intangible assets and the goodwill associated with the acquisition of Mobilisa and in turn write-down goodwill.

This will have a direct positive impact, a positive impact on P&L for future quarters. So I'll ask Pete Mundy, our CFO, to briefly discuss the goodwill and intangible adjustments and SFAS 142 analysis that he and our auditors performed. Go ahead, Pete.

Thank you, Nelson. As Nelson stated, we completed our audit, which had been delayed because of the ongoing evaluation of the carrying value of our goodwill, which was precipitated by the decline in the Company's stock price towards the end of the year and as well as the continued drop in our market price subsequent to year-end. We performed our analysis of impairment and goodwill in accordance with Statement of Financial Accounting Standards, SFAS, 142 goodwill and other intangible assets, which is done annually as of December 31st each year. The computation of the write-down is based upon a discounted cash flow analysis supported by comparative market multiples to determine the fair values of our business unit versus its book value. The computations are complex and we had help from an outside evaluation firm who performed evaluation models and this was in concert with our auditing firm.

At the date of the merger with Mobilisa on March 14, 2008, we estimated the purchase price allocation based upon the information that was available at that time. The accounting rules allowed for us to finalize that purchase price allocation up to one year from the date of the merger. During the year-end impairment analysis, we were able to refine the initial estimates made based upon better and updated assumptions as well as taking into account the impact of the current market environment. At December 31, 2008, we finalized our purchase price allocation resulting in an increase in the carrying value of goodwill and a decrease in the identified intangible assets by $6.293 million. The impact of this change will be a reduction in the future non-cash merger related charges. In 2009, the impact will reduce these cash charges by approximately $847,000, which will go right to the bottom-line on our Statement of Operations.

Over the next five years, the impact is close to $2.5 million. After the finalization of the purchase allocation at December 31st, the Company had goodwill of $43.908 million, which represented the aggregate of the excess purchase price for the acquired business of Mobilisa over the fair value of the net assets acquired. The fair value is determined primarily using a discounted cash flow method, although market transactions and multiples are considered also. Such analysis requires the use of certain future market assumptions and discount factors, which are subjective in nature. Estimated values can be affected by many factors beyond the Company's control, such as the business and economic trends, government and regulation, and technology changes. The Company used a valuation advisor to assist in performing the impairment analysis and valuations. The estimates of fair values were primarily based on these discounted cash flows based upon the Company's latest plans and projections.

The use of the discounted cash flow method requires significant judgments and assumptions of future events, once again, many of which are outside the control of the Company. In addition, the use of market transaction and multiples requires significant judgment as to whether the observed data is comparable to the reporting units being evaluated and how much weight should be given to such data in the valuation. Management believes that the assumptions used to determine the fair values are appropriate and reasonable,. However, changes in circumstances and conditions affecting these assumptions could have a significant impact on the fair value determination. As of December 31st, the Company compared the carrying amounts of the reporting unit to its fair estimated value and determined that the carrying amount exceeded the fair value.

The test determined that there was an impairment related to the carrying value of goodwill and the Company recorded an impairment charge of $32.172 million in the fourth quarter of 2008. The goodwill impairment charge was driven by adverse market conditions and the resulting decrease in the market multiples and the Company's stock prices as of December 31, 2008, as well as the deteriorating economic conditions that manifested themselves in the fourth quarter of 2008. It's important to note again that this goodwill write-down is a non-cash charge and does not impact the Company's business operations. Since I already addressed the results of the year prior to the impact of impairment charges in the last conference call, I'll just address a few highlights that were included in the press release we put out this morning. The full 10-K is expected to be filed with the SEC by Monday.

Once again, the information includes the results of Mobilisa for the periods March 15, 2008 through December 31, 2008, since the merger was completed on March 14, 2008. For the year ending December 31, 2008, Company revenues increased approximately 183% to $9.954 million from $3.512 million reported in the prior year. Revenues from the Company's historical business increased 12% to $3.950 million and Mobilisa contributed $6.004 million. Excluding the impact of the goodwill impairment charges, our net loss decreased 66.7% to $890,000 loss or a loss of $0.04 per share for the year ending December 31, 2008, from $2.673 million loss or $0.22 loss per share for the year ending December 31, 2007. After the goodwill impairment charge, the net loss for the year was $33.061 million or $1.47 per share in 2008.

