Intellicheck, Inc. (IDN) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Intellicheck Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Now, it’s my pleasure to introduce Mr. Bill White, Intellicheck Chief Financial Officer. Thank you, Bill. You may begin.

Good day and welcome to our shareholders, guests and listeners. Thank you for joining us today for the 2016 third quarter conference call to discuss Intellicheck Mobilisa’s results for the fiscal quarter ending September 30, 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’d like to 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 meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they’re inherently susceptible to uncertainty and changes in circumstances and the company undertakes no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of changes, new information, subsequent events or otherwise. Additional information concerning forward-looking statements is contained under the heading of Risk Factors listed from time to time in the company’s filings within the Securities and Exchange Commission. Management will use the financial term adjusted EBITDA in today’s call. Please refer to the company’s press release issued this morning for further definition of and context for the use of the term. I would now like to introduce Dr. Bill Roof, Intellicheck Mobilisa’s Chief Executive Officer. Dr. Roof?

Thank you. Good day and welcome to the Intellicheck Mobilisa Q3 2016 earnings call. Today, we will present corporate earnings information for the quarter ending September 30, 2016. Q3 was a turning point for our organization, and I am excited to report progress with many of our operational and strategic goals that we are confident will ultimately return significant value to our shareholders. After our prepared remarks, we will answer questions from shareholders. Our Chief Financial Officer, Bill White, will now review the quarter ending September 30, 2016 financial results. Bill?

Thank you, Bill. I am pleased to discuss some of the financial information that was contained in our press release for the third quarter ending September 30, 2016, which we released this morning. We anticipate that our quarterly report on Form 10-Q will be filed with the SEC this afternoon. Revenue for the third quarter ending September 30, 2016 was $1,214,000 versus $940,000 in Q2 of this year. This represents a 29% increase in Q3 versus Q2. As we have indicated in prior earnings calls, we expected and are now seeing higher sustained margins due to our Software-as-a-Service business model. Gross profit as a percentage of revenue was 77.9% for the quarter ending September 30, 2016 and 79.6% for the quarter ending June 30, 2016. We also indicated on previous calls that we expected a continued decrease in operating expenses in Q3 over Q2. I’m happy to announce that for the quarter ending September 30, 2016, our operating expenses, which consist of selling, general and administrative, and research and development expenses decreased $852,000, nearly 34% to $1,676,000 compared to $2,528,000 for the 3 months ending June 30, 2016. This decrease is mainly as a result of completing new product development initiatives, general cost-reduction initiatives and a decrease in the employee severance cost. Adjusted EBITDA for the quarter ending September 30, 2016 improved 62% to a negative $490,000 compared to a negative $1,293,000 in the quarter ending June 30, 2016. This represents a 62% improvement over Q2. The company posted a net loss of $727,000 for the three months ending September 30, 2016 compared to a net loss of $1,775,000 for the quarter ending June 30, 2016. This represents a 59% improvement over Q2 2016. As of September 30, 2016, our backlog, which represents non-cancelable sales orders for products not yet shipped and services to be performed, was approximately $233,000 versus $124,000 in Q2 2016 in the increase of 88%. Interest income and expense was insignificant in the three-month period ending September 30, 2016. Now, I would like to focus on the company’s liquidity and capital resources. As of September 30, 2016, the company have cash and cash equivalents of $3,534,000; working capital, defined as current assets minus current liabilities of $3,040,000; total assets of $15,538,000; and stockholders’ equity of $13,557,000. During the nine months ending September 30, 2016, the company used net cash of $3,471,000 in operating activities, $22,000 in investing activities and generated $1,074,000 in financing activities. The company has a revolving credit facility with Silicon Valley Bank that allows for a maximum borrowing of $2 million and is secured by collateralized accounts. The facility bears interest at the prime lending rate. It is payable monthly with the principal due on maturity on October 5, 2017. As of September 30, 2016, there were no amounts outstanding under the facility and unused availability under the facility was $2 million. We currently anticipate that our available cash as well as expected cash from operations 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, the company renewed its shelf registration statement on Form S-3 with the SEC and we have been notified by the SEC that the statement has become effective. As of September 30, 2016, the company had net operating loss carry-forwards of approximately $2.2 million. I will now turn the discussion back over to Dr. Bill Roof, Chief Executive Officer. Bill?

