Intellicheck Inc (IDN) 2015 Q4 法說會逐字稿

Good day and welcome everyone. Thank you for joining us today for the 2015 fourth quarter and full-year call to discuss Intellicheck Mobilisa's results for the fiscal year ending December 31, 2015. My name is Adam and I will be your operator today. In a moment, I will call up Intellicheck's CEO, Dr. Bill Roof, who will lead today's call and introduce the members of the Intellicheck Mobilisa management team, will be participating in today's conference call. Following management's prepared remarks, we will open up the call for questions.

Before I turn the call over to management, 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 it relates 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 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 are inherently susceptible to uncertainty and changes in circumstances, and the Company undertakes 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 within the Securities and Exchange Commission.

Management will use the term adjusted EBITDA in today's call. Please refer to the Company's press release issued this morning for a broader definition of and context for the use of this term.

I would now like to introduce Dr. Bill Roof, Intellicheck Mobilisa's Chief Executive Officer. Dr. Roof?

Thank you. Good day and welcome to the Intellicheck Mobilisa Q4 2015 and fiscal year 2015 earnings call. Today, we will present corporate earnings information for the quarter ending December 31, 2015 and the fiscal year ending December 31, 2015. After our prepared remarks we will answer questions from shareholders.

Intellicheck Mobilisa directors and officers present on this call today are Admiral Mike Malone, Chairman; General Buck Bedard, Director; General Jack Davis, Director; Mr. Guy Smith, Director; Mr. Bill Georges, Director; Mr. Bill White, Chief Financial Officer; Mr. Bob Williamson, Chief Revenue Officer; and myself. Our Chief Financial Officer, Bill White, will now review the quarter ending December 31, 2015 and the fiscal year ending December 31, 2015 financial results. Bill?

Thank you, Bill, and a good day to our shareholders, guests and listeners.

I would like to discuss some of the financial information that was contained in our press release for the fourth quarter and fiscal year ending December 31, 2015 that we released this morning. We anticipate that our Form 10-K will be filed with the SEC this week.

I will begin with our fourth-quarter results. Revenue for the fourth quarter ended December 31, 2015, increased 39% to $1.5 million compared to $1.1 million in the same period last year. The Company's booked orders for the three months ending December 31, 2015, excluding [42,000] in wireless bookings from the prior year comparable period, increased 4% to $968,000. Approximately 80% of our bookings were attributable to our commercial products.

Gross profit as a percentage of revenues was 63.6% for the three months ending December 31, 2015 compared to 32.1% for the three months ending December 31, 2014. Operating expenses, which consist of selling, general and administrative and research and development expenses, increased 20% to $2.5 million for the three months ending December 31, 2015, from $2.1 million for the three months ending December 31, 2014. Selling expenses increased $158,000 driven primarily by additional salespeople versus the prior year.

G&A expenses increased $33,000, research and develop expenses increased by $230,000 and were driven by continued development of our SaaS product platform that includes Age ID, Law ID, and Defense ID.

Adjusted EBITDA was a loss of $1.1 million for the fourth quarter of 2015 compared to a loss of $873,000 for the fourth quarter of 2014. The net loss for the three months ended December 31, 2015 was $1.5 million or $0.16 per diluted share compared to a net loss of $5.96 million or $1.24 per diluted share for the same period last year. In the fourth quarter of 2014, the Company took a goodwill impairment charge of $4.2 million. Excluding the goodwill write-down, the comparable net loss for the three months would have been $1.75 million or $0.37 per diluted share.

Now turning to our full-year results. Revenue for the full year ended December 31, 2015 increased 6.1% to $7 million compared to $6.6 million in the prior year. As previously mentioned, the Company sold its wireless division in 2015 that accounted for $369,000 in revenue during 2015, and $963,000 in revenue in the prior year. Excluding the revenue generated from the wireless divisions from both periods, sales were up over 18% for the year.

