Intellicheck Inc (IDN) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Intellicheck's Q4 and 2016 Year-end Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dr. Bill Roof, Chief Executive Officer for Intellicheck. Thank you. Dr. Roof, you may begin.

Thank you for joining us today for the 2016 fourth quarter and fiscal year 2016 conference call to discuss Intellicheck Mobilisa's results for the fiscal quarter ending December 31, 2016, and for the fiscal year 2016. In a moment, Intellicheck's CEO, Dr. Bill Roof, will lead today's call.

Following management's prepared remarks, we will open up the call for questions. Before I turn the call over to Dr. Roof, 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 and information currently available to the company's management, identify forward-looking statements within the meanings 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 undertakes no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements whether resulting from 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 SEC.

Management will use financial terms such as EBITDA in today's call. Please refer to the company's press release for further definition of the context of this term.

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

2016 was a major transition year for Intellicheck. We continued our aggressive company reorganization and branding initiatives, purchased nearly 1 million shares of Intellicheck stock from a former CEO and closed the Port Townsend office, moving the corporate headquarters back to Jericho, New York. In 2016, we designed, developed and released new products for our retail market, identified and secured pilot agreements in our new market segments and began pilot planning and implementation with our clients. In 2016, we hired a new Vice President of Sales, who sourced, hired and trained a new dynamic sales team, and we hired a new Vice President of Engineering to lead our product development efforts.

In 2016, we also identified new markets for existing products and identified new government clients who need our current products. We worked towards and achieved partnership with Nlets, the National Law Enforcement Telecommunications System, whereby we can access all state law enforcement networks from a single secure location. The Nlets partnership is critical to our law enforcement and defense markets, especially considering worldwide concerns pertaining to hacking and cybersecurity.

Every day, we continue to see the fallout from much-publicized breaches in cybersecurity, hacking by hostile organizations and an overall perception that data safeguards are not fully capable of identifying and stopping cyber attacks. This has caused within our markets a heightened awareness of vulnerabilities and the need for stronger measures to protect personal information.

The cybersecurity related events of recent months gives us a strong belief that our technology solutions are needed to help companies across our market verticals address costly challenges at this critical time. In addition to cyber attacks against our government data sources, we see multiple incidents of widespread hacking and compromise of personal data having dramatic and expensive impact on a variety of high profile financial institutions and iconic brands. Intrusions and fraud impacting profitability and consumer confidence for these businesses continues to heighten market concerns of network and data security, engineering processes and physical security of facilities. The results understandably include new approaches to data protection by our clients.

I will provide more detail about the effects of our clients' elevated cybersecurity efforts after we hear from our Chief Financial Officer, Bill White. Bill will now review our financial results for the quarter ending December 31, 2016, and the fiscal year ending that same date. Bill?

Thank you, Bill, and a good day to our shareholders, guests and listeners. I'd like to discuss some of the financial information for the fourth quarter and the fiscal year ending December 31, 2016. We anticipate that our Form 10-K will be filed with the SEC this afternoon as well.

I'll begin with our fourth quarter results. Revenue for the fourth quarter ending December 31, 2016, was $733,633. The company's booked orders for the 3 months ending December 31, 2016, was approximately $521,000. 71% of our bookings were attributable to our commercial products.

Gross profit as a percentage of revenue was 80% for the 3 months ending December 31, 2016. Operating expenses, which consists of selling, general, administrative and research and development expense was $1,679,000 for the 3 months ending December 31, 2016. Adjusted EBITDA was a loss of $852,000 for the quarter, and net loss for the 3 months ending December 31, 2016, was $1,550,000 or $0.10 per diluted share.

Turning now to our full year results. Revenue for the full year ending December 31, 2016, was $3,839,000. Our gross profit as a percentage of revenue was 80% for the year ending December 31, 2016. Operating expenses for the fiscal year 2016, again, which consists of selling, G&A and research and development expenses, amounted to $8,819,000 for the full year. Adjusted EBITDA was a loss of $4,379,000 for fiscal 2016, and the company had a net loss for the fiscal year of $5,735,000. Bookings for the year ending December 31, 2016, was $3,672,000, and our backlog at 12/31/2016 was $133,000.

