fourth quarter and 2016 year end results confirmation #13653518 page 1 · 2017-03-31 · fourth...
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Fourth Quarter and 2016 Year End Results March-30-2017
Confirmation #13653518 Page 1
INTELLICHECK MOBILISA, INC. Fourth Quarter and 2016 Year End Results
March-30-2017 Confirmation #13653518
Operator: Greetings and welcome to the Intellicheck’s Q4 and 2016 Year End Earnings Call. At
this time, all participants are in a listen-only mode. A question-and-answer session will follow
the formal presentation. If anyone should require Operator assistance during the conference,
please press star, zero on your telephone keypad. 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.
Male Speaker: 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
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Confirmation #13653518 Page 2
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 to 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 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 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 at today’s call. Please refer to the Company’s press release
for further definition of the context of this term.
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I would now like to introduce Dr. Bill Roof, Intellicheck Mobilisa’s Chief Executive Officer. Dr.
Roof?
William H. Roof, Ph.D.: Twenty sixteen was a major transition year for Intellicheck. We
continued our aggressive Company reorganization and branding initiatives, purchased nearly
one 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
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to our law enforcement and defense markets, especially considering worldwide concerns
pertaining to hacking and cyber security.
Every day we continue to see the fallout from much publicized breaches in cyber security,
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 cyber security related events of recent months give 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 at
facilities. The results, understandably, include new approaches to data protection by our
clients.
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I will provide more detail about the effects of our clients’ elevated cyber security efforts after
we hear from our Chief Financial Officer, Bill White. Bill will now review financial results for the
quarter ending December 31, 2016 and the fiscal year ending that same date. Bill?
Bill White: 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 three months ending December 31,
2016 was approximately $521,000. Seventy one percent of our bookings were attributable to
our commercial products. Gross profit as a percentage of revenue was 80% for the three
months ending December 31, 2016. Operating expenses, which consist of selling, general
administrative, and research and development expense, was $1,679,000 for the three months
ending December 31, 2016. Adjusted EBITDA was a loss of $852,000 for the quarter, and net
loss for the three months ending December 31, 2016 was $1,550,000, or $0.10 per diluted
share.
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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 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 principle due upon
maturity, October 5, 2017. As of December 31, 2016, there were no amounts outstanding
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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 carry forward of approximately $7 million.
I’ll now turn the discussion back over to Dr. Bill Roof, Chief Executive Officer. Bill?
William H. Roof, Ph.D.: 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 2105 and into 2016, our retail and hospitality clients were
involved in a transition from the old style, chip-less credit cards to the Euro pay, MasterCard
and Visa, or EMV chipped 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.
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In previous addresses to our shareholders, I focused on five 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’ requests for product derivatives that bolster our offerings and
provide real, measurable value to our clients.
Law ID is making significant strides, and I am excited to report that we are on schedule to finish
our Nlets’ implementation as we complete rigorous security audit requirements. Nlets is a
National Law Enforcement Telecommunications System owned and managed by law
enforcement representatives of all states and US territories, with a charter to process and share
law enforcement data among the 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.
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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 five
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
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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 three major sports and entertainment venues using our Age ID authentication
solution. The plans are to add three 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 Lite (phon). We are actively engaged with four of the top 15 credit
card issuers in North America. For example, a top five credit card issuer selected Intellicheck
over our competitors and asked that we work with one of their current vendors to integrate our
authentication products. We expect the integrated product to provide an extremely powerful
anti-fraud 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
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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 four
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 five 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
underway, or scheduled to begin in April, at these accounts that have the potential to generate
$1.3 million in annual revenues. Again, these initial five 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 a 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 and formulating a go-forward plan with another top five 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
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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 Lite. 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 remaining states. In non-controlled states, we recently on-
boarded 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 formerly 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.
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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 Operation Center.
We became an Nlets strategic partner in October, and are currently implementing our software
and servers 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 on-boarding new law
enforcement agencies, in the short term it has moved the on-boarding 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 five states for immediate
implementation. Note that once a law enforcement agency is live in any given state, the on-
boarding of additional agencies within the state becomes quite easy, as the connection 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
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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 four 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.
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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, depended 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 US 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
two merchant payment processors who will introduce our retail solution to smaller retail
prospects. We are engaged with a 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.
