Intellicheck, Inc. (IDN) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Intellicheck Mobilisa's First Quarter 2012 Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Erika Moran, Investor Relations for Intellicheck Mobilisa. Thank you. Ms. Moran, you may begin.

Thank you very much, and welcome, everyone. Thank you for joining us today for our first quarter 2012 conference call to discuss Intellicheck Mobilisa's results for the fiscal quarter ending March 31, 2012, and to discuss other business developments. In a moment, I will call upon our CEO to lead today's call and to introduce the other members of Intellicheck Mobilisa's management team who'll be participating in today's conference call. Before I do that, I will take a few minutes to read through the forward-looking statements. 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 in the company's first quarter 2012 financial results identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise. Additional information concerning forward-looking statements is contained under the heading of Risk Factors listed from time to time in the company's filings with the Securities and Exchange Commission. Now with that out of the way, I would now like to introduce Steve Williams, Intellicheck Mobilisa's Chief Executive Officer, to preside over today's call.

Thank you, Erika, and welcome, everyone, to our Q1 2012 conference call. Let me begin by introducing our Board of Directors: our Chairman on the call, Dr. Nelson Ludlow; General Buck Bedard, Ms. Bonnie Ludlow, Mr. Mike Malone, Mr. Woody McGee and Mr. Guy Smith; and the members of the management team: myself; the Chief Executive Officer, Steve Williams; our Chief Financial Officer, Bill White; our Chief Technical Officer, Mr. Russell Embry; and our Senior Vice President, Ms. Bonnie Ludlow. Let us begin by giving a highlight of Q1 2012 results and a brief overview of the trailing 12 months. Our revenues for the quarter are $2.7 million, approximately breakeven for net income. This is significant because it's the first time in the history of the company that we reach that goal. It's the fourth quarter in a row that we have a positive EBITDA. Our commercial identity Systems are up 40%. Net income for the trailing 12 months is $0.02 earnings per share. That's the best since the IPO in '99. Trailing 12-month EBITDA change of $2.3 million. Let me briefly talk about the 3 business units. The commercial identity business unit continues to be one of our 3 major groups with the focus on credit card issuance, loyalty, loss prevention, and most recently, our significant sales and hospitality. In Q1, we made announcements of banking operations. We've been working with banks for several years, but this is the first real movement into the banking operation or teller services. We announced a deal with a major international bank, and in that press release, you saw indication this is the first that we hope could be a very large contract, much larger than our initial award. Our second business unit, government identity systems. Our focus continues to be on active control on military installations, and we'll move into other Department of Defense, as well as other agencies within the federal government. We'll expand into the state and local, and I'll briefly talk about that later. The announcements in Q1, we recently received an authority to operate from the Marine Corps. This is significant because it opens up the ability to sell our systems in the Marine Corps bases. This is a new authority to operate and includes a much more robust system than previously sold to these bases. We also made an announcement of a new patent. This patent allows us to compare multiple documents and features to make sure someone that presents those documents are who they say they are. So that's our new patent in the government identity space. And obviously, it would be applicable to the airport operations, or hopefully, TSA. In the wireless systems, our focus continues to be the same, in the autonomous active sensor system, exploiting our capability of Wireless Over Water. It's a multi-use platform that provides both environmental and security detection. In this last quarter, we deployed yet under buoy, and we have yet a third buoy to be deployed for an upcoming evaluation. We also participated in the Department of Defense active exercise to show the capabilities of buoy, which went quite well. With that overview of the 3 divisions, I'll now ask our Chief Financial Operator, Mr. Bill White, to give you the financial results for the quarter. Bill?