I'd like to take a moment to comment on some additional financial metrics. In 2016, interest and other income was insignificant. As of December 31, 2016, the company had cash and cash equivalents of $3.1 million, working capital, defined as current assets minus current liabilities, of $2.5 million and total assets of $14.5 million and stockholders' equity of $12.9 million. During the year 2016, the company used net cash of $2,861,000. Cash used in operating activities was $4,240,000 in 2016. Net cash used in investing activities was $28,488, and we generated net cash of $1,408,000 from financing activities.

We have a revolving credit facility with Silicon Valley Bank that allows for a maximum borrowing under the facility of $2 million and is secured by collateral accounts. The facility bears interest at a prime lending rate and is payable monthly with the principal due upon maturity October 5, 2017. As of December 31, 2016, there were no amounts outstanding under this facility, and the unused availability under the facility was $2 million.

We currently anticipate that our available cash as well as expected cash from operation and available under the revolving credit facility will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.

In October 2016, we renewed Intellicheck's shelf registration statement on Form S-3 with the SEC, and we've been notified by the SEC that this statement has become effective.

As of December 31, 2016, the company had a net operating loss carryforward of approximately $7 million.

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

Thank you, Bill. We live in a dynamic world of cyber threats that our clients must address. Failure to do so could have devastating results for their businesses and stakeholders. You may recall that in 2015 and into 2016, our retail and hospitality clients were involved in a transition from the old style, chipless credit cards to the Europay, MasterCard and Visa, or EMV, chip credit card system. This was a tremendous drain on their information technology resources and budgets, resulting in lengthened sales cycles in the retail and hospitality verticals. Likewise, in 2016, our clients again diverted their information technology resources to address the threat of hacking into personal information held by the client, specifically information pertaining to store credit card holders, customer loyalty members and other services provided by retailers that require collecting and storing personal information.

In previous addresses to our shareholders, I focused on 5 main areas and talked about progress in each area, those being resources markets, products, processes and intellectual property. Again, we will address each in kind.

Resources. We have evolved the company to a SaaS business model as evidenced by our increases in gross margins, and we believe our key resources are now in place and focused on revenue generation. We are fortunate to be agile, enabling us to respond to clients' request for product derivatives that bolster our offerings and provide real, measurable value to our clients. Law ID is making significant strides, and I'm excited to report that we are on schedule to finish our Nlets implementation as we complete rigorous security audit requirements.

Nlets is the National Law Enforcement Telecommunications System, owned and managed by law enforcement representatives of all states and U.S. territories, with a charter to process and share law enforcement data among these states and territories. We are in the process of establishing our law enforcement data center with Nlets, where we will have access to all 50 states' law enforcement networks from a single location. As we add new law enforcement agencies to our client base, this will mostly occur via Nlets, with virtually no requirements for Intellicheck to install hardware at law enforcement facilities around the country. This is the scalability we have sought and now have.

Markets. We'll spend some time reviewing our market verticals beginning with retail. We still see continued momentum within our retail vertical with our Retail ID products. Retail ID pilot results continue to excite retailers and exceed their expectations regarding fraud reduction and account acquisition. At this point, we have some significant wins that I am pleased to present.

We recently completed the initial pilot for a top 15 furniture retailer underwritten by one of our financial clients. The results of the pilot in the form of verified identified fraud savings exceeded $1.2 million for the initial 23 store pilot. Both the retailer and the bank were surprised and elated by the results, and we are in process of implementing the storewide deployment of Retail ID. More importantly, the bank underwriting this retailer's credit has thousands of merchants, and we anticipate based on these results and ongoing discussions that our solution will be implemented in many of the retailers going forward.

One of America's largest department store chains is progressing out of pilot and into full store rollout beginning in April. Annual recurring revenue for our software licenses with this client is estimated at over $875,000. Additionally, we are finalizing a pilot strategy for a top 5 furniture retailer and expect this pilot to begin in May. We are in active discussions with a major discount variety chain with over 8,000 locations that is interested in deterring underage alcohol sales by deploying our Age ID solution integrated with their point-of-sale system. This client recently completed integrating Age ID with their point-of-sale system, and we are scheduling product rollout.

We signed a contract with a national concessions client and have an initial order for 500 Age ID licenses for deployment in Q2. We are beginning a Q2 pilot with another national concession vendor at 3 major sports and entertainment venues using our Age ID authentication solution. The plans are to add 3 additional sports venues in Q2. We originally expected these pilots to begin in 2016, but the client requested that we add some additional features to our Age ID product. Seeing the overall market value in a more feature-rich product, we completed the engineering work and are now ready for pilot. We have additional pilots with major retail clients scheduled to begin in Q2.