Thank you for presenting these encouraging financial results, Bill. During today’s call, I will repeat some information from previous calls, mostly related to product descriptions. We believe we have some new significant investors on the call today and we want to make sure we review the product functionality for their benefit. Let’s begin by reviewing our projections of breakeven in 2017. Two key components of our objective are increasing revenues and decreasing and positively leveling expenses. We will continue to focus on breakeven and Q3 represents significant progress toward that goal. We have an increase in revenues of 29% and a decrease in expenses of 34%. We are confident that we have the team, products and momentum to meet our projection of breakeven in 2017. During our August 11, Q2 2016 earnings call, we projected that our shareholders would see revenues increased quarter-to-quarter, while we hold expenses at a level commensurate with operating the business efficiently and achieving breakeven in 2017. Some may recall that projection is perhaps the first statement providing guidance put forth by this company in a very long time. In 2015, our shareholders asked us when we will begin providing guidance and we responded that we hope to begin providing some level of guidance beginning the second half of 2016. This we did during our August earnings call. Of particular note, Q3 2016 saw the company complete the staffing of our new sales force, with our new team quickly becoming effective in the new areas. While I cannot share specifics, I can tell you that we are seeing significant monthly sales pipeline opportunity growth. Last year, we implemented an aggressive plan to revitalize the company. You may recall among other activities that we reorganized and completely re-branded the company, raised operating capital to carry us through to profitability and envisioned and began developing a new suite of products. We modernized our sales and financial systems. We lead our IT backbone to the cloud, fully implemented our Software-as-a-Service business model for new clients and began moving legacy customers to that model. We narrowed and focused our product offerings, divested our wireless business unit, relocated the corporate headquarters to its original location in Jericho, New York and began implementing a plan to close the Port Townsend, Washington office, certainly a beautiful part of our country, but a logistical challenge for the path we plan to take the business. We see the strategy we planned and began implementing last year, now come into fruition. We have completed a number of pilot product implementations with terrific results, meaning that our products address customer needs and these customers are converting from pilot to pay at a rate of 100%. Additionally, customers who enjoy the benefits of our products are more than willing to speak with new potential customers and provide the types of references we need to shorten our sales cycles and to close deals. 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. Beginning with resources, our use of resources to develop new products and to locate and hire top talents are showing the returns we anticipated. Our pilots have been successful and we have identified new market segments for our products and increased our total available markets across our product offerings. Beginning early this year, we applied resources to the task of becoming an Nlets’ strategic partner. On October 10, our final Nlets requirement, a presentation to the Nlets’ Board of Directors in Washington, D.C., resulted in Intellicheck selection as an Nlets’ strategic partner. From a large number of proposals, Nlets selects only four strategic partners per year. Many have asked what this means from a business perspective, so I will respond now. Nlets is the National Law Enforcement Telecommunications System, owned and managed by law enforcement representatives of all 50 states and U.S. territories, with a charter to process and share law enforcement data among the states and territories. For example, when an officer in one state wants to check on a person presenting a driver license from another state, those queries pass through Nlets. Effectively, Nlets is our nation’s law enforcement information broker. What does this mean for Intellicheck, in most cases Intellicheck will no longer need to install hardware at a law enforcement agency or multiple law enforcement agencies in each state. 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 customer 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. We have a long list of interested law enforcement agencies spanning 14 states, many of whom have asked that we establish their connection via Nlets. Our Nlets partnership is in place and we are moving forward with our Law ID opportunities. Moving on to markets, we are tightly focused on our core markets, defense, law enforcement, hospitality and retail. We believe that our total market potential within our current markets is approximately $2.5 billion annually while our total available market, including newly identified potential markets may exceed $4 billion annually. A few words about our sales pipeline, with our new sales team operating at full speed, we have a realistic pipeline of sales opportunities that support our projections of breakeven in 2017. We define a pipeline opportunity as a potential customer whom we have engaged and where the probability of successful deal closure is 75% or higher. Our pipeline is robust and exciting and continues to grow as our dedicated sales team works with customers each day. For example, our Retail ID pipeline consists of retailers segmented into big box, discount, boutique and specialty firms where we reduce fraud and help on-board loyalty in credit card customers. We also see a robust potential for the pipeline in the credit card issuers segment and are speaking with the top 15 issuers in North America. Our Age ID product is gaining ground with supermarket, convenience and dining customers as well as with alcohol beverage control states in their associated law enforcement agencies. I mentioned the importance of our Nlets partnership to our law enforcement market where we are in discussions with local police departments, highway patrols, sheriff’s departments, campus police and federal law enforcement agencies. Our national defense market shows significant promise for 2017 and our pipeline in that market is growing. We