Gross profit as a percentage of revenue was down slightly to 57.1% for the year ending December 31, 2015, compared to 58.2% for the year ended December 31, 2014. Operating expenses for fiscal year 2015, which consist of selling, G&A, and research and development expenses, increased 30% to $9.5 million from $7.3 million for the comparable fiscal year ending December 31, 2014. Selling expenses increased by $76,000, driven primarily by additional salespeople, G&A expenses increased $1.35 million, principally as a result of amortization of the covenant not to compete with the former CEO and Senior Vice President of the Company, whose final payments occurred in December 2015, the non-cash stock-based compensation expense increase of $689,000 and an increase of professional fees.

R&D costs increased by $772,000, driven by the continued development of our SaaS product platform. This expense is partially offset by a decrease in salary and wages related to product development.

Adjusted EBITDA was a loss of $3.6 million for 2015 compared to a loss of $2.1 million for fiscal year 2014. The net loss for fiscal year December 31, 2015 was $5.3 million or $0.55 per diluted share compared to a net loss of $7.6 million, or $1.59 per diluted share for the same period last year.

Turning now to backlog, as of December 31, 2015, the Company's total backlog -- which represents noncancelable sales orders for products not yet shipped and services to be performed -- decreased 15% to approximately $197,000. The commercial business increased approximately $89,000 but it was more than offset by government business that decreased by approximately $124,000.

I would like to take a moment to comment on some additional financial metrics.

For fiscal 2015, our interest and other income was $150,000, primarily attributable to the sales of the wireless division. As previously announced, during the third quarter of 2015, the Company sold its wireless business unit assets for a total consideration of $350,000. It consisted of an upfront cash payment of $30,000, the issuance of a promissory note from the buyer of $200,000, and the contingent earnout up to a maximum of $120,000 based on future earnings of the buyers' wireless business.

The Company recognized a gain on the sale of approximately $109,000 based on the proceeds of the promise totaling $230,000 issued by the buyer, plus $120,000 in assets disposed that consists of certain trade names in net fixed assets associated with the wireless assets. Any gain on future earnouts will be recognized from the buyer as wireless revenues.

Now, I would like to focus on the Company's liquidity and capital resources. As of December 31, 2015, the Company had cash and cash equivalents of $6 million or $0.60 per share, working capital defined as current assets minus current liabilities of $5.7 million, total assets of $18.4 million and stockholders equity of $15.3 million or $1.65 per share.

During the year ended December 31, 2015 the Company generated net cash of approximately $3 million compared to $2.7 million for the 12 months ending December 31, 2014. Cash used in operating activities was $4.4 million in 2015 compared to a use of $2.4 million in 2014. Net cash used in investing activities was $177,000 in 2015 compared to $131,000 in 2014. We generated net cash of $7.6 million from financing activities in 2015 compared to $5.2 million in 2014.

On October 5, 2015, the Company entered into a two-year revolving credit facility with Silicon Valley Bank secured by collateral accounts. The maximum borrowing into the facility was $2 million. At March 22, 2016, there were no outstanding borrowings under the facility. We currently anticipate that our available cash as well as expected cash from operations and available under our revolving credit facility will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.

At December 31, 2015, the Company had net operating loss carryforwards of approximately $2 million.

I'll now turn the discussion back over to Dr. William Roof, Chief Executive Officer.

Thank you, Bill. 2015 was a busy transition year for the Company. We began with a new executive organization in late 2014 that developed a strategic transition plan to position the Company for profitability. Understanding that the Company would need capital to restructure, develop new products, grow our market share and pivot to sustain profitability, we executed a capital raise early in 2015 to generate the projected funding needed to execute our plan.

I'd like to share some of the Company's turnaround highlights for 2015.

The recent merger with Mobilisa in 2008. We divested the Company of the legacy wireless business to enhance our focus on the core business of threat identification and identification authentication. We rebranded the Company, including conducting our business with a more simplified and descriptive Company name, that being simply Intellicheck. We hired a new public relations firm, the results being that we have much greater visibility within our markets and many more opportunities for media events and interviews with the goal of evangelizing our Company and products.

We released two major products: Law ID and Page ID, and will soon be announcing the release of additional new products. We migrated many of our products to a subscription revenue model and took that model along with our new products to new markets and opportunities. We implemented a new customer resource management system to support our sales strategy and customer support organization.