In our financial services vertical, we see elevated interest in our Retail ID on premise and Retail ID online products. Our Retail ID on premise products are Retail ID, Retail ID Mobile and our brand-new variant, Retail ID Light. We are actively engaged with 4 of the top 15 credit card issuers in North America.

For example, a top 5 credit card issuer selected Intellicheck over our competitors and ask that we work with one of their current vendors to integrate our authentication products. We expect the integrated product to provide an extremely powerful antifraud tool for financial institutions and retailers. The requirement for the integrated product moved Retail ID rollout for the first designated retailer to the right several months. We believe, however, that notwithstanding delays, the outcome of the integrated product offering will accelerate our trajectory in the financial services vertical. We believe that the first 4 retailers this financial institution selected for product installation have the potential to generate approximately $4 million in annual high margin revenues for Intellicheck.

In another example, a top 10 credit card issuer introduced us to 5 of their accounts experiencing the highest fraud rates. These introductions followed a rigorous head-to-head competition, resulting in Intellicheck's selection by the credit card issuer. We now have pilots under way or scheduled to begin in April at these accounts that have the potential to generate $1.3 million in annual revenues. Again, these initial 5 retailers are only a small fraction of the retailers represented by this credit card issuer.

We expect that our Retail ID online solution will be deployed by this top financial services company in Q2. This will be our first implementation of Retail ID Online to fortify our client's e-commerce web presence. With online fraud rampant and getting worse each day, we believe, as do our clients, that Retail ID Online is the right product at the right time.

This same financial services provider is scheduled to pilot our Retail ID Mobile application in their fraud operations group in May.

We are currently in discussions in formulating a go forward plan with another top 5 credit card issuer that already uses our solutions in the retail bank fraud and disputes operations and home loans fraud investigations team. In yet another instance, a top 15 credit card issuer currently uses our solution on a limited basis for credit card customer acquisition. We recently advanced our discussions with them and have customized a solution for this institution that we are branding Retail ID Light. We expect that one of the major retailers with over 1,000 stores will be the first to begin using this product in the coming quarters.

The entire Intellicheck team is extremely excited and optimistic about our business relationships with some of the largest banks and retailers in the country and with the fact that our products have performed so impressively in every vertical.

Now some information about the state alcohol authorities. There are 58 alcohol authorities in the United States, with 17 states and jurisdictions that control the sale of spirits and wine. Of these 17 states, Mississippi, North Carolina and Ohio are our clients, and we are at various stages in the sales cycle with the remaining states. In noncontrolled states, we recently onboarded The Louisiana Office of Alcohol and Tobacco Control and began a pilot with The Washington State Liquor and Cannabis Control Board. Our Age ID application is currently in pilot in other states.

Moving from alcohol authorities to law enforcement. A few months ago, we welcomed Michael McDonald as our new business development manager for law enforcement solutions. Mike was formally a Major and later Director of Information Technology for the Delaware state police and has held positions on the Nlets Board of Directors and FBI Advisory Policy Board. Mike has been a great addition to the team and is currently project managing all aspects of the implementation of our servers within Nlets. He's out in front of this implementation and is already engaged with Nlets state representatives seeking necessary approvals once our infrastructure is operational at the Nlets Phoenix network operations center. We became an Nlets strategic partner in October and are currently implementing our software and service at the Phoenix location. We anticipate this task to be completed in late May. Again, while in the long run, this will compress the sales cycle and facilitate onboarding new law enforcement agencies, in the short term, it has moved the onboarding to the right to allow for the necessary integration with Nlets. We currently have a backlog of 16 agencies and police departments that are awaiting completion of our Nlets integration. Once we are live at Nlets, we are targeting no less than 5 states for immediate implementation. Note that once a law enforcement agency is live in any given state, the onboarding of additional agencies within the state becomes quite easy as the connections to the state's law enforcement network is already approved, installed and available to follow-on law enforcement agencies. I will now address our defense market.

We presently see uncertainty within the federal government as it relates to requirements and funding for the identity authentication technologies. Within the executive branch of the Federal Government, there are numerous political appointees that have not yet been confirmed or filled important positions within the Department of Defense, Department of Homeland Security and intelligence-related agencies. As the new administration completes the staffing process, we expect to gain a better understanding of the government's priorities for identity and authentication. Intellicheck expects the administration and Congress will increase funding for the Department of Defense by an additional $80 billion. We believe a meaningful portion of this funding will be used to enhance security at critical facilities and military installations, both domestic and abroad. Intellicheck plans to aggressively market our Defense ID solution to military installations that have not yet deployed a comprehensive physical access control system.