Basic and diluted weighted average shares outstanding used in the computing the per share amounts were 22.453 million shares outstanding and 12.262 million shares outstanding in the years ending December 31, 2008 and 2007 respectively. As of December 31st, our backlog, which represents non-cancelable sales orders for products not yet shipped or services to be performed, was approximately $10 million compared to $1.9 million as of December 31, 2007. The significant increase is principally related to the backlog for Mobilisa. Going to the fourth quarter, revenues for the quarter ending December 31, 2008, increased 107% to $2.553 million compared to $1.230 million for the previous year. We had a net loss in the fourth quarter of 2008 of $378,000 or $0.02 a share prior to the impact of the impairment charge compared to a net loss of $385,000 or $0.03 a share for the fourth quarter of 2007.

After the goodwill impairment charge, the net loss for the fourth quarter was $32.550 million or $1.29 loss per share in 2008. At December 31, 2008, we had approximately $3.4 million in cash and cash equivalents. We have no bank financing, nor do we have any long-term debt. After the goodwill impairment charge, our total assets are $24.2 million and we have shareholders equity of $20.6 million. Back to Nelson.

Thanks, Pete. Okay, let's briefly recap just a couple of the business highlights before we take questions. We brought in more money than we spent in Q4 and we closed the year in that same situation, so we turned around from a $2.2 million in cash and operations loss last year to generating positive cash of over $800,000 this year. That's about a $3 million swing in just over nine months. We improved our cash, our position in cash as well. As you know, to me one of the best indicators of a Company is what I call a health number, cash and cash equivalents plus the accounts receivable minus accounts payable. This is not a GAAP number, but it is useful to determine whether a business is moving in the right direction. The management team improved the health numbers every quarter, the last three quarters in a row and this was true for Q4 again. We had no burn of cash.

In fact, cash was up and ended the quarter, at the end of December 31st at $3.4 million and just the quarter before, 30 September, it was $2.3 million. We received the Army-wide certification. We've hired three people in sales to beef up that team. We have engaged an investor relations firm that I have very high confidence in, The Investment Relations Group, or IRG, led by Dr. Dian Griesel and her team and you'll steadily see increased involvement in our Investor Relations program. I'm very impressed with them and we're already making progress. We also were pleased with our recent announcement of our sales defense ID to a commercial company called Forts Protection, and they're on NASDAQ as FRPT, to help protect the critical plants building those military vehicles.

We announced our partnership with Georgia Technology Authority, or GTA, to provide an online tool offered by the State of Georgia, provides a instant simple solution to stop anyone from using a fraudulent, fake Georgia drivers license. Businesses can verify that drivers license information against that State database. We also received a new patent for identity systems from the U.S. Patent Trademark Office that was just awarded and we have over 10 other applications in the works for filing of new intellectual properties. So let me end on a theme that I mentioned on the call last week, because this is the direction we're heading. We've converted the Company from the old Intelli-Check that was losing money to a new Company that's making money. My view is that we're a solid $10 million to $12 million a year revenue type of Company and making money without taking into account the non-cash expenses.

However, my vision is that I want to shift us to the new level to increase sales, to get us to the $20 million to $25 million a year in revenue. I received a couple calls and questions last time, if that was like the end goal. No, this is just obviously the first step, but let's make that our next short-term goal. So, we're looking forward. Pete Mundy and I are available to answer any questions that you have.

(Operator Instructions) Our first question comes from Robert Shapiro, please state your question.

Good afternoon, gentlemen. Would it be safe to say that with the liabilities, I mean the write-off that you have right now, if the government was ever to get their act together on the [TWX] program and you were to secure a contract that would be well, let's say $30 million to $40 million in size, that this write-off would shelter that entire contract as far as profitability goes?

Hi, Robert. This is Nelson Ludlow. I'm going to ask Pete to talk about the tax aspect of that. This is basically a write-down of goodwill. We did readjust some of the intangibles downward over to goodwill. That does help in the P&L for future quarters. That's the part I'm excited about. Pete, I'll let you talk about the net operating losses of not having to pay taxes and how this affects them.

Okay. We still have net operating loss carryovers of about $36.6 million that are offsettable against future income. As a result of the merger with Mobilisa, those NOL's are limited to how much can be used in a particular year and there's a computation that is performed relative to that. We do get to use the full $36.8 million, but we're probably limited to using them to the tune of about $1. -- we figured about $1.5 million to $1.6 million per year. So as much as the $35 million contract that, Robert, we hope to God we get, that would not put us in a position where we would be able to utilize the NOL all at once against that and not pay any taxes. We would have to be paying some taxes. Steady growth along the way is the best way to utilize our NOL, but I'll be, I'm sure, Nelson and I would be more than happy to receive some very large contracts and show that more quickly and pay some taxes and still be able to utilize down the road the NOL.