We moved our accounting system from QuickBooks to Great Plains. Great Plains is a fully integrated accounting system that we expect will increase our efficiency significantly. We planned and began executing our intellectual property protection strategy by identifying firms willing to work with us to protect our financial property on a contingency basis.

We filed four new patents. We purchased a significant patent portfolio.

We believe the strategy we planned and began implementing in 2015 is working. We have assumed an authoritative position in our threat identification and identification authentication markets, and we are evolving our products in all our vertical markets to have compelling features and to provide barriers to entry for potential competitors.

In previous addresses to our shareholders, I focused on five main areas and talked about progress in each area: resources, markets, products, processes and intellectual property. We already covered much of our progress in these areas when discussing our 2015 progress highlights. We will cover them briefly here then move ahead to answer shareholder questions.

Upon completing our strategic turnaround plan, we raised capital in early 2015 to support our growth objectives. This was a necessity at the time, and we have applied debt capital to meet the plan objectives. It was necessary to restructure Company and to rightsize our headcount with the objective of the increasing headcount commiserate with growth and future. We added key positions and replaced some existing positions with key individuals who we believe would be instrumental in executing our plan. We realigned our sales team and moved forward with sales training, and with renegotiating our legacy business deals, many that had been in place without change for over 10 years.

As mentioned in our highlights, we reassigned our corporate headquarters address back to our New York office, the original Intellicheck corporate headquarters prior to emerging with Mobilisa in 2008. Intellicheck has maintained offices in New York since its founding over 20 years ago. And Intellicheck Mobilisa, the merged Company, has maintained an office in New York since the Intellicheck and Mobilisa merger in 2008.

We are finalizing our move from the Port Townsend office to provide us with easier, faster access to our customers. All employees working at the Port Townsend office will continue their employment with Intellicheck as we move a portion of our employees to virtual offices, allowing us to leverage their talent and experience while operating more efficiently and cost-effectively.

In the second half of 2015, we sold our wireless division as part of our strategy to focus our efforts on our core business -- that being threat identification and identification authentication. All former Intellicheck employees who are working in the wireless group continue to be gainfully employed, maintaining and installing wireless Internet links around the Olympic Peninsula in the Puget Sound region.

As I mentioned earlier, we rebranded the Company, including conducting our business with a more simplified and descriptive Company name, that being simply Intellicheck. This rebranding included a new website, search engine optimization, new product and services brochures, 30 new trademarks and much, much more. We hired a new public relations firm, results being that we have much greater visibility within our markets and many more opportunities to engage the media, penetrate target markets with key messages, and conduct media events and interviews with the goal of evangelizing our Company and products. Our integrated positioning approach is generating awareness and demand for Intellicheck products and services, and it supports our goal to become the recognized market leader within our vertical markets.

We believe that our strategic communications initiatives are creating brand value, visibility and market awareness at a level not previously achieved by our Company.

We have begun to solidify agreements with channel marketing and sales partners. This strategy will increase our sales presence without the need to hire a large sales force. Our white labeling strategy is taking hold with potential partners, and we are extremely optimistic about our potential to reach large numbers of customers through these managed changes. Please watch for future press releases on this subject.

Our digital marketing strategy continues to create awareness and visibility for our Company and our solutions. We see significant growth in website visits and an ever-increasing number of visitors requesting to become customers on our business-to-business portal. Our rebranded web presence is a very cost-effective way to enhance our market presence and provide key information to our markets. We are seeing our enhanced online presence increase our sales efficiency and reduce our selling costs.

We believe that our strategic communications initiatives are creating brand value, visibility and market awareness at a level not previously achieved by our Company. We have positive media stories in Q4 resulting from our media strategy, press releases and other outreach. We continue to deliver our key messages to target audiences, and we are optimistic about the traction we see from our messaging platform and messaging distribution.

Our public relations efforts continue to support partnerships such as American beverage licensees and support access to a large base of potential new customers.

Products. We released two new major products, Law ID and Age ID, and will soon be announcing the release of additional new products. We expect these new products to grow revenues and profits. The critical need to add new products to our offerings required a significant increase in our internal research and development expenses. As a result, we believe we see growing traction with these new products, and we expect that traction to increase throughout 2016 and beyond.

Additionally, we expect to release information on other new product developments throughout 2016.