At the state level, we continue to see budgetary constraints as an impediment to making investments in Defense ID and other related solutions. Intellicheck has narrowed its focus at the state and local level to law enforcement and specific facilities within the Department of Defense, and we are currently engaged with several law enforcement agencies and Defense Department facilities. We have opportunities at foreign installations that want our Defense ID solution, although they continue to experience funding challenges. We will meet with the appropriate agencies and offices in Q2 to solicit their support.

On past calls, I mentioned some sizable government opportunities that we were pursuing, one of those opportunities restricted to a specific region of a single state, dependent upon grant funding and is currently on hold due to contractual issues. We did not forecast any revenues from this opportunity so there's no effect on our projections. Our partnership with Nlets provides us with a much larger and more predictable opportunity than this regional initiative. And we are focused sharply on implementing our law enforcement backbone with Nlets.

The other opportunity I mentioned is still active and moving forward. We are working directly with a member of the Senior Executive Service, an appointee, on this project, and we have been asked to make connections from his agency to numerous U.S. law enforcement networks through Nlets. As previously stated, we are currently undergoing a rigorous Nlets security audit and expect that to be complete in April. At that time, we expect to move forward with this opportunity. We forecast revenues from this initiative later in 2017.

A few words about third-party integrators. We recently presented reseller referral contracts to 2 merchant payment processors who will introduce our retail solution to smaller retailer prospects. We are engaged with the manufacturer of secure identity solutions that is interested in integrating our ID authentication into their visitor management application. Additionally, we presented our solutions to a retail and restaurant point-of-sale provider and signed an agreement for product integration.

Products. We have significantly increased the addressable market for our mobile platform software by moving Age ID, Retail ID and Law ID to Android operating systems to support market segments that prefer Android over iOS. In April, we are scheduled to release hybrid software development kits for clients who ask for our mobile applications to integrate with their information technology backbones. Currently, Intellicheck has 15 clients paid pilots of our Retail ID and Age ID products either in process or scheduled. As discussed, the composition of clients range from large financial institutions to major national retailers. The pilots to date have exceeded expectations, with ROIs yielding quick payback times as our products reduce fraud. Based on our significant successes, we are converting these paid pilots into subscription clients.

The relationships we have been building with major financial institutions and credit card issuers are beginning to show results. The sales process with these clients is complex and lengthy, requiring significant due diligence with respect to system and information security. Financial institutions have several uses for our fraud fighting software, including online identity authentication in addition to their brick-and-mortar banking locations. We see the largest growth opportunity in providing our Retail ID products to their merchant clients, thus providing fraud savings for both the retailer and the bank.

We have strengthened these relationships by listening to our clients and by enhancing our products using their input. Our product enhancements follow our development process that requires return on investment calculations and prioritization before we begin work. As a result, we are confident that the product enhancements we undertake will provide the best ROI for the company.

For those new investors listening today, I'll say a few words about Age ID and Law ID. We were honored that our Law ID product was recognized as a top public safety product for 2016 by Law and Order Magazine. With Law ID, the officer simply scans the contact's ID barcode, and the ID is instantly authenticated on the officer's mobile device. Critical data fields that indicate the threat level are highlighted in red, yellow and green and are visible at a glance. Having authenticated the contact's identity, the officer can act accordingly, which can immediately de-escalate a potentially tense situation. When the officer returns to the station, Intellicheck makes reporting faster and more accurate by populating standardized form fields from the data retrieved during the ID authentication and from the system's reporting features. 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. As an Nlets partner, access to those critical authoritative data sources is made quicker and simpler, lowering our cost of goods sold and speeding the sales and implementation process for our law enforcement clients.

Selling age-restricted products like alcohol and tobacco and, in some states, marijuana is a nationwide compliance challenge. The risks and costs associated with noncompliance are high and rising. Our Age ID product instantly authenticates identification documents such as driver licenses. So our retailers immediately know if the customer's ID is counterfeit. That reduces risks of noncompliance without slowing down the purchase transaction. Age ID works with mobile devices or integrates with existing point-of-sale solutions. With the ability to read more than 250 unique barcode formats from all U.S. states and territories, Canadian provinces and many Mexican driver licenses, in addition to other U.S. government forms of identification, Age ID provides the most accurate and up-to-date solution for compliance with laws and to mitigate the risks associated with underage drinking.