have found new customers for this technology and are moving forward with those projects. From a public relations perspective, our strategic communications initiatives are exceeding our expectations in raising awareness of our products. Q3 provided positive media events, including the production of a Law ID video with the police department in Illinois. Our access to the media and their corresponding support is growing and becoming an increasingly important component of our overall market strategy. We invite you to visit the newsroom on our website, intellicheck.com, to see how our customers use and appreciate our products. Now, we will move on to products. Last quarter, I mentioned that our product development expenses were front loaded in 2016 and that shareholders could expect to see a significant drop in operating expenses in the second half of the year. As such, Q3 expenses are down 34% from Q2 and down 43% from Q1. Our new products are gathering momentum as revenues are up 29% from Q2. The new products we developed earlier this year have either completed pilots or are in pilot evaluation with a number of major national brands in the retail and financial services spaces. In May, we announced the release of Retail ID Mobile. We developed and released Retail ID Mobile in response to our retail customer’s requirements for our mobile fraud prevention solution that avoids the cost and resource expenditures associated with point of sale integration. Soon, we will announce the release of another new product that resulted from our development investments in quarters one and two. Cost of developing these products earlier this year was high and we are now seeing results we expected. As we move forward, we will continue to enhance our products and look for product development opportunities that can provide Intellicheck with leverage in our markets. With respect to our endless partnership, we already mentioned Law ID, our product that enhances an officer’s situational awareness by minimizing the loss of visual contact with an unknown person during the field contact. 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. Handing authenticated the contact’s identity, the officer can act accordingly, which can immediately deescalate 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 systems reporting features. Law ID instantly access this critical authoritative data sources, increases officer and citizen safety, provides the officer with accurate, relevant data at a glance and supports faster, more accurate recording. As an Nlets partner, access to those critical, authoritative data sources is made quicker and simpler, lowering our cost of goods sold in speeding the sales and implementation process for our law enforcement customers. 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 counterfeited. 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 U.S. states, 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 solutions 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 was available as a subscription service or customized solution designed to meet our clients’ specific needs. Our Age ID product is gaining traction within our intended market as well as in some new and previously unforeseen ways. We recently announced our partnership with Carolina Data Systems, who will take our technology, integrate it with their point of sale systems into all the alcohol beverage control stores in North Carolina, representing approximately 450 stores. We now see law enforcement officers from state run alcohol beverage control boards in multiple states and Police Department Bike Squads using Age ID to catch underage drinkers and those who sell to them. This is happening coast-to-coast in some of our nation’s largest cities. A great example of this is the Southeastern state that has just deployed Age ID to all 100 of its Alcohol Control Officers statewide. We are pleased to support local government initiatives to curb underage drinking and we are excited about the exposure our Law ID product has received through the use of Age ID by law enforcement. Now we will address processes. In Q2, we implemented new business processes in both sales and product development. Our new sales leadership and team has continuously improved our online customer relationship system and process to provide the company with a realistic, achievable pipeline and the management reporting we required to maintain success. Additionally, over the past 5 months, we have built and deployed a social media capability that has outreached to many current and potential customers. You can now find us on Facebook, Twitter, Instagram, LinkedIn and other social media outlets. I will address intellectual property. I don’t plan to discuss our IP legal initiatives in any detail. However, we are currently involved in a number of vigorous intellectual property defense initiatives. These include lawsuits filed with claims based upon patent infringement as well as numerous actions against firms that were using our company name, trademarks and other intellectual property without permission. We continue to be vigilant and to protect our shareholders’ investments and the company’s intellectual property. In Q3, we saw a new patent issue and we will be announcing that shortly. In general, we continue to implement our strategy defined by our previously identified five pillars. Those being, one, to operate as efficiently and effectively as possible; two, to focus on developing our key competencies into world-class products; three, to manage our product offerings with the goal of focusing on value and scalability to our customer base; four, 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 optimism and expect our momentum to increase going forward. We believe we are on schedule for breakeven and long-term profitability in 2017. Customers need and appreciate our products and services. We believe our decisions to invest in our five key areas were correct and are now generating the returns we expected. In summary, thank you for your attention today. As we stated, our Q3 financials show our trend of increasing revenues and decreasing steady predictable expenses. We believe the quarter is indicative of our turning point that will bring breakeven and profitability in 2017. 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 and we will take questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Ryan Nelson from Special Situations Fund. Please go ahead.