Intellicheck Law ID enhances an officer's situational awareness by minimizing the loss of visual contact with an unknown person during field contact. Because it is available on mobile devices, Law ID ensures the officer has one hand free at all times, whether on foot, bicycle, horseback, motorcycle or in the car. With Law ID, the officer simply scans the contact's ID barcode and the ideas instantly authenticated on the officer's mobile device. Critical data fields that indicate the threat level are highlighted red, yellow and green, and are visible at a glance. Having authenticated the contact identity, the officer can act accordingly, which can immediately de-escalate a potentially tense situation. Best of all, when the officer returns to the station, Intellicheck makes reporting faster and more accurate by populating standardized form fields from data retrieved during the ID authentication, and from the mobile device's reporting features, including location, date time, and weather information.

Law ID instantly accesses critical authoritative data sources, increases officer and citizen safety, provides the officer with accurate relevant data at a glance, and supports faster, more accurate reporting. [When you saw] Law ID under a pilot program at our first Police Department in Illinois, in October 2015. This department was our new product test bed, and provided us with critical product feedback. We worked with this department to enhance the product and add new capabilities that make Law ID truly a world-class product.

In December 2015, this police department conducted a department-wide product rollout to all its officers. As we begin installing the product at other police departments in other states, we are thankful for the input received from our partner police department in Illinois.

We believe our early adopter pilot strategy has allowed us to demonstrate the product's scalability and applicability to a variety of law-enforcement agencies and operational environments. As Law ID has passed certification requirements for connection to the FBI's criminal justice information system, we continue to move forward in the approval processes for connection through additional state law enforcement networks that will allow us to deploy our products in markets nationwide.

Our Age ID product is gaining traction in producing revenues at increasing rates, selling age-restricted products like alcohol and tobacco with the compliance challenge. The risks and costs associated with noncompliance are high and rising. Age ID instantly authenticates identification documents such as drivers licenses so our retailers immediately know that the customer's ID is fake. That reduces risk of noncompliance without slowing down purchase transactions. Age ID works with mobile devices or integrates with existing point-of-sale solutions.

We developed our Age ID product to curtail underage drinking because proprietors who serve alcohol are also members of their communities, who understand their obligations to their fellow citizens. Age ID verifies that the individual purchasing restricted goods is using an authentic identification document and is of legal age to make the purchase.

With the ability to read more than 200 unique barcode formats from all US states, Canadian provinces, and many Mexican driver licenses, in addition to other US government forms of identification, Age ID provides the most accurate and up-to-date solutions. Age ID also offers regulatory compliant audit capabilities often needed by proprietors to demonstrate compliance with state regulations for it to earn discounts from reliability insurers. Age ID is available as a subscription service or customized solution designed to meet our client's specific needs.

We now have our Age ID product operational at liquor establishments in several states, including North Carolina, Texas, California, Mississippi and Georgia. More importantly, our product is well received by law enforcement and state liquor authorities, and we are implementing our strategy to work closely with those organizations to expand our Age ID footprint.

Our partnership with ADL continues to generate business for Intellicheck. Our future press releases will describe the advances we have made into the age verification market with this new product. We are excited about the ease and speed to market of Age ID, and look forward with optimism to increased product acceptance quarter to quarter.

During 2015, we migrated many of our products to a subscription revenue model and took that model along with our new products to new markets and opportunities. This initiative also required changes in our software and backend systems to ensure we had the means to collect metrics associated with subscription revenue models. We were also successful in renegotiating the number of marquee customer legacy contracts, some as old as 10 years, to increase our recurring revenue proportionate to the value we bring to the market. Negotiations with other legacy customers will continue in 2016.

Processes. We understood the need to modernize our infrastructure and business processes. In response to that need, we have implemented a new customer relationship management system to support our sales strategy and customer support. This provides organization and customer tracking for our sales personnel, as well as sales status and metrics for management. This initiative is critical to our objectives of increasing revenues. CRM provides us with cost and time efficiencies that previously did not exist within the Company.