Age ID also offers regulatory compliant audit capabilities often needed by proprietors to demonstrate compliance with state regulations or to earn discounts from their liability insurers. Age ID is available as a subscription service or customized solution designed to meet our clients' needs.

Processes. In 2016, we implemented new business processes in both sales and product development. Our new sales leadership and team has continuously improved our online customer relationship management system and process to provide the company with a realistic, achievable pipeline and the management reporting we require to maintain success. Additionally, over the past several months, we have built and deployed a social media capability that has outreach to many current and potential clients. You can now find us on Facebook, Twitter, Instagram, LinkedIn and other social media outlets.

The rigorous security audits we underwent and those that are in process provided a foundation for upgrading and enhancing our business processes. Our engineering team has worked diligently to ensure we meet or exceed security standards from engineering processes through the client support cycle. Our processes are better, stronger and more easily articulated than previously. This gives our clients high levels of assuredness that we understand their challenges and are completely on board with our support.

Intellectual property. We received numerous inquiries about our current patent infringement cases. Obviously, we need to exercise caution with our communications pertaining to this issue, but I'm at liberty to say that the federal judge assigned to both open cases directed us to work towards settlements in each. Settlement discussions have now begun. We do not know nor will we speculate on the outcomes of these discussions. Although some of our investors continue to communicate ideas, suggestions and advice on this matter, we will continue to work closely with our experienced litigation team to mitigate our risk and to maximize the outcome for our shareholders.

We have other legal initiatives that we are considering, all pertaining to patent infringement. In some cases, we have notified the alleged infringers and have asked to meet with them prior to filing a lawsuit, and we are working toward that goal.

Moving forward, turning now to our outlook and timeline for positive EBITDA. One client, a large retailer we forecast will begin providing revenue in Q4 2016, now requires their information technology partners including Intellicheck to undergo and audit addressing security concerns with the objective of ensuring compliance with rigorous system testing and standards to protect their customers' personal information. This demanding audit designed to assure we can withstand an onslaught of intrusion attempts and maintain protection from compromise lasted nearly 4 months. The audit found that our products and procedures met or exceeded our client's security requirements. This delay moved the significant revenue stream to Q2 2017. It is important to realize that Intellicheck does not capture and store personal information for our clients in the financial and retail markets. Regardless, we find it as now standard policy among our financial and retail clients to conduct extensive security audits on all partners and vendors who have access to client networks. From a cybersecurity perspective, this is the correct approach.

We currently have several security audits underway as prerequisites to system installations and subsequent revenue generation. In the words of one of our clients, the vendor security risk management program consists of security risk assessments and due diligence achieved by reviewing the vendor's organizational, personnel, technical and physical security standards. The objective of the review process is to assess security risk, information security controls, systems and processes. As we move ahead with these audits, we expect the time our clients require for their security audits to shorten. We are pleased that our initial security audit that was recently completed provide an impressive results and a solid baseline for future audits.

In the short term, the accommodation for this reasonable and now customary marketplace environment response sees our mid-2017 projection for a go forward EBITDA positive status pushed to Q4 2017 or early 2018. We are, however, excited about the larger view, we believe, underscores our strengths and high growth potential.

It is important to acknowledge and understand that we have not lost any business that form the basis of our profitability projection. Realistically, our sales pipeline has continued to grow since that projection and our new sales team is fully on board, trained and extremely busy. Additionally, we expect our 2017 expenses to be lower than 2016 even as we continue to add personnel to support company growth. Since we have not had any clients test our solution who did not subsequently purchase our products, we expect to see revenue conversions from our active and scheduled pilots that include nationally recognized retail and banking clients. As our client share actual fraud data with us, we see that their returns on investments are much better than initial indications. Given this, our technology becomes more critical to our clients in maintaining and growing market share within their highly competitive markets. Fundamentally, our business opportunities are more robust now than they were in 2016 when we first announced our plan to be EBITDA positive by mid-2017. We believe our long-term visibility of revenue-producing clients is clear, and these clients want and need our products. We see the fundamentals of our business and our business trajectory as solid and exciting.