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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 being 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.
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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 the 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.
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Selling age-restricted products, like alcohol and tobacco, and in some states, marijuana, is a
nationwide compliance challenge. The risks and costs associated with non-compliance 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 non-compliance 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 US states and
territories, 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 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
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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 outreached 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 onboard 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 am at liberty to say that the federal judge assigned to both open cases directed us to
work toward settlements in each. Settlement discussions have now begun. We do not know,
nor will we speculate on the outcomes of these discussions.
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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 the 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 to begin providing revenue in Q4 2016 now requires their information technology
partners, including Intellicheck, to undergo an 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 four months. The audit found that
our products and procedures met or exceeded our client’s security requirements. With 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.
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Regardless, we find it is 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 cyber security 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 revealing the vendor’s organizational,
personnel, technical, and physical security standards, the objective of the review process 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
provided 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 projections for go-forward EBITDA positive status pushed to Q4 2017 or
early 2018. We are, however, excited about the larger view we believe underscores our
strength and net high-growth potential.
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It is important to acknowledge and understand that we have not lost any business that formed
the basis of our profitability projection. Realistically, our sales pipeline has continued to grow
since that projection, and our new sales team is fully onboard, 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 clients 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.
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We have several contracts signed, and several pre-approvals 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.
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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 our product is
operational.
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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 two radio interviews last week. In previous times, the Company
would have issued two press releases describing these events. Now we will wait to receive the
recorded interviews from the radio stations, 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, and
excited about, our products. We find that 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.
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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
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 a 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 nurture 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 break evens 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 non-material information that may be of interest we will post to our website. Our
outlook is optimistic and we look forward to our next call with our shareholders.
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Confirmation #13653518 Page 27
I will now turn the call over to the Operator who will facilitate questions from our shareholders.
Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-
and-answer session. If you’d like to ask a question, you may press star, one on your telephone
keypad. A confirmation tone will indicate your line is in the question queue. You may press
star, two if you would like to remove your question from the queue. For participants using
speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Ryan Nelson with Special Situation Fund. Please
proceed with your question.
Alex Silverman: 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?
William H. Roof, Ph.D.: Right now it appears that—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 half a
million a year, with potential if they roll out throughout the departments.
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Alex Silverman: All 16, if they roll out through all departments, is about a half a million a year?
William H. Roof, Ph.D.: That’s what it appears to be right now.
Alex Silverman: Okay. Secondly, within the quarter, the $733,000, how much of that was
recurring revenue?
William H. Roof, Ph.D.: About 75%, Alex.
Alex Silverman: Okay, and last quarter of—according to last quarter’s conference call, 75% of
the $1.2 million was also recurring, so what changed?
William H. Roof, Ph.D.: There was less military sales.
Alex Silverman: They were contracts that were cancelled?
William H. Roof, Ph.D.: No, they’re not contracts that were cancelled. There’s less military
sales this quarter than last quarter. When we have a military sale, that comes along with an
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annual maintenance fee, and when the maintenance fees are paid for the year and if we don’t
have any new sales, then we don’t have the recurring maintenance fees associated with it.
Alex Silverman: So recurring is really just for one year?
William H. Roof, Ph.D.: 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 one-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.
Alex Silverman: Okay, and what—how much of that $733,000 was SaaS?
Bill White: I don’t have that number broken out. I could get back to you on that, Alex.
Alex Silverman: Okay. Going forward, that would be a very helpful number, since Bill Roof
mentioned that the focus of this Company is a SaaS business.
William H. Roof, Ph.D.: Yes, we’ll make sure that happens.
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Alex Silverman: Thank you.
William H. Roof, Ph.D.: Thank you, Alex.
Operator: Our next question comes from the line of Anthony Markazi (phon), a Private
Investor. Please proceed with your question.
Anthony Markazi: First of all, Bill, I think you do a masterful job, in all honesty, of presenting
the conference. 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.
Two questions; first, with respect to break even, 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 break even?
Bill White: About $2.2 million, Tony, per quarter—on a quarterly basis.
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Anthony Markazi: Okay, so that would be—well, obviously, I could do the math—almost $9
million—so you’d need about $9 million—your—it implies about a $9 million run rate in order
to be—a annual run rate to be—break even?