As another key process improvement, we moved our accounting system from QuickBooks to Microsoft Dynamics Great Plains. Great Plains is a fully integrated accounting system we expect will increase our efficiency significantly. Great Plains provides financial management and accounting inventory management and operations, sales and service support, business intelligence and reporting, and human resources and payroll functions. A growing business with growing revenues and expanding customer base needs and enterprise resources planning system like this to manage operations.

Intellectual property. Because we are now moving ahead with our intellectual property protection strategy, I will keep comments pertaining to this initiative brief. We planned and began executing our intellectual property protection strategy by identifying firms willing to work with us to protect our intellectual property on a contingent fee basis. In 2015, we engaged and experienced and very reputable firm to represent us, and we are currently in the process of contracting with an additional law firm, again under contingent fee agreements.

In executing our strategy, we have filed patent infringement lawsuits against Wizz Systems, doing business as IDscan.net, and against Honeywell International Incorporated. We are in the process of finalizing other filings against organizations we believe are infringing on our intellectual property. We filed four new patents that we believe will expand or modernize our technology and products to address a host of threats facing our nation. We also purchased a significant patent portfolio, with some patents already issued and others pending, to support our move into biometrics identification markets.

In general, we continue to implement our strategy defined by our previously identified five pillars, those being: to operate as efficiently and effectively as possible, to focus on developing our key competencies into world-class products, to manage our product offerings with the goal of focusing on value and scalability to our customer base, to establish a position of market recognition and leadership based upon our core competencies and world-class products, and to define, implement and nurture a culture that supports this transformation. We are excited and optimistic about the progress we made during this turnaround. 2015 was a transitional year for Intellicheck, and we believe our strategy and plan execution will bring increase the shareholder value we all expect.

Customers need and appreciate our products and services. We believe our investments in our five key areas are starting to generate the returns we expected in terms of top and bottom line growth.

In summary, thank you for your attention today. We look forward with great optimism and excitement to executing our strategy as we continue to gain the market awareness and momentum needed to drive the Company forward. I will now turn the call over to the operator, who will take questions.

(Operator Instructions) John Bendall, JBC Partners.

Thank you very much. First of all, I want to applaud you for buying back 1 million shares of the overhang of that stock at the time it was a premium, which I thought was a very small premium to be able to clean that up. I think that was terrific.

The other thing I wanted to mention, I can see and we have had people look at some of the liquor and beer stores, the one in Atlanta has -- I guess they hit somewhere over 300 when we last checked of identifying people under age. And whether that saved them from getting a tremendous fine or losing a license, I don't know. But it certainly seems to be working.

What I wanted to ask you on a sadder note, right near that particular store, have you all talked to gun deal? Is that big gun dealers, do big-time checks with the FBI. They get -- small gun dealers don't really have that. They ask for your driver's license.

Two weeks ago, a 16-year-old boy wanted -- not far from the facility that you all have your system in to check of underage alcohol buyers, and he bought -- with a license, he bought ammunition, which required someone to be 21 years old. He then proceeded to go home and commit suicide.

It seems to me that that is as important, if not more, than the alcohol stores. I don't know what will resolve in the lawsuit. One always says, well, we ask for identification, but a 16-year-old, there is not many of them that look 21. So I am not sure that someone doesn't look the other way and just accept the driver's license.

If they would have had the Intellicheck, I suspect the boy would have been alive today. So, if you could comment on that, I would appreciate it.

The other thing is the Honeywell lawsuit. I know you can't comment much on that, but it is a serious law firm as far as the patent attorneys, so it must be a serious suit in doing that. And what I would like to know exactly, if you can, explain a little bit of what the violation is with Honeywell.

And lastly, I wanted to ask Bill White, did you say built $2 million in carryforward? That was -- I thought it was a lot more than that.

This is Bill White. Yes, the Company conducted a what is called a Section 382 tax study that would evaluate the net operating loss carryforwards that were available to us. And given the change in ownership of stock, the limitation of that net operating loss carryforward was limited to $2 million. That study was just completed here this last week.

With respect to the Honeywell lawsuit, we are really not at liberty to talk about that. But as we make progress, as we can talk about it, we will let everybody know.

And this is Bob Williamson to respond to the -- Mr. Bendall, to your question about gun sales. Great question. We agree.

