Intellicheck, Inc. (IDN) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to, the Intellicheck 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 [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dr. Bill Roof, Chief Executive Officer for Intellicheck. Thank you, Dr. Roof. You may begin.

Thank you for joining us today for the 2016 fourth quarter and fiscal year 2016 conference call to discuss Intellicheck Mobilisa’s results for the fiscal quarter ending December 31, 2016 and for the fiscal year 2016. In a moment, Intellicheck’s CEO, Dr. Bill Roof, will lead today’s call. Following management’s prepared remarks, we will open up the call for questions. Before I turn the call over to Dr. Roof, I will take a few minutes to read the forward-looking statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. When used in this conference call, words such as will, believe, expect, anticipate, encourage and similar expressions as they relate to the Company or its management, as well as assumptions made by and information currently available to the Company’s management, identify forward-looking statements within the 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 resulting from such changes, new information subsequent events or otherwise. Additional information concerning forward-looking statements is contained under the heading of Risk Factors listed from time-to-time in the Company’s filings with the SEC. Management will use financial terms such as EBITDA in today’s call. Please refer to the Company’s press release for further definition of the context of this term. I would now like to introduce Dr. Bill Roof, Intellicheck Mobilisa’s Chief Executive Officer. Dr. Roof?

2016 was a major transition year for Intellicheck. We’ve continued our aggressive Company reorganization and branding initiatives, purchased nearly 1 million shares of Intellicheck stock from a former CEO and closed the Port Towns and 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 implementations 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 work towards and achieve partnership with NLETS, the National Law & Enforcement Telecommunication System whereby we can access all state law enforcement networks from a single secure location. The NLETS partnership is critical to our law and 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 and cyber security; hacking by hassle 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 comprise or personal data having dramatic and expensive impact on a variety of high profile financial institutions and iconic brands. Intrusions and fraud impacting profitability and consumer confidence for these businesses continues to heighten market concerns of network and data security, engineering processes and physical security of facilities. The results understandably include new approaches to data protection by our clients. I will provide more detail about the effects of our clients elevated 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 at same date. Bill?

Thank you, Bill, and a good day, to our shareholders, guests and listeners. I would 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, 71% 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 consists of selling, general and administrative and research and development expense, was $1,697,000 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. 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. At 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 a principle due on maturity, October 5, 2017. As of December 31, 2016, there were no amounts outstanding under this facility and the end user 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-S3 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 Dr. Bill Roof, Chief Executive Officer. Bill?