Bill White: Yes, depending on the margins, but assuming that margins—we’re going to
maintain about that, yes.
Anthony Markazi: Okay, so that would be, I guess, a significant—almost two and a half times
what you did this year. Am I correct? So that—or two times 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 department, that’s a tremendous amount of activity, on-boarding,
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 banks.
Could you just go through with us in terms—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 departments—police
departments. It sounds to me, and maybe you can go through—with one bank, one retailer,
you have significantly more than $500,000 per year, so do you understand where I’m going with
this?
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William H. Roof, Ph.D.: Absolutely, Anthony. Each one of our verticals has its own unique sales
cycles 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 the state 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 five
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 Triple A 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
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state and municipal budgets, very different than your commercial world in retail and Age ID. I
hope I answered your question with that.
Anthony Markazi: Yes, yes. No, no. It just seems to me, you take a credit card processor 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 the 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 that’s all I’m saying.
William H. Roof, Ph.D.: Yes, 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 three types. Nlets is doing one, so that’s a government, or a
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Confirmation #13653518 Page 34
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 retailer and say, “Okay, we’ve 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 a citizen’s life because you had information in your hand in five seconds
instead of waiting five 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.
Anthony Markazi: Great. Thank you.
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Operator: As a reminder, ladies and gentlemen, it is star, one to ask a question.
Our next question comes from the line of Jim Kennedy from Marathon Capital. Please proceed
with your question.
James G. Kennedy: Hi Bill.
William H. Roof, Ph.D.: Hello Jim.
James G. Kennedy: Question one; 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?
William H. Roof, Ph.D.: We can talk about that, Jim, and actually I’m going to ask Paul to jump
in here, our VP of Sales. Paul?
Paul Fisher: Hi Jim. Thanks Bill. Our Online ID pilot, the first pilot will go live the beginning of—
end of April, beginning of May. There’s a specific amount of development that has to occur in
that you have a card not present transaction with a remote user, so we’ve shored up the
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Confirmation #13653518 Page 36
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.
James G. Kennedy: Okay, so by—when you talk about a major bank, so that trial would be in
conjunction with a retailer or retailers?
Paul Fisher: That’s correct. The initial approach is one retailer, but given a short pilot period
following that, we should be able to move that to many retailers just for that one institution,
and then also carried over to the retailers’ direct market, and also the financial services direct
market.
James G. Kennedy: Okay, so have there been any, what we would call, trials yet in terms of
trying to determine the effectiveness of the technology online?
Paul Fisher: No, we’ll know that after this pilot begins. Probably end of May we’ll have hard
statistics on fraud savings.
James G. Kennedy: Okay, so they think what? Within about a 30-day period they’ll have
enough knowledge to determine whether or not it works?
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Paul Fisher: We’ll have initial evidence end of May. That life cycle for a credit card payment or
process is typically 60, 90 days, but we’ll see counterfeit IDs, fake credentials being presented
at that time, and we can associate some preliminary numbers in the bank.
James G. Kennedy: Great. Okay. Thank you very much.
William H. Roof, Ph.D.: Thank you Jim.
Operator: We have a follow-up question from the line of Anthony Markazi. Please proceed
with your question.
Anthony Markazi: Hi guys. Thanks for the update on the patent infringements. You mentioned
that you were directed to sit down, and I guess my question’s twofold. One, how long ago were
you directed to do that, and secondly, just because your—you direct both parties doesn’t
necessarily mean that you’ve actually sat down, or that both parties are anxious to sit down, so
could you just, potentially, give us a little more clarity on sort of timing, and sort of where you
are, and I’m not suggesting anything more specific than just an overview.
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Confirmation #13653518 Page 38
Bill White: Yes, 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.
Anthony Markazi: Okay. Okay. All right. Very good. Thank you.
Operator: There are no further questions in the queue. I’d like to hand the call back over to
Management for closing comments.
William H. Roof, Ph.D.: 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.
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Confirmation #13653518 Page 39
I want to reiterate the good word is that we haven’t lost any business. In fact, our pipeline is
bigger than it was three months ago and six 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 your joining us today, and we look forward to speaking with you soon. Thank
you.
Operator: 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.