What I can tell you is we have had some conversations and continue to look at that market. Obviously retail is a key market for us. We believe that there is an opportunity to leverage our ID authentication solutions in that space to verify and help expedite the process for background checks, the like. So, we are early in the process and can probably speak more to that in the months ahead.

Thank you. Amy Norflus, Neuberger Berman.

You are doing a great job turning around and rebuilding the Company. Can you give us some numbers or quantify either the law market and the age market is, what it is, how big it can be, what -- or just kind of put some numbers around the wonderful things that you are doing?

Yes, Bob, do you want to take that?

Yes, sure. Hi Amy. I'll be glad to address, I think, at a high level. So, appreciate your question.

We think that the law market is potentially very, very large. Depending on what data you look at in the US, there is between 1 million plus foreign officers in the United States alone, and Law ID has applicability to the great majority of those. So, our objective right now is continuing to identify those law enforcement agencies who are moving toward mobile solutions, and there are a number of those -- and who seem to understand the value of having instant information, queried information that we can provide in the fingertips of an officer's hand in the fields.

So, our ID authentication solution that has been around for years, now repurposed and packaged into the Law ID, and then connecting through various states and their switches to provide -- allows us to provide instant information to an officer in the field to give them what we call full situational awareness when they encounter somebody. So, we think and what we have heard is that very important, our current customer in northern Illinois and their officers and detectives using the solution have confirmed that this is a very important tool to help them quickly discern who they are engaging in the field. And the important thing we think, particularly in today's climate, is that not only does that make the officer safer, but his engagement with the community is ultimately going to be enhanced dramatically, because as Bill mentioned earlier, we could really de-escalate a situation before it potentially can become problematic.

So, we see a big opportunity here. The market is quite large. Our objective is to penetrate those law departments again who are moving toward mobile solutions, either as a local, state or federal level. And also, we see a lot of channel partners in this particular space who already are engaged in working with various law enforcement agencies where we can actually embed and tag as our solution with them. So, I hope that answers your question about Law ID.

Right. Yes, and of these 1 million officers, how do you create revenue? Is it a per scan? Is it, do you sell them a complete product? Do you -- I mean, just kind of give us an understanding of what would contain revenue.

Yes, sure. Again, specific to this Law ID product?

Well, yes, and then I just wanted to touch the same thing on the Age ID, just so that we can understand the potential of it.

Yes, happy to. On Law ID, and quite frankly on Age ID, but let me start with Law ID first. We really -- it is a subscription-based model, as Bill mentioned earlier, as we kind of pivoted the business in that direction. And with Law ID, we see a couple of different scenarios. A license type model based on the number of users in the department, for example, that are using Law ID. So, if they have a certain number of sworn officers that have leveraged Law ID, they would pay us a monthly subscription based on those number of users. And there are several different ways that we can structure that particular subscription with those departments.

And then obviously, we can apply other terms relative to the volume and scope and the like. But really think of it in terms of a monthly subscription per user.

And, on the Age ID side, and which by the way, kind of parallels in some ways retail market as well. There, our objective is we get a monthly subscription-based model. But it is built around a per store, per location model that has a predefined number of licenses already assigned to it. So I will give you a quick example.

A lot of stores will have 2 to 3 points of sale. In fact, I think John Bendall referenced the Atlanta story that was done a couple weeks ago. There, they have two or three different points of access, where they are checking out people. And what we have done is try to package Age ID on a monthly subscription, so very affordable for them where they get a flat fee and they can have up to three different licenses to operate that store using Age ID.

And then for the larger stores, they can add incremental licenses, and we just charge them on a per license or per user basis for that afterward. And that is very similar to what we do in the retail ID market as well. We can go into a particular retail store. We can size it based on the type of store, department store versus non-department store models, a certain number of points-of-sale that are bundled or packaged in, and then additional licenses as they need them.

So it gives us the flexibility to price this commensurate with the need that the client has, and obviously certainly prices it in a way that is affordable in the marketplace that still works very well for us for the client. So, different models for those three different verticals but similar and all based around a monthly subscription. Does that answer your question, Amy?

Thank you. Dennis Van Zelfden, Brazos Research.

Bill, I was wondering if you could give us a little bit more color on the status of these police pilots. I know you said the one in Illinois was pretty much implemented in December of 2015. What has been their feedback? And what about the status of the other pilots?