Hi. It’s actually Alex Silverman. How are you guys?

Hi, Alex. How are you?

Good. Thank you. Can you help us was there – can you, a), help us with what the mix of SaaS revenue was as a percent of the total revs this quarter and how that changed versus just a quarter ago?

Yes, hi Alex. SaaS revenue this quarter is about 75%. We had about $0.5 million in Defense ID sales that had an equipment component to it, but about 75% was recurring revenue.

Got it. So – and about $0.5 million was Defense ID?

Correct.

Got it. So that’s very helpful. And is that why gross margins were just down a tad between second quarter and third given the hardware component of this quarter?

Yes. I mean, the reduction between second and third quarter was de minimis, nonevent, but yes, that probably had most of the reason to do with it, yes.

Okay. And Bill did you – I apologize, I was frankly multitasking. Did you say that some – that 100% of pilots progressed into paying contracts? Was that for a specific product you were referring to?

That number is correct and that’s across our product line.

That’s across your product line?

Right.

Okay. So you had a number of Law ID pilots. I think you announced several quarters ago that I think in the press release, you said could equal $0.5 million a year of recurring revenue. Can we assume that those have progressed as – into paying customers or were those waiting on Nlets to progress?

We are in the implementation phase. So, they were waiting on Nlets to progress. Now that we are a few weeks after our Nlets partnership, we are talking to them again. We are talking to their state reps of Nlets and we are trying to get hooked up. So that was really the slowdown for us with the other Police Departments. So, our first Police Department was our alpha and beta site. Just a few months ago, they went live across Police Departments they converted from pilot to pay. That was our first one. In Nlets, we expect to see a much, much quicker sales cycle.

Great. And then can you walk us through what the process with Nlets is going forward? In other words, is the software now hosted on their site? Can you just flip on a state easily or do you have to go through a process still? What – how should we think about it?

We are in the process of moving our hosting systems to Nlets to their hosting facility in Phoenix. And each state representative at Nlets has the authority after going through a process with us to make sure that we meet the state standards for encryption and all of the technical issues to allow us to connect to the state switch. So, we – this really streamlines us, because – so for example, in our Policing Department in Illinois, we are going to remove the hardware from that Police Department and move it to Phoenix. There is a component of availability of a Police Departments or county’s or city’s IT staff to be able to support us when we have to install locally. We don’t need that anymore. We won’t...

So, if I understand – sorry, go ahead, I apologize.

We won’t need that anymore. We will be able to put our hardware, our servers at Nlets in Phoenix and have the Nlets rep from each state verify that we meet their standards and get us flipped into the state network. So that really is a streamlined process for us now.

And I assume having gone through the Nlets approval process gets you a pretty far – gets you pretty far along with each of those state reps.

It does, we think. And the fact that we have already passed the state of Illinois and we are connected to leads which is their law enforcement data system and other states will look at them and say anyone who has got permission to connect to leads automatically has follow-on permission to connect to us. So, that type of thing exists among the states and we expect to see this really, really speed up card our process.

And what’s the timing on hosting the software at Nlets, is it this year?

Yes, it’s going to be this year. We are moving – in the process of moving now. That’s part of our proposal that we had to write. We went through a multi-month proposal process for this. We had to actually give them our system architecture and have that approved that – how we would host there. So, we already know what that looks like, we just have to start it from earning it.