Yes. Thank you, Steve, and a good day to our shareholders, guests and listeners. I'd like to discuss some of the financial information that is contained in our press release for the first quarter ending March 31, 2012, which we put out this morning. We anticipate that our complete quarterly report on Form 10-Q will be filed with the SEC this afternoon. I'm pleased to announce that the company achieved positive earnings for the first quarter with a net income of $15,000 as compared to a net loss of $708,000 for Q1 2011. EBITDA, which is earnings before interest, taxes, depreciation and amortization, was a positive $314,000 versus a negative EBITDA of $356,000 for the same period last year. This is an improvement of $670,000. The company generated net cash flow from operating activities during the quarter of just over $1.063 million. This is also up from $241,000 in Q1 2011. Cash and cash equivalents were $1.394 million to begin the quarter and $2.428 million as of March 31, 2012. Revenues for the quarter ended March 31, 2012, decreased 5% to $2.711 million compared to $2.856 million for the previous year. Identity systems revenues increased 29% to $1.931 million compared to $1.502 million last year. The company continues to see positive growth in the identity systems portion of our business. Wireless revenue decreased 42% to $780,000 from $1.354 million quarter-over-quarter. The decrease in wireless revenue resulted from a general push in Q1 2011 to deploy one of our Aegeus buoys. Equipment purchased for the resale and build labor were higher by $240,000 and $200,000, respectively, in 2011. As of March 31, 2012, our backlog was approximately $1.6 million compared to $1.5 million at March 31, 2011, with quarterly booked orders of $651,000 versus $1.27 million in Q1 of 2011. The company continues to maintain high-growth gross profit margin. Our gross profit as a percentage of revenue decreased 72 -- increased to 72.2% for the 3 months ending March 31, 2012 compared to 60.8% for the 3 months ending March 31, 2011. The company historically has recognized higher gross profit margins on ID system revenue and the wireless segment of our business. With ID systems revenue a greater portion of the overall revenue stream were realized in the overall lift in gross margins. Operating expenses, which consists of selling, general and administrative and research and development expenses, decreased 20% to $1.943 million for the 3 months ending March 31, 2012. This is down from $2.441 million for the 3 months ending March 31, 2011. The company restructured certain operating expenses in 2011, which decreased due to the expenses by approximately $2 million on an annualized basis. The $498,000 reduction in operating expenses in Q1 2012 reflect these reductions. The decrease in 2012 expenses included lower legal fees, reduction in consulting and professional fees and reduction of 7 FTEs. We do not anticipate that these operating cost reductions will impact our expected growth, and we will continue to look for cost reductions and efficiencies that makes business sense. The trailing 12 months revenue picture and financial summary look like this. The revenues trailing 12 months, 2011 over 2012 were down 1%, 2012, $12,339,000 versus $12,472,000 in 2011. Our gross margins trailing 12 months 2012 was $9,008,000 compared to $8,773,000 in 2011, which is a 3% increase. Gross margins, 73% for 2012 versus 70.3% in 2011. Operating expenses decreased 21%, trailing 12 months 2012 versus 2011, to $7,597,000 in 2012 versus $9,653,000 in 2011. Adjusted EBITDA for 2012, $1,548,000 versus a negative EBITDA of $881,000 in 2011. This is a 276% increase. Net income 2012, as Steve alluded to before, $432,000 for the trailing 12 months due to -- ending 2012 versus a negative $2,461,000 ending 2011. That's a 118% increase. I'd like to change the focus for a minute to discuss the company's liquidity and capital resource. As previously mentioned, as of March 31, 2012, the company had cash and cash equivalents of $2.428 million; working capital, defined as current assets minus current liabilities, of $2.18 million; and total assets of $22.702 million. Stockholders' equity at end of Q1 2012 was $19,794,000. The company does not utilize any bank financing during the quarter. During 2011, the company entered into a 2-year revolving credit facility with Silicon Valley Bank. The maximum borrowing under the facility is $2 million. Borrowings under the facility are subject to limitations based percentage of accounts receivable, as defined in the agreement, and are secured by substantially all of the company's assets. We currently anticipate that our available cash, as well as expected cash from operations and availability under the revolving credit facility, will be sufficient to meet our anticipated working capital and capital expenditure requirements for least the next 12 months. We currently have effective a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. Under the shelf registration statement, the company may offer itself from time to time in the future in one of more public offerings its common stock, preferred stock, warrants and units. The aggregate initial offering price of all securities sold by the company will not exceed $25 million. And pursuant to SEC rules, the company may only sell up to 1/3 of the market cap held by non-affiliate shareholders in any 12-month period. And now I'll turn it back over to Steve.