Thank you, sir. (Operator Instructions) Our next question comes from Robert McCabe with EWM Investments, please state your question.

Two questions. Since Dr. Ludlow is the key person in the Company, do we have a sizeable key man insurance on him in case something would happen to him?

Robert what was your second question?

And can you speak at all to how the first quarter is looking since it's almost over.

Yes, there is a key man insurance on a couple, more than one person in the Company and I'm not the only person that makes things happen. I'd like to think that I'm key, but I've got a lot of other very good key solid people and as you see as we're growing, we're going to be transitioning now to this more depth on the bench, for example. The second thing is how is Q1 looking. Some good things have happened in Q1. I think the biggest one was getting our award of the Army-wide certification. There's a lot of other Army bases. We're getting more interest. The other thing I'm excited about is it doesn't matter what party, from my point of view, but we have a new administration in so the government is now moving forward, taking meetings, looking at issuing new contract. It's no secret whenever you transition an administration things kind of come to an end, so this is good.

It means the government is back in business and things are happening with respect to that. The only guidance I'll give on that is we typically, and if you look at Intelli-Check in the past, you look at Mobilisa by itself in the past, and although it didn't hold exactly true this year, generally was true is that our Q1 is usually our lowest in revenue and Q4 typically our most and it grows through that. I expect to see a similar pattern, but we're still very optimistic and we're still trying to grow the Company, so overall, I think we're good. And we'll have to get back to you on exactly where we are in the key man insurance because I don't know the exact specifics on that. So one people are giving me a note to say please double check on that, so, Robert we'll get back to you on the key man insurance part.

Thank you. An additional question from Robert Shapiro. Please go ahead, sir.

Are you seeing any weakness or maybe you can add some color about what's going on with the present condition of the marketplace as far as your approach toward financial concerns and selling of the product to help them save some money on receivables?

I'm sorry, can you restate the question? I didn't hear it.

I was saying with the current weakness in the marketplace and the problems that a lot of the financial concerns are having, have you had any benefits in approaching the financial operators of banks, et cetera, et cetera, about using your product to save them money on their receivables?

Yes, actually, that's my view that it's actually gotten slightly better. Our official position is that just the economy is having a downturn but is that hurting us as a Company? And we don't think it is and let me give you two reasons why. We have so many opportunities that ID cards can be used in. Even if the whole economy is decreasing 10%, 20% or pick some number, we're just tapping into such an amazingly small amount of it. What we need to do is we've got four big retailers, Toys R Us, Target, Payless Shoes, L.L. Bean, I want to take that four big retailers and take that same model that we did good work for them and do it for 40 to 400 for example. There's a lot of good retailers out there. We don't -- even if 20% less, we're only tapping into 1% of that market for example. I'm making that 1% number up, but we're just -- it's a very, very small part of that, so we can easily grow even if the economy is dropping.

The second is retailers now are looking harder and harder at how to bring in new customers, how to keep their revenue going, and our instant credit card application thing is a very cool system. We found with one of our people that we did it, they were 12 times more likely to follow through with a credit card application by using our software and scanning the ID card at the point-of-sale than they were the old fashion way of filling out a form and on a clipboard and somebody trying to get you to do it and give you a little free prize or something. So it's definitely something that other retail companies are interested in. I've hired three new people, two of them are in that commercial new space doing exactly that, and I'm more optimistic about the aspect in that than in the entire last year that I've been with the Company.

Thank you. Ladies and Gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing comments. Thank you.

Well I'd like to thank the shareholders and potential investors. I would like to point out to potential investors, we have added an investor relations firm, IRG, and we would like to speak to you. We're excited about this and I think we as a Company have a very interesting technology at a very good time. Let me just state something I've stated in previous conference calls. This technology, its time now has come. If you look five years ago not all drivers licenses had bar codes and magnetic stripes. Only recently has all the states now have a machine readable zone and almost everyone that has a drivers license in their wallet has a machine readable zone on it. That means now the major retailer, these applications can use this. So, I know some of you guys have been in this for the long haul. We hope you stick it out. I think now the time is starting to move. So we're looking forward to this. We are proud and happy of the results that we got to this $11 million point from the combined companies for the year, but this isn't the time to rest. We need to keep growing and we really appreciate the shareholders' involvement in this. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.