Got it. Very helpful. Thank you very much.

You are welcome.

Our next question is from Anthony Marchese, Private Investor. Please go ahead.

Hey, good afternoon, Bill. First of all, congratulations and I want to say you do a really outstanding job in giving us an overview of each product line, really, really truly great job. I have two questions. First, with respect to your operating costs, you have done a great job in reducing them. First question I have is what can we expect going forward? Are these expenses? Obviously, if you have sales expenses, they are going to rise. But other than sales expenses, do you feel as though this is the level that we should consider over the next two, three quarters?

Yes, we are – we expect to be on or about this level over the next few quarters. We are going to stay here as well as we can until breakeven. We are going to be bringing on more salespeople that will add a little bit, but we expect that the – obviously, that the revenues they bring in will offset that. So our goal is to remain about this level. It may be up a little bit, it may be down a little bit, depending on what opportunities arise and we decide to spend money on. But we will do that very judiciously and always with our goal of breakeven in 2017.

Okay. Second question I have, during the last conference call, you mentioned that you were imminently going to be coming out with a new product, we should check our – we should check for press release imminently and as of yet, I don’t think we have seen it, so could you tell me what happened or where we are or…?

At the risk of sounding the same as I did last time, I ask that you check press releases next week.

Okay, alright. Okay, we will do that. And another question I have is with – I am still laughing, sorry. With respect to your patent litigation, can you just give us a little more detail, not necessarily who you are suing because I think that’s a matter of public record, but in terms of are you – what expenses are you incurring, are you – do you have an outside law firm, give us an understanding of how much you are actually spending?

Sure. We initially took on our first lawsuit out-of-pocket and we – it was important to us to get claims adjudicated, which were adjudicated in the court here in Seattle. Those were the claims were allowed, so we are very happy about that. We wanted to do that before we moved ahead with other lawsuits with larger suspected infringers. And once we got into our second lawsuit, we were – and started seeing the need for expert witnesses, etcetera, second lawsuit being with a contingent firm, so that’s not costing us very much at all. We moved the initial lawsuit over to that contingent firm. So our legal expenses initially were high. We get the claims adjudicated now. Those suits are with contingent firm and our future suits will also be with contingent firms. So we had high expenses legally. Initially, they are way, way, way down now and will continue to stay down.

Okay. Now your patent litigation, if you can also sort of take us through – you have two sets of patents, correct, the patent litigation that you re pursuing right now is different or rather separate from the biometric patents that you purchased, is that correct?

The suits that we have currently filed are not based on the biometric patent portfolio that we purchased last year. However, we do believe there is infringement across our markets in – with our biometric patent portfolio and we are taking a very hard look right now on who is doing that, who we believe is doing that and what we should do about it. So we are going to vigorously enforce all our patents, whether it’s our original patent portfolio or this new one we bought last year. And we are spending a lot of time on that.

Great, okay, very good. I really appreciate the update. Thanks Bill.

Thanks Tony.

Our next question comes from Joe Bernini, Private Investor. Please go ahead.

Bill congratulations. Being an investor with the company since the IPO of Intellicheck, I have been here a long time. And a couple of the questions were answered already, unfortunately. But the pilots turned into sales and your SaaS model, but I have got to commend you and the team, this is a complete paradigm shift for the company between the products, the execution and redefining your sales force, I congratulate you all.

Thank you very much. That’s very kind of you. We appreciate that.

I do have one last question, on the pilots turned into sales, you also said they would become a supporter or an encouragement to additional sales to other companies?

Yes. We – when we initiate our contracts with many of these customers, we ask and had in the contract that they will be a reference account for us. And almost everyone says, well, certainly if your system works, if your products work the way we expect them to, we would be happy to evangelize these to your future customers. And we are finding that word-of-mouth as being extremely helpful right now.

You just picked up another sales force?

Exactly.

Well, thank you very much. I appreciate it.

Thanks Joe. It’s nice to talk to you.

Our next question comes from Mike Grondahl of Northland Securities. Please go ahead.

Hey guys. Thanks for taking my question. First, just on the Retail ID, we are getting close to the holidays, can you kind of talk about some of the newer opportunities you have there and do those get live before the holidays?