Thanks, Bill. Here's a quick market overview as of 8th of May. Our share price was $1.55. Outstanding shares still remain at 27.5 million. Market cap was 29.4 million. Management still retains 45% of management holdings, and our average daily volume is now over 30,000. Some growth initiatives. We continue to work on our sales and marketing efforts. We've added business development people on both East and West Coast to sell all of our systems. We've added additional sales personnel and will continue to do so. The biggest move would be in the distribution model. We'll ask some of our existing vendor retailers that have channels in excess of thousands of people that they would distribute our software, as well as our solutions, to increase top line, as I mentioned previously. Top line growth is our focus. Many people have raised the question about cost-cutting measures. I prefer to say cost restructuring. We didn't reduce overhead personnel totally, we actually are about the same, if not a little more personnel. We just redid the way our structures look. So for a review of Q1 in the trailing 12 months, it's the best EPS since the inception of the company in '94. We are focused on top line growth to move from where we are to where we want to go. We have significant change in EBITDA with even flat revenue, $2.43 million change in EBITDA. And as I mentioned, we restructured our sales and marketing efforts to grow top line. With that, we'd like to open the line and welcome your questions.

[Operator Instructions] Our first question is coming from Sam Bergman of Bayberry Asset Management.

A couple of questions. In the identity systems division, can you give us a little bit more color on perhaps beta sites that are ongoing right now?

Sure. Let me explain a little bit on the Marine Corps ATO. That's a system we actually introduced some time ago, and it gives the installation a much greater capability. So though we've gotten the authority to operate, that doesn't happen overnight. In many cases, it takes 1 year or 2 years. So that was a beta. That happened to be one of our military bases that had our previous system Defense ID. They move to Fugitive Finder where we built a total solution that has a server. It gives them the ability to do a real bad guy check, as I call it, where it's actually law enforcement data. So that was a pilot. Many of the cases you've seen is something called transportation work or identification credential. That law is still not in effect. We still don't know. That's supposed to go into effect this year, 2012. Frankly, there aren't a lot of people left in that space, maybe 1 or 2 of us. There were probably 8 of us 2 years ago when we all did our initial capability evaluations. So we continue to support several pilots and seaports and hope to see some nice wins coming out of their really soon, as well as the rest of the tier because that law will go into effect. On the commercial side, we have the same kind of thing. We've talked about in the past what we call behind the curtain things we've developed. You've heard us talk about the cell phone and the briefing side you'll see a photo, the ability to drive the buoy from the cell phone. We've had -- we've come up with a way to make money on the cell phone app. That's what we've got to figure out. We know that people charge $0.99. If I told you, "Hey, look you can have this app for $4,000 on your cell phone," you'd laugh. Well, we think we've devised a plan on how we're going to make money in using cell phones. So we have lots of pilots going on in all 3 divisions. And we'll continue to do it. If you can't figure it out, I'm a little bit excited about all our pilots we've got going on.

On the transportation side, if you were to get several contracts, do you have any idea of the dollar amounts of these types of contracts?

Yes, sure. I mean, it's similar to what we do on military bases. I mean, we're not really interested in doing $10,000 dollar install. It's eaten up in overhead, and we pride ourselves on support. So we would estimate that there can be $200,000 to $300,000. Some of the larger ones will be $400,000 or $500,000. You'll see some of the -- I believe, you'll see some that would be in $1 million. But understand one thing, that we kind of stumbled into it. I'd like to claim that we planned it this way. So we now see the transportation worker identification card and the buoy systems both work in security in the ports. So now we've created even yet a more robust solution. So let's say we get a port to buy a couple of quick readers. Now they start to trust this and believe in us and say, "Okay, these guys are real." Now they want the security system with a buoy as well. So I think this will be the year you'll start to see quick, really, start to move.