We understand that we must work through the delays and that we must and we will continue to focus on providing the best products available to our clients and to supporting our sales force as they continue to identify new opportunities, grow our pipeline and close business. We have several contracts signed and several preapprovals to begin installing our systems, and we are strategically addressing unanticipated delays, such as the system security requirements I mentioned earlier.

As we move forward, we are incorporating unforeseen delays into our forecast. As with all other challenges, the mission of our management team is to identify and implement solutions that are reasonable with expectations of measurable returns. As an example, to compensate for clients' lack of available resources, we have begun offering our internal information technology support personnel in terms of integration services and general engineering support. This is meant to shorten the time between end of pilot and full client rollout, and we anticipate this will help move revenues in closer than we might expect in the absence of this initiative.

We also continue to develop key partnerships with firms that provide synergistic technology. Some of these partnerships are at the request of major clients in common and have moved our revenues to the right while we integrate our products into what we believe to be game-changing offerings. Although our previously forecast revenues move out later in the year, our expectations of follow-on business not previously forecast are higher than before we began the partnerships.

Investor communications. We have received numerous inquiries about our investor communications policy, specifically our press release policy. I understand that in the past, this company issued press releases for a wide variety of activities, including attendance at conferences and meetings, meetings with politicians and so on. Our goal is to communicate to our investors information that will keep them abreast of our current initiatives, progress and other company status. We will accomplish this by judiciously issuing press releases and by posting informative data to our website. It is important to understand that a lack of press releases as opposed to the volume you may have seen in the past is not indicative of progress or lack of progress. Our goal is to issue press releases only with meat on the bone, to paraphrase one of our valued investors.

Due to the cost and resources associated with the press release process, I decided to limit our press releases to information that is associated with revenue generation, either immediate or forecast. Such information would include execution of signed contracts, channel partnership agreements and other vehicles that bring cash into the company. We will not issue press releases describing successful pilots and subsequent go live events with that client. We will issue the press release after we have installed and trained the client and the product's operational. As I explained earlier, our client delays associated with security audits and other unanticipated slowdowns have delayed the press release process as well. We have numerous signed contracts, and are awaiting installation with our clients. We will announce these deals as we go live.

For other information that might be of interest to investors, we developed an email initiative that pushes email notices of company activities to those who subscribe to the service. We currently have 61 subscribers who use our website to sign up for these notices. Our emails contain links to our website where the information is readily available. For example, I conducted 2 radio interviews last week. In previous times, the company would have issued 2 press releases describing these events. Now we will wait to receive the recorded interviews from the radio station, post them to our website and inform the subscribers where to find and listen to them when they visit intellicheck.com.

I hope to see more and more investors visit our website and become more familiar with it and excited about our products. We find investors who regularly visit intellicheck.com are knowledgeable and current on our product offerings and often introduce us to potential clients and partners. We appreciate these introductions and believe that more such initiatives will be valuable to the company.

In general, we continue to implement our plan, and we believe and expect that plan to work and bring us to profitability later this year. We also continue to follow our previously identified 5 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 client base, to establish a position of market recognition and leadership based upon our core competencies and world-class products, and five, to define, implement and measure a culture that supports this transformation. We continue our optimistic outlook and expect our momentum to increase going forward. We believe we are on schedule for breakeven and long-term profitability this year or early 2018.

In summary, thank you for your attention today. We understand that, to many of our investors, a lack of publicized news is the same as bad news, but we do not interpret it that way. We have not had a great deal of information that we have been able or authorized to report, so we understand the anxiety among investors. I hope this call today clarified our current positive situation. We will announce via press release closed deals that are generating revenues. All other nonmaterial information that may be of interest, we’ll post to our website. Our outlook is optimistic, and we look forward to our next call with our shareholders.

I will now turn the call over to the operator, who will facilitate questions from our shareholders.

(Operator Instructions) Our first question comes from the line of Ryan Nelson with Special Situations Fund.

It's actually Alex Silverman. The 16 law enforcement agencies that you say are signed up and ready for Nlets, what do they represent in terms of annual revenue?

Right now, it appears that it depends on how many licenses they buy, Alex, and that depends on which parts of the police departments they decide to outfit with Law ID. Some police departments decide to go with their mobile data terminals that are in the cars they won't be issuing. But as far as we can tell, this appears to look like something about $0.5 million a year with potential if they roll out throughout the departments.

So all 16 if they roll out through all departments is about $0.5 million a year.

That's what it appears to be right now.

Okay. Secondly, within the quarter, the $733,000, how much of that was recurring revenue?