The Law ID process has been very, very controlled, mostly by the government and --. So, for example, we went into our Northern Illinois Police Department in October and that was the first time a police officer had had this product in their hands.

The interesting thing is, we can't see how the product works in the field. We are not allowed to see that here at the Company. So, we have to rely upon reports from police users as to whether or not they like the way the screen is laid out, whether or not they need more information are passed down to them, etc. Only a sworn officer can use the system.

And we can set up fake databases with fake people and so forth, but really in the fields, we don't have any visibility into how the product works, and that is because of privacy issues and our inability to, as a company, to access criminal databases. So, we were able to get a couple turns on the software, so we went in with version 3. We came out with two new versions after the October install, based upon lots of meetings with the officers, and no feedback.

And we put out a Version 3 in December, and that is when they rolled it out. And it is really difficult not being able to test your own product in a real environment to really get it right, and to get it dialed in correctly.

And I will give you an example. We were asked that if we could have a reverse screen at nighttime, so that when the officer is looking at the smartphone his face is illuminated, making a target. That type of thing -- are the type of fixes that we make in the system actually about our police partner there so, the rollout is starting to happen now.

We have contracts signed in other states. We are in the process of connecting to the state law enforcement networks in most states. And we also have some really nice general partners that we are in negotiations with right now, who will be able to sell our products for us into a wide variety of law enforcement agencies. Does that answer your question, Dennis?

Well, can you give us an example of like what is a channel partner in this particular channel? Who would that be, or what kind of a firm would that be?

Well, a channel partner might be a company that builds a police records management system or an automated dispatcher, a computer automated dispatch system. There are already -- they already have footprints in the police departments. Their systems are already being used by police officers on the streets, and to add a mobile capability, smartphone capability is a natural extension.

So, the idea there is to -- this would allow you to get into more police departments quicker than you would ordinarily would? Is that the whole idea?

Yes, yes it would. It would speed up (technical difficulty)

I'm sorry; you cut out. Say that again?

(technical difficulty) by getting our systems distributed by channel partners instead of trying to grow a salesforce here and do it one by one.

Okay. And then just one question, if you could, on your strategy of defending your IP.

When you discover someone who is -- who you think is violating it, do you first attempt to contact them to kind of tell them that you think they are infringing on your patents and talk to them first, or is the strategy just to go ahead and sue them? Can you just talk about the strategy in general?

Dennis, I would love to be able to do that, but our attorneys have recommended (technical difficulty) not to discuss our strategy with anyone. That is pretty close hold right now. We have a number of different strategies, depending on who the infringer is and where they are located, and that is (technical difficulty).

Tom Maguire, a private investor.

First one is just a little clarification on your bookings. Bill, I think you said that 80% are attributable to commercial products. And is that all? Like, Retail ID, Law ID, Age ID, is that your commercial products that we are talking about? Or is there more in that in terms of maybe some old hardware also? And secondly, what's the other 20%?

The other 20% would be recurring revenue from our legacy Defense ID business, (technical difficulty) [old] support, that type of revenue.

And then the 80%, would that be the Retail ID, Law ID, Age ID products?

That's correct, yes.

Okay, thank you. Now, how many salespeople do you have currently? And is that number what you want to stick with or do you want to add more or what?

Bob, why don't you go ahead and answer that?

Yes, this is Bob Williamson. Currently we have, at the moment, five different people on the sales team. We are intending to add additional. Actually have a couple of openings to fill as we speak, as we are expanding and growing the marketplace. As was mentioned previously, in fact I think by Bill just a moment ago, on a channel partner discussion, we fundamentally believe, however, though that our key channel partners in some of these verticals, whether it is the retail space, law enforcement space, and others, are a smarter, more cost-effective way to go to market.

So, the purpose of the sales force is to help us be opportunistic when we can be, and at the same time, to help us develop and grow these channel partner relationships. But certainly, to leverage those large companies already in the vertical markets that can basically embed our technology and solutions, and we think that is a smarter way to go.

Thank you. Jim Kennedy, Marathon Micro Fund.