Have you seen any issues when presenting proposals on the balance sheet that you have for viability even though it's gotten better?

Yes, we don't really -- on the balance sheet, we wouldn't reflect those. And we're very conservative. We don't really provide projections so -- for that very reasons. We're only the research and development trends technology company. So we tend not to give those forecast because -- in a lot of times, we're the market leader, and we make the market. So we haven't really seen those fall away. It's quick, but a little longer than we expected. But we've been in the government space a long time. And I can tell you, a lot of my competitors know that we're going to go away any time soon. And the result from our recent quick wins, we're still there. We're not going to go away. Frankly, for us, it was just another card that we're going to add to our existing systems. Because quick wasn't new for us. It was just another card. So it's created a new market space for us, the seaports specifically.

Okay. And on the hospitality space, so when you've got that last contract, has there been any other interest generated from other hotels because of that reference site?

Yes, absolutely. We're trying to get our to our complete -- we've done our integration with a company you may know called MICROS. It's a company you see at hospitality and restaurants. So they have a touchscreen pad. We did all the integration with that some time ago in order to complete and move into their distribution channel, as I mentioned, early distribution, we have to do pilots at 3 major properties. I can't reveal who those 3 properties are, but to your earlier question on pilots, once we complete these pilots, we will be able to put out that we're certified to operate with their system called OPERA. It's owned by MICROS. And then we'll be able to go into their sales channel, so that's 35,000 properties around the world. So yes, Accor was the first one. I'm going to acknowledge my Chairman a little bit here on a book called Crossing the Chasm by Geoffrey Moore. There's always that person that's an innovator. In this case, let's say Accor was the innovator. Accor said, "Well, let me be the first out of the box." Well, the next question is the chasm. Either you're accepted or you're not. Call the earlier adopter, the adopters, I would say MICROS and their properties are now the adopters. So I think we're over the chasm, and I think you'll start -- people will understand the efficiencies of checking those. So imagine if you'd go to a hotel and a busload of kids get there before you and they're all trying to check in. You can do it in 3 seconds versus 15 minutes on each kid. You're going to be very happy to see our solution in that hotel.

All right. Makes good sense. And the last question, you said you moved around some people and you hired some people on East Coast, West Coast. If you look at the press release, the press release certainly holds a lot of promise for the future for Intellicheck. What can you tell us about S&G going forward or a combination of research and development and S&G going forward for the next 6 months? Is there much cost increases that we should expect?

Absolutely not. A lot of things that we've done in the company is we've been fortunate enough to get several government contracts in many regards we're our research and development are. I mean, we retained the IP, Intellectual Property, after contract completion. So one of the things I've asked Bill White to do as the Chief Financial Officer -- when you look at our Q, really, R&D is a revenue generator, not a cost center. So we actually used the government research and development on our own efforts to develop our product. So you should not see increased expenses dramatically anywhere. We have the infrastructure put in place now with our cost structure that for instance, if another Tier 1 retailer like a Target, Walmart, were to buy an enterprise license, it's literally ship them a disc. I'm not going to have an increased costs. The only place you could see a little bit of an increased cost, let's say we pulled 10 buoys or 100 buoys, obviously, that raw materials. But other than that, you should not expect significant cost increases.

So going back to the question of revenue increases, I know you don't make projections. What type of growth do you feel the company can have going forward?

Yes. We don't provide projections, but obviously, we didn't used to have what I call a customer relations, CRM, system. But the pipeline is very full. And as of 1 January, all sales people have a revenue generation plan. They have a commission plan. They have a minimum floor sales. So those are all things that they know. And in fact, I mean, in the midst of reviewing all those with all salespeople. Can't give you numbers. But we hope that would have significant growth.

Our next question coming from Walter Schenker of MAZ Partners.