Thank you, Bill. We live in a dynamic world of cyber threats that our clients must address. Failure to do so could have devastating results for their businesses and stakeholders. You may recall that in 2015 and into 2016, our retail and hospitality clients were involved in the transition from the old style chipless credit cards to the EuroPay, MasterCard and Visa or E&B chips credit card system. This was a tremendous drain on the 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 cardholders, customer loyalty members and other services provided by retailers that require collecting and storing personal information. In previous addresses to our shareholders, I focused on 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 time. 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 client’s request for product derivatives that bolster our offerings and provide real, measurable value to our clients. NLETS is making significant strides and I am excited to report that we are on schedule to finish our endless implementation as we complete rigorous security audit requirements. NLETS is a national law enforcement telecommunication system, owned and managed by law enforcement representatives of all states in U.S. territories; with the charter to process and share law enforcement data among the states and territories. We are in the process of establishing our law enforcement data centre with NLETS where we will have access to all 50 states law enforcement networks from a single location. As we added 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 thought and now have. Markets, we’ll spend some time redoing our market verticals, beginning with retail. We still see continued momentum within our retail vertical with our Retail ID products. Retail ID pilot results continued to excite retailers and exceed their expectations, regarding fraud reduction and account acquisition. At this point, we have some significant wins that I'm 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 elided by the results, and we are in process of implementing the store-wide 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 solutions 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 and detouring underage alcohol sales by deploying our Age ID solution integrated with their point of sales system. This client recently completed integrating Age ID with their point of sales 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're beginning a Q2 pilot with another national concession vendor at three major sports and entertainment values 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, our Retail ID, Retail ID Mobile and our brand new variant Retail ID Light. We are actively engaged with four of the top 15 credit card issuers in North America. For example, a top five credit card issuers 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 provide an extremely powerful antifraud tool for financial institutions and retailers. The requirement for the integrated product moved Retail ID rollout for the first designated retailer to the right several months. We believe, however, that notwithstanding delays the outcome of the integrated product offering will accelerate our trajectory in the financial services vertical. We believe that the first four retailers this financial institution selected for product installation have the potential to generate approximately $4 million in annual high margin revenues for Intellicheck. And 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 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 our clients’ ecommerce Web presence. With online fraud rapid and getting worse each day, we believe, as do our clients, that Retail ID Online is the right product at the right time. This same financial services provider is scheduled to pilot our Retail ID Mobile application in their fraud operations group in May. We are currently in discussions in formulating a go-forward plan with another top 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 other instance a top 15 credit card issuer currently users our solution on a limited basis for credit card customer acquisition. We recently advanced our discussions with them and had customized a solution for this institution that we are branding Retail ID Light. We expect that one of the major retailers with over 1,000 stores will be the first to begin using this product in the coming quarters. The entire Intellicheck team is extremely excited and optimistic about our business relationships with some of the largest banks and retailers in the country; and with the fact that our products have performed so impressively in every vertical. Now, some information about the state alcohol authorities, there are 58 alcohol authorities in United States, with 17 states and jurisdictions that control the sale of spirits and wine. Of these 17 states, Mississippi, North Carolina and Ohio, are our clients and we are at various stages in the sales cycle with the remaining states. In non-control states, we recently on-boarded Louisiana Office of Alcohol and Tobacco Control and began a pilot with the Washington State Liquor and Canada’s Control Board. Our Age ID application is currently in pilot in other states. Moving from alcohol authorities to law enforcing. A few months ago, we welcomed Michael McDonald as our new Business Development Manager for Law Enforcement Solutions. Mike was formally a major and later director of information technology for the Delaware State Police and has held positions on endless Board of Directors and FBI Advisory Policy Board. Mike has been a great addition to the team and is currently project managing to 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 a 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 enforcing 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 in 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 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 the 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 [technical difficulty]. 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 is focused 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 continued to experience funding challenges. We will meet with the appropriate agencies and offices in Q2 to solicit their support. On past calls, I mentioned some sizable government opportunities that we were pursuing. One of those opportunities restricted to specific region of a single state, dependent upon grant funding and is currently on hold due to contractual issues. We did not forecast any revenues from this opportunity, so there is 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 the member of the senior executive service and appointee on this project that we’ve been asked to make connections from his agency to numerous U.S. law enforcement networks through Nlets. As previously stated, we are currently undergoing a rigorous Nlets security audit and expect that to be complete in April. At that time, we expect to move forward with this opportunity. We forecast revenues from this initiative later in 2017. A few words about third party integrators. We recently presented reseller referral contracts at two merchant payment processors who will introduce our retail solution to smaller retail prospects. We are engaged with the manufacturer of secured identity solutions that is interested in integrating our ID Authentication and our visitor management application. Additionally, we presented our solutions to a retail and restaurant point of sale provider and signed an agreement for agreement integration. Products, we have significantly increased the addressable market for our mobile platform software by moving Age ID, Retail ID and Law ID to Android operating systems to support market segments that prefer Android over iOS. In April, we are scheduled to release hybrid software development kits for clients for our mobile applications to integrate with their information technology backbones. Currently, Intellicheck has 15 clients paid pilots of our Retail ID and Age ID products, either in process or scheduled. As discussed the composition of clients range from large financial institution 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 the relationships by listening to our clients and by enhancing our products using their input. Our product enhancements follow our development process that requires return on investment calculations and prioritization before we begin work. As a result, we are confident that the product enhancements we undertake will provide the best ROI for the Company. For those new investors listening today, I’ll say a few words about Age ID and Law ID. We were honored that our Law ID product is recognized as a top public safety product for 2016 by Law and Order Magazine. With Law ID, the officer simply scans the context, ID barcode and the ID in 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 glance. Having authenticated the context identity, the officer connect accordingly, which can immediately deescalate the potentially [technical difficulty]. 