About 75%, Alex.

Okay. And last quarter, of -- according to last quarter's conference call, 75% of the $1.2 million is also recurring. So what changed?

There was less military sales.

So they were contracts that were canceled?

No, not contracts that were canceled. There's less military sale this quarter than last quarter.

When we have a military sale, that comes along with an annual maintenance fee. And when the maintenance fees are paid for the year, if we don't have any new sales, then we don't have the recurring maintenance fees associated with it.

So recurring is really just for one year?

It's signed up at the end of the year. That's the way the Defense budget works. Typically, we'll re-sign existing customers. In fact, we haven't had anyone drop off. And they'll get a 1-year maintenance fee, and the maintenance is put into categories. You have a platinum maintenance, a gold maintenance and so forth. If we don't have any new sales, then the recurring portion of that, which would be the annual maintenance fees, won't show up.

Okay. And what -- how much of that $733,000 was SaaS?

I don't have that number broken out. I can get back to you on that, Alex.

Okay. Going forward, that would be a helpful number since Bill Roof mentioned that the focus of this company is a SaaS business.

Yes. We'll make sure that happens.

Our next question comes from the line of [ Anthony Marchese ], a private investor.

First of all, Bill, I think you do a masterful job, in all honesty, of presenting the company, so I appreciate the level of detail. I know it takes more time, but I think that as shareholders and potential shareholders, we get a tremendous overview of the company. So I do appreciate that. 2 questions. First, with respect to breakeven, what -- and I realize you don't know exactly where the revenue will come from. But what level of revenue would that imply, whether it's fourth quarter or first quarter, what level of revenue is implied by, I guess, net income or EBITDA breakeven?

About $2 million, $2.2 million, Tony, per quarter, on a quarterly basis.

Okay, so that would be -- obviously, I can do the math, almost $9 million -- so you’d need about $9 million -- it implies about a $9 million run rate in order to be -- annual run rate to be breakeven?

Yes, depending on the margins. But assuming the margins that we're going to maintain, about that. Yes.

Okay. So that would be, I guess, a significant, almost 2.5x what you did this year, am I correct? Or 2x what you did this year, so that would be fairly significant. Second question I have for you is, and I think it goes to Alex Silverman's point, 16 police departments, that's a tremendous amount of activity, onboarding, so on and so forth. It sounds like you get a lot more bang for your buck, if you will, when you sell retail clients or bank. Can you just go through with us in terms of where do you see the greatest amount of bang for the buck, so to speak? And maybe I'm saying it incorrectly, but I think you know what I'm saying. In other words, it takes a tremendous amount of effort to sell 16 police departments. It sounds to me, and maybe you can go through it, with 1 bank, 1 retailer, you have significantly more than $500,000 per year. So do you understand where I'm going with this?

Absolutely, Anthony. The -- each one of our verticals has its own unique sales cycle and own unique sales challenges, and so I'll start with the police departments. Before we were an Nlets rep, we had to go police department by police department. Now that we're an Nlets partner, we can get to -- to the states switch and to the police departments through their state Nlets representative. And so essentially, Nlets will function as a channel partner for us. It does take a while to roll out to get the first connection to each state. But after that, we expect it to be very quick, and I said that in the call here. It's different than retail. Retail has its own issues, and you've heard them. We're in 5 different security audits, and they take a long time. They've come about recently. And we can get to a bank and we can get to a financial institution, and they can say we love you and we can go competitive and win, but then they've got to roll it out to their -- help us roll it out to their clients. And their clients are each different. So if we go to AAA bank and they've got 1,000 retailers, each one is going to be different to get installed and trained. Each one has its own IT section. They have priorities. They're doing other things. And so it's just as difficult but in a different way to roll out to retail as it is to police. We think retail is a bigger market. We like the diversification that law enforcement gives us because that law enforcement market helps us get into federal government budget as well as state and municipal budgets, very different than your commercial world in Retail and Age ID. I hope I answered your question with that.