Obviously, you've gotten the company both financially and profitability stable. You said for -- good to see that consistently. You've said you're not yet a $10 million company with marginal profitability. There were a number of things if we look back over the last 6 to 12 months which might have quantum leap, really expanded revenues, some relationships in retail, at least one of which was probably not happening because of their screwed up situation, potentially some larger applications away and other applications, environmental for buoys. So if you look at this business at this point, are there, in fact, very large opportunities still within a 12-month time horizon? Or is it going to be just, which is not negative and good growth, adding pieces, adding Marine bases, a few Marine bases adding a couple more buoys, I mean, it all adds up, but are we yet at a point where you're confident we've got fairly dramatic expansion? Or is it still largely, not that it's not always there blocking and tackling and growing the business sort of that way since we have been see any of that yet?

Yes. Great question. You're right. I'm not happy and I'm going to be happy at $13 million. So what we've done is we've solidified the base. We now have the structure in place, and we've made everybody look at how they're contributing to the top line. I can tell you, after the last conference call, I mean, we dialed in, and all the employees listen in. The sales team get it. They have got to get the top line to grow. And they know that. They feel that. And frankly, they're all stepping up. So we've created the pipeline. I do not expect that we'll be having the same discussion a year from now. It just doesn't make sense or we'll have to tweak some other things. So it takes a while. 12 to 18 months is normal. I mean, by and large, you alluded to the one Tier 1 retailer. I mean, that one was in there for 9 months. It's not over. I think that will still come back around. But add some personnel changes as you mentioned. But that's only one of several Tier 1 on the commercial side, quick reading on the government side, as well as the new solution we're presenting to military installations and as well as the buoy system. So I'm very optimistic you should start to see that this year.

[Operator Instructions] We'll go to the next question coming from Gus Allen of GA Financial.

One of the things that seem to be most interesting in the video that you had produced was the discussion about the system for law enforcement personnel to use cell phones to reach the cloud, so to speak, and be able to check and verify identities. This to me seems like an extraordinary opportunity. And I was surprised in the last answers you gave to questions. You didn't mention that side, and one of my curiosity, obviously, is what sort of a revenue model that works out to be. And I think you kind of slipped past it when you talked a little bit about selling a product for $4,000 and then charging some sort of $0.99 per call fee to it. And I'm just kind of curious, how big can that market be? How long is it going to take to development? Are you doing any trials with any enforcement agencies at the moment? Those sorts of questions.

Okay. Let me explain to you why we moved into that space. It was a capital expenditure versus OpEx. So a typical military base is $300,000 to $400,000, and we were trying to open up the state and local and still trying to open up the state and local markets on how do we penetrate that. Unfortunately, they don't have the capital expenditure available to buy a $400,000 system. So what we're trying to do is we've created an application that they can do the NCIT check kind of the gold standard law enforcement on the cell phone. We have it working on several different phones, iPhones, BlackBerry, because we're trying to figure out how they can pay us on the transactional model, as you talked about the cloud, so they can do the background check. It will be a transactional model. It is, I don't know, a number, a quarter or something per transaction, we would bill them monthly. So obviously, if you think about the numbers, state and local law enforcement they were working with some of the big hardware guys. It's more a question of who has what phone and does that model works and are they going to do it. So we're seeing some -- we do have some pilots. We have a couple of devices here. They're actually law enforcement devices. We can do it on the cell phones. And we have a couple of very helpful law enforcement entities that will pay to test anything we develop for them. So that's relatively new product we've got out there, but I don't want to put out any forecast. But if it gets adopted or accepted by the law enforcement, that will be new for us. We will have a public safety advisory board that kind of advises on that kind of stuff. So it's exciting. It's a new product. We're landing with all new products. We're not sure how far to go, but obviously, we're optimistic that it could be a great revenue stream at the state and local level. It's not something -- we do have some state and local and primary country in Ohio. We have very good success in the courthouses there. We're just trying to find the new products. So if the county sheriff says, "I don't have the money. I can't buy a hardware system. But I've got this cool cell phone, if you can do the bad guys stuff here." I mean, we're really seeing it. The guys was a cruiser, they're used to going back to the laptop and typing it in. But the guy on foot patrol or the guy on the bike or a gal understand they don't have that. They have to call back on the radio. So it's a new product. We're showing it off. We're taking it to shows. And we'll see how big the market -- well, we know how big the market could potentially be, just the sheer number of sworn officers. The question is, is everyone willing to accept the technology? We find out some departments are very willing to accept technology. Others are a little more technology adverse. So it's still a learning curve, but it's a very exciting product for us. And just the reading or parsing of the drivers' license, actually taking a picture of the drivers' license, sending it to our cloud, opens up a whole other area. Imagine, it's not only law enforcement. What if it's your online identity for one of the retailers? So the ability to take the phone, capture the bar code correctly and enter the parcel on our cloud creates some market capabilities for us.