First of all, one, investor communications going forward. What I think I am hearing is, from the last call, you talked about some trials that were occurring. I believe the only thing that was announced between the last call and this call was the closing of an account in Atlanta for a liquor store contract. And what I think I'm hearing is that over the last three months, we have secured various police departments as well as various liquor stores as well as various channel partners. And from my perspective, that is very useful and valuable information for investors to be aware of. And obviously, you don't want to put out a press release when you close one liquor store, but I think you are demonstrating enough progress, or I am hearing enough progress on this call, to say, gosh, it is almost as though we closed one liquor store in three months according to your communications. And now, it turns out that you have got a lot of things in the hopper and a lot of things closed that no one was aware of.

Very good points, and I appreciate your input on that. We do have a lot more going on right now. And so we are walking the tightrope between customers who are entitled, who we are sure will convert to paying customers versus customers who may not. And so, we are in pilot all over the country right now, with Age ID and we are having great success with it.

What we saw at Max in Atlanta, that is duplicated throughout the country right now. We are having great success. So, we are anticipating those converting, and some of them are converting to paying customers. And we had (technical difficulty) we convert them to paying customer (technical difficulty) bottom and (technical difficulty) will revisit that policy certainly.

And (multiple speakers) channel partners and the Age ID world can be a state liquor control board. In the states where the state actually owns the liquor stores, that is a great way for us to go. And we are working with these types of states right now. So we are going to be making them shortly, but we just decided that while the customer was in pilot, we were not going to say much about it.

Okay, thank you. Well, I would certainly encourage you, once the contract is signed, that it is newsworthy. We also wanted to ask you about the patents that you purchased. Can you talk a little bit about what they cover, why you bought them?

Certainly. These patents are biometrically-based, which -- and by that, I mean fingerprints. And I will give you the key reason we purchased the patent.

One of these patents essentially is the underlying technology behind the government's PID card. And what the patent covers is the -- a PID card has a chip in it and that chip is encrypted, embedded image of the fingerprint. And one way to gain access with this card to a government facility is to show up, the card is read by a mobile card reader that also has a fingerprint scanner on it, and the person trying to gain access to the facility puts their thumbprint on there and it matches it with the encrypted image on the chip, and it (technical difficulty) the authentic owner of the card. That patent, our patent that we purchased covers that.

So that covers a number of government ID cards, including the common access card used by the military and the TWIC, the Transportation Workers Identity Credential. And of course, the [pig]???

So we thought that this is going to be very big for us. We thought it was a way to extend our barcode and mag stripe technology into biometrics and we were able to negotiate what I think was an excellent deal on this, and move forward, purchasing the patent portfolio.

Okay, very good. And then last question for you, in layman's terms, could you describe what your broader patents around drivers' licenses actually covers? So, in other words, is if I use a driver's -- if I scan or take a picture of a driver's license, and I use that for what --? Verification or to access databases, in layman's terms, give me a broad description of what your patents cover.

Certainly. Our key patents around reading identity documents, and by identity document, I mean perhaps a driver license or a military ID card, they -- the patents cover the scanning -- the reading of the barcode, whether you read it with a laser scanner or another imaging device, like a smartphone camera. And the checking to see if that is a valid, authentic barcode format and then the extraction of the data from the barcode can be used for a variety of different things.

In our retail stores, that data is extracted and it may be used to fill out credit card applications. Or, it may be used to identify someone who is returning merchandise.

In a pharmacy, it can be used to identify people who are buying pseudoephedrines, which the DEA requires everyone who is buying the ingredients of methamphetamine to be logged into the pharmacy when they purchase that. So the main patent covers that type of work flow.

Interestingly enough, we had built over 20 years a library of barcode formats that are valid and authentic in our state and in Canada and in some of the Mexican states that actually have barcodes on their licenses. They don't all have that.

And we also receive a number of fakes that we can decide how they are trying to do the fake, and we can put countermeasures in place in our library that we check against to make sure that we are completely up to speed on the latest state techniques. So, that is kind of what we do with our workflows.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing remarks.

Thank you very much for joining us today for our earnings call. We look forward to a real, real exciting 2016 and we look forward also to meeting our investors when we are on the road as often as we can. Thank you again.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.