Yes. We are – that’s a great question and the answer is, during the retail holidays, we typically don’t go live. The stores in our IT departments are gearing up beginning with Black Friday and they are gearing up now. And typically, their IT departments don’t have time to work with us to go live. So what happens in Q4 in the retail world is that we stack up these deals and then we start in earnest right after the New Year. So it’s typical. We saw it last year, too. They say I know we have a contract for your product, but we just can’t go live right now. We are going to slip it a quarter until after the holidays. We are seeing that right now and we expected it. So it’s not a shock to us, but I think that answers your question Mike, that we do see a slowdown in Q4 in the retail world.

Got it. And then Age ID, how do you kind of see that progressing in the next few quarters?

We see that progressing very well. I would really like to ask our VP of Sales, Paul Fisher, who is on the line, to talk about that because I would like to get some exposure from Paul to the shareholders. Paul, are you there?

Yes, Bill, I am.

Why don’t you go ahead and answer that last question, if you would.

Yes. As far as Age ID, it’s a pretty consistent growth that we are seeing there. There is really no challenge as to market. It’s about efficiency, reliability, quick information to our law enforcement and also restaurant, convenience stores and so forth market. So we will continue to see the growth there. It’s – no challenges. We see market facing like holidays or anything we see in the retail space. So I think that answers your question.

Got it. And then maybe just lastly, it sounded like over time, you will be adding a little bit to sales, how can we think of that cadence kind of over the next year?

Do you want to respond to that, Paul or do you want me to?

Yes. Definitely, I will take it. So we have got a – we have added quite a few salespeople across the U.S. this year in the last two quarters, right. We will continue to do that as we see the markets grow. Right now, they are very much a generalist sales force, meaning they are attacking all of our products in markets. As those markets grow, we will look at specialization and maybe we have a law enforcement specialist by market instead of a generalist across the board, have a couple of specialists within each territory. So we are going to track it to revenue growth and make sure we are doing our due diligence there. And as the – like I said, the markets grow. From revenue perspective, we will backfill that with additional salespeople that could grow additional market share.

And I am newer to this story this year, when you say you have added sales in the last couple quarters, how many FTEs have that been?

We have added four new FTEs in the last two quarters. I have got a team of nine, that includes direct sales and sales support.

Great, okay. Thank you, guys.

Thank you.

Our next question is from Anthony Marchese, Private Investor. Please go ahead.

Hi guys. I have a follow-up question, where – do you find – it would seem to me that you might find it easier to sell your retail product than your other product. How do you – I guess, whatever you are saying, how do your customers measure return on investment, I could see for example, in the retail area, you are preventing fraud. So they can actually see and touch how much money they are saving versus, for example, a liquor store where, let’s face it, you are taking sales away, obviously they shouldn’t be selling to them in the first place, but you know what I am saying, help us understand how do customers measure ROI? Is it a factor in what you sell?

Another good question, Tony. ROI doesn’t necessarily calculate in terms of dollars and cents. Sometimes it calculates in one’s responsibility to the community. So for example with Age ID, there’s a responsibility issue here. The local liquor stores especially, they live in a community. Their kids grew up there. They know the families. They don’t want minors drinking and driving and getting hurt or killing someone. There is also a compliance portion of that. Yes, there is a dollar and cents ROI in compliance because you avoid a fine or maybe being shut down. In Atlanta, there is a rule, a law that if you are caught selling to a minor they can shut your business down for an entire month. That’s going to put most people out of business. So, the ROIs are all over the place. With Law ID, we initially envision the Law ID product as an officer safety tool where the officer can scan a license and have – when he want some warrants and be on the lookout and terrorist watch list information in their hands on their smartphone in 10 seconds. That’s a lot quicker than walking back to their car, sitting down, typing the information or calling dispatch and waiting for a verbal response. That makes them safer. We have got problems with people shooting officers in the country right now. There is an ROI on saving a life, definitely. Also, having that information in 10 seconds can deescalate a situation. It could make the citizen safer. The officer may think they have got a bad guy. It’s not the person they think, they will know it in 10 seconds and they can deescalate. It makes the citizen safer. You can put a dollar value on that maybe. But certainly, the ROIs across some of our products are not measured in dollars and cents and we are real proud that we can stabilize, we can keep minors from drinking, we can be responsible to the community as well as save people money in the fraud arena.