[Operator Instructions] We have a question coming from Amy Norflus of Pilot Advisors.

Can you talk a little bit more about the banking contract and expand on that and just give us some other visions of some more top line growth?

Yes, absolutely. So the contract we announced was with a major bank, international bank. We all know that. We're not allowed to say their name in a public forum. So -- but it's a major bank. It's thousands of locations around the U.S. And it's really the first move in the banking operation. We have several other clients that sell in the banks, but this is the first time we're really in the front end of the teller station. You will see our solution. It's branded. So you'll see Intellicheck Mobilisa. That's really new for us. And now they've already asked us to move into other areas like ATM banking and other capabilities. It's really funny for us that we've finally made it into the transaction or the teller station. For those of you flying around the country, you're going to see our little box in the airlines. I know that Delta, United, Southwest, US Air, they all have it now. So this is really the first move to banking operations, which is interesting because we really didn't do a lot of software change. This is just like Accor. This is really taking our Accor business and then moving it into another area. And these happened to customers of ours, Chase, Barclays and GE in the banking operations that have always been a partner of Intellicheck Mobilisa. But it allows us to expand. What is really exciting is not only do we get to sell software, but we potentially could sell hardware as well. This is valued in millions of dollars. So that was the kind of deal specific in the bank that gets really exciting for us, and frankly, changed the face of the company relatively quickly. So that's a big one. As I mentioned, other potential growth opportunities, we're working on export control in the buoy systems. That opens up an international market as well as in the U.S. market as we just commercialized that product. And then in the government identity space, the release of the law enforcement data. We're the only company, that we're aware of, in the U.S. that has the ability to integrate with what they call, CJUS, criminal justice system, in all 50 states. So we're doing the right things for exponential growth. And hopefully, in the next quarter or 2, you'll start to hear those stories.

And now are these numbers already in the backlog?

They are not in backlog. This is one thing that the board and I have a discussion on regular basis. In most cases, on our business backlog is inefficiencies. What that means is, and the board would agree with me, is that when you're delivering products, your backlog means you are not able to deliver or they've asked for a delayed schedule of rollout. So our backlog is not reflecting either of those business development opportunities. Our backlog only reflects those things that we have signed contracts and either they've delayed delivery, or in the buoys contract, the buoy contract, actually, is an hourly basis, and this is called 18-month contract. So some of that's still in backlog. None of the other things, the opportunities we're talking about, are in backlog. We don't report those.

So this banking field is not in the backlog, and we would see it in one quarter or in 3 quarters? Or how does that like go in?

Obviously, we would hope in 1 or 2 quarters, but hopefully not beyond that. And we get pricing based on that. So obviously, we incentivized them to close quicker and not carry too long a backlog. Time-value money, money now is better than money in the future. So it is not in backlog currently.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Thank you. We appreciate your time today listening to our earnings call. If you have any further questions or follow-ups, please contact IRG, and they'll be happy to answer your questions. Any questions they may not be able to answer, they'll notify the management, and we'll help respond. Thank you for your time, and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.