Yes, yes. No, no. It just seems to me you take a credit card processor or like or even a customer like a Capital One. I mean, they have thousands of accounts, and I realize that each one has its own intricacies. But once you're in the system, now you potentially are exposed to significant numbers of clients, whereas it seems like with -- and again, I'm not suggesting you shouldn’t be in the police area. Maybe I'm using them as the whipping boy. But all I'm saying is that it seems like once you're into a retailer or rather a bank, who then can, in essence, vouch for you with their retailers, that yes, it may take more time and you're dealing with more nuances of each retailer, but the market is significant, it seems to me, significantly larger in the retail space than for example in a law enforcement space. And more importantly, in my opinion, a retailer sees the clear economic benefits of using your product, they can save money. They can go to their superiors and say look, I can save x amount of dollars here. Whereas I'm not so sure that some of the other verticals, the ROI, if you will, is as clear, so...

I think that was really well put, Tony. And to be honest with you, you're right. The retail vertical is going to be big, we expect. And so when I talk about the security audits, we're having 3 types. Nlets is doing one, so that's a government or a pseudo-government operation. We are getting audited by individual retailers who are very, very large, and we're getting audited by financial institutions. The financial institutions, once we pass their audit, then they can channel us out to their retailers. So we like those types of security audits because we know that once we pass that, they can go to the retailers and say okay, we checked them. They’re data secure. They're not going to be hacked. When they're on our network, nobody's going to backdoor into our network, and they're free to go sell it. We agree with you. We think that using a financial institution as a channel partner after we pass their security audits is really the top way to go. And there is an ROI. We have enough data over the last year to show some tremendous ROIs in retail and banking. The ROI in law enforcement is did you stop a bad guy from getting onto a facility, or did you save an officer or citizen's life because you had information in your hand in 5 seconds instead of waiting 5 minutes to go back to your car and call dispatch. So the ROIs are very hard to measure in the law enforcement defense world, but they're clearly obvious to the client. And that's why they're interested in our product.

(Operator Instructions) Our next question comes from the line of Jim Kennedy from Marathon Capital.

Question 1, your trials for online Fraud ID, can you talk a little bit more about that? Is that process -- have you completed some trials there? Is that part of the auditing process? What have been the results? Can you talk a little bit more about what you're doing online?

We can talk about that, Jim. And actually, I'm going to ask Paul to jump in here, our VP of Sales. Paul?

The Online ID pilot, the first pilot will go live end of April, beginning of May. There's a specific amount of development that has to occur in that you have a present transaction with a remote user. So we've shored up the authentication process and are happy to go live with one of these major banks that we've been discussing here at the end of April, beginning of May.

Okay. So by -- when you talk about a major bank, so that -- would that trial would be in conjunction with a retailer or retailers?

That's correct. The initial approach is one retailer. But given the short pilot period following that, we should move that to many retailers just for that one institution, and then also carry it over to the retailer's direct market and also the financial services' direct market.

Okay. So have there been any what we would call trials yet in terms of trying to determine the effectiveness of the technology online?

No. We'll know that after this pilot begins. Probably at the end of May, We'll have hard statistics on fraud savings.

Okay. So they think what, within about a 30-day period, they'll have enough knowledge to determine whether or not it works?

We'll have initial evidence end of May. That life cycle for a credit card payment or process is typically 60 to 90 days. But we'll see counterfeit IDs, fake credentials being presented at that time, and we can associate some preliminary numbers at the bank.

We have a follow-up question from the line of Anthony Marchese.

Thanks for the update on the patent infringement. You mentioned that you were directed to sit down. And I guess my question, twofold. One, how long ago were you directed to do that? And secondly, just because you direct both parties doesn't necessarily mean that you've actually sat down or that both parties are anxious to sit down. So can you just potentially give us a little more clarity on sort of timing and sort of AUR? And I'm not suggesting anything more specific than just an overview.

Tony, Bill White here. We had a settlement discussion recently, and we expect to have more discussions down the road. So as recently as last week, we sat down and met with one of the defendants. So we'll keep everybody posted as we have progress as we can.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Thank you, everyone, for joining our call today. We've received notice that apparently part of the call was very fuzzy. We apologize for the electronics here. Not sure what caused that, but we hope you were able to glean the information from the fuzzy phone system. We appreciate all the support that we have from our shareholders. We are working very hard to bring some of this revenue back in that had been pushed out due to security audits and other issues with IT teams not being available with our customers and with federal budgets. A lot of this hit us at the same time. I want to reiterate, the good word is that we haven't lost any business. In fact, our pipeline is bigger than it was 3 months ago and 6 months ago and more solid. And we believe that we're still on track for EBITDA positive end of this year, early 2018 due to some of the delays we had experienced over the last quarter or so. We appreciate you joining us today, and we look forward to speaking with you soon. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.