Okay, great. I appreciate that. Two other questions. There was a major article I think it was in The Wall Street Journal a week or 10 days ago talking about actually with the holidays coming up, online sales, identity issues with online sales, do you have any initiatives in that area?

We certainly do and we understand that that’s an issue. We have looked at the numbers. We understand the fraud numbers across all of the avenues of fraud, whether those be internal employees, whether it be shoplifting, whether it be fake IDs and fake credit cards, whether it be online, whether it be in the brick-and-mortar store, we are actually addressing all of those.

Okay. And final question, you had mentioned earlier in the year, a development project with, I guess, a company called Visualant. I am just curious as to where you stand with that. Had you gone further or what you need to do to – I think you have mentioned you had a customer, in fact, who could complete the products. So can you just take us through where you are with that?

We are moving ahead with Visualant. We’re doing it slowly, so we can conserve cash. We’re controlling our expenses. The deal we have with Visualant gives us lots of time to build the product. We’ve been doing our market research. We have multiple customers now who could use this product, all the way from the federal government down to individual stores or credit card providers and so forth. So we are in the product definition phase right now. We are defining what the product needs to look like, how it’s going to be implemented. There is going to be a form factor that we have to design and we have got some designs on the drawing board right now for the device that actually reads the chemical tag-ins. So that’s all progressing and it’s progressing at a decent pace, and it’s not costing us much money at all, the way we are going right now.

Final, final question, could you just briefly take us through how that product works?

Sure. The Visualant product is – they call it, we call it ChromaID. Every object in nature and every object in the world has a chromatic response. So, if you shine particularly light pattern, different frequencies, etcetera, added it will return a unique signature. And what we are looking at are some government requirements to make sure that, for example, military ID cards and visitor passes at bases, etcetera, are – have built-in counterfeiting – anti-counterfeiting technology. We believe Visualant is perfect for that because we can produce ID cards and visitor badges that have a unique chemical tag-ins built into the paper, the plastic that returns a unique signature, and then we can shine a light at it and get the signature back. We can tell whether that’s fake or real. That’s a real fundamental description of how that works, but that could be worked – that could work for passports. It could work for currency. It could work for ID cards. It could work for credit cards, driver licenses. It has a wealth of uses out there.

Great. Alright, thank you very much. Really appreciate the time and effort in explaining that.

Thanks very much, Tony.

Our next question is from Jim Kennedy from Marathon Capital Management. Please go ahead.

Good afternoon, gentlemen.

Hi, Jim. How are you?

Good. Thanks for good quarter. Great call. Couple of additional questions in each area. Number one, did I hear you correctly earlier say that you were talking with the top 15 credit card issuers?

Yes, I did say that.

Okay. Obviously, you can’t talk about – we can all figure out who the top 15 are, but could you kind of clarify a little bit as to the benefit to them? Obviously, you are reducing fraud at the store level, does that fraud typically end up on their tab or is that split with the retailer? In other words, why would they have such interest in this?

Yes, hi Jim. Bill White. There is – the merchant processing agreements vary between the merchant and the merchant processor and there is different loss share arrangements. So, the answer is the merchant and the processor normally will share the loss in some fashion. Smaller merchants, 1, 2 store merchants probably eat 100% of the fraud where larger merchants have more leverage to negotiate.

So in other words, there is pain at all levels, in other words?

Correct.

Okay. And then can you speak – I know you can’t talk about individual retailers, but can you give us at least some experiential results as to the amount of fraud you are cutting, either dollar wise or percentage wise at the retail level in your customers’ stores?

Yes, yes, certainly, Jim. We have a lot of data points now to evaluate the ROI and what we are finding is that a retailer will pay for our software within the first 2 months of the year for the entire year. So, it’s about a 6:1 payback on an annual basis on average.

Okay. So payback is 2 – you said 2 months approximately?

About 2 months, yes, one point.

Okay. And have you sized the amount – shall we say it’s really not an addressable market for you, but the amount of fraud at that retail level for in-store credit card applications. How big is that fraud?

We don’t know that right now. We have got a lot of fraud numbers that we have been able to get our hands on, but we don’t know what portion of that is fraudulent by use of fake IDs to get – to gain credit cards. We have larger overall fraud numbers, but that’s not broken out. We just know that the banks and the retailers know it’s a problem. And obviously, when we do check and cut the fraud down, then we have got some data points there, but that may not be representative of the entire retail industry.

Jim, there is a lot of ways to cut the fraud. There is internal shrink. With respect to our fraud, what we found is fraudulent account setups is a big one that we could stop in its tracks. That return merchandise without a receipt, we are stopping that fraud in its tracks or account lookups where a customer comes in and wants to put a purchase on their account using a fraudulent ID and we have stopped that in its tracks as well, so yes.

That’s called a card not present. Oh yes, I am Bill White, but I forgot my credit card. Here is my driver license. And they will go ahead and they will put the purchase on Bill White’s credit card and it really wasn’t Bill White that we could stop that type of fraud, too.

Got it, got it. Okay. And then the nature of your discussions with the issuers, do you think it will end up being a situation where rather than them necessarily being a client of yours, it might be that they require their merchant network to have this technology in place or else they may pass that merchant who assume more of the risk?

You are dead on with that, Jim. We are seeing all of the above. Everything you just mentioned, we are seeing right now.

Okay. And then switching gears over to hospitality, you mentioned the word hospitality early on. Are you speaking just to liquor stores in Age ID or is there a much larger hospitality effort here? And if so, what does that encompass?

Well, certainly, yes, I am going to ask Paul to address that also. Paul, would you go ahead and respond to Jim on that?

Yes, definitely. Thanks, Jim. Hospitality market would include what you just talked about in regards to age restricted products, but we also expand that into the guest in hotel environment. So, we are talking to multiple hotel chains that would expand our opportunity there in the hospitality industry.

And would that include – I know in a lot of stores and even in the ABC states, would that include grocery stores, too, because I know you can walk into a pharmacy or a grocery store in certain states and buy beer and wine?

Yes, we are talking to the grocer and c-store chains also.

Okay. Has anyone in that genre picked up the service or the technology, yet?

Active discussions underway, I don’t believe that any are revenue-ing at this time.

Okay. And then the arrangement that you have in North Carolina, which I am guessing is the first of its kind with Carolina Data Systems. Is that likely to be the business model in the states that are ABC controlled, which remind me again I think there are about 18 of them?

Yes, that’s correct. That’s one of our forward-looking strategies because we believe they can get us quicker time to market rather than us go get 38 ABC entities in a particular store.

Okay. So that would be the strategy in those ABC states. What about the other approximately, what other, 40 states that do not – that are not ABC?

Yes, that’s true, Jim. It’s a point-of-sale integration strategy. So that’s also across market strategy. If we could find a point-of-sale provider and do the integration with that point-of-sale provider, again, that gives us quick time to market.

Got it. Okay. And then Bill, could you just remind us, or maybe Paul, in terms of the structure of the sales force, you said it’s 9 people now with a couple in support. Are we geographical? Are we vertical? Do you think it will stay in that structure going forward?

We are geographical today. It will move to more of a vertical alignment in the future as we grow revenues.

Got it. Okay. Okay, very good. Appreciate your time.

Thank you, Jim.

Our last question comes from Michael Kellen from First Eagle Investment Management. Please go ahead.

Good morning or good afternoon. On your second quarter call, you referred to 8 clients where pilot programs were necessary perhaps even underway, but whose annual revenue collectively could be over $5 million. Could you bring us up to-date on those particular clients? And since you mentioned that pilot-to-pay conversion was running at 100%, I was wondering where those are 8 clients stood?

Well, sure. We are still on pilot. The pilots are going well. We are in discussions with some to move into pilot. Those discussions are going well. In some of those cases, we have been in competitive proposal mode and have done very well with that too. And so there is no real change. We still standby that and we are moving ahead. It’s not moving as quickly as we had hoped, but we are still making advances in that area.

Thank you.

Thank you, Michael.

Thank you. This concludes the question-and-answer portion. I would like to turn the floor back over to management for any closing comments.