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 assistance 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 has made quicker and simpler, lowering our cost of goods sold and speeding the sales and implementation process for our law enforcement clients. Selling age restricted products like alcohol and tobacco and in some states Marijuana is a nationwide compliance challenge. The risks and costs associated with non-compliance are high and rising. Our Age ID product instantly authenticates identification documents such as driver licenses, our retailers immediately know if the customers’ ID is counterfeit. That reduces risks of non-compliance out slowing down the purchase transaction. Age ID works with mobile devices or integrates with the existing point of sale solutions. With the ability to read more than 250 unique barcode formats from all U.S. states and territories, Canadian provinces and many Mexican driver licenses in addition to other U.S. government forms of identification, Age ID provides the most accurate and up to date solutions for compliance with laws loss 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 reliability insurers. Age ID is available as a subscription service or customized solution designed to meet our clients’ needs. Processes, in 2016 we implemented new business processes in both sales and product development. Our new sales leadership and team has continuously improved our online customer relationship management system and process to provide the Company with a realistic achievable pipeline in 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 in 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 are easily articulated than previously. This gives our clients high-levels of assurance that we understand their challenges and completely onboard with our support. Intellectual property, we received numerous enquiries about our current patent infringement cases. Obviously, we need to exercise caution with our communications with change of this issue, but I am at liberty to say that the federal judge has signed to both open cases directed us to work towards settlements in each. Settlement discussions have now begun. We do not know, though we speculate on the outcomes of these discussions. Although, some of our investors continue to communicate ideas, suggestions and advice us on matter, we will continue to work closely with our experienced litigations 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 and audit addressing security concerns with the objective of ensuring compliance with rigorous system testing and standards to protect their customers’ personal information. This demanding audit designed to assure we can withstand an onslaught of intrusion attempts and maintain protection from compromise lasted to nearly four months. The audit filing that our products and procedures met or exceeded our client security requirements. With this delay moved that significant revenue stream to Q2 2017, it is important to realize that Intellicheck does not capture and store personal information for our clients in the financial and retail markets; regardless, we find that it's 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 pre-requisites to system installations and subsequent revenue generation. In the words of one of our clients, the vendor security risk management program consists of security risk assessments and due diligence achieved by reviewing the vendors’ organizational, personnel, technical and physical security standards. The objective of the review process is to assess security, risk, information security controls, systems and processes. And to move ahead with these audits, we expect to time our clients required 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 projection for go-forward EBITDA-positive status push to Q4 2017 or early 2018. We are, however, excited about the larger view we believe underscores our strength and high growth potential. It is important to acknowledge and understand that we have not lost any business that formed a basis of our profitability projection. Realistically, our sales pipeline has continued to grow since that projection and our new sales team is fully on-board trained and extremely busy. Additionally, we expect our 2017 expenses to be lower than 2016 even as we continue to add personnel to support company growth. Since we have not had any client test our solution who did not subsequently purchased 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 forces as they continue to identify new opportunities grow our pipeline and close business. We have several contracts signed and several pre-approvals to begin installing our systems and we are strategically addressing unanticipated delays, such as assisted 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 for 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 logistic 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 not previously forecast are higher than before we began the partnerships. Investor communications, we have received numerous inquiries about our investor communications policy, specifically our press release policy. I understand that in the past, this Company issued press releases for a wide variety of activities, including attendance at conferences and meetings, meetings with politicians and so on. Our goal is to communicate to our investors, information that will keep them abreast with our current initiatives, progress and other company status. We will accomplish this by judiciously issuing press releases and by posting informative data to our Web site. 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 and the bone to paraphrase one of our valued investors. Due to the costs 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 went cash into the Company. We will not issue press release describing successful pilots in subsequent or live events with that client. We will issue the press release after we have installed and trained the client and the product is operational. As I explained earlier, our client delays associated with security audits and other unanticipated slowdowns have delayed the press release process as well. We have numerous signed contracts and are awaiting installation with our clients. We will announce these deals as we go live. For other information that might 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 Web site to sign up for these notices. Our emails contain links to our Web site 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 Web site 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 Web site and become more familiar with it 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 the potential clients and partners. We appreciate these introductions and believe that more of such initiatives will be valuable to the Company. In general, we continue to implement our plan, and we believe and expect that plan to work and bring us to profitability later this year. We also continue to follow our previously identified 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 mature a culture that supports this transformation. We’ll continue our optimistic outlook and expect our momentum to increase, going forward. We believe we are on schedule for breakeven and long term profitability this year or early 2018. In summary, thank you for your attention today. We understand that, to many of our investors a lack of publicized news, is a same as bad news, but we do not interpret it that way. We have not had a great deal of information that we’ve 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’ll post to our Web site. Our outlook is optimistic and we look forward to our next call with our shareholders. I will now turn the call over to the operator who will facilitate questions from our shareholders.

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

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

So, all 16, if they rollout through all departments, is about $0.5 million a year?

That’s what it appears to be right now.

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

About 75%, Alex.

According to last quarter’s conference call, 75% of the $2 million was also recurring. So what changed?

There’s less military sales.

So they were contracts that were cancelled?

No they are not contracts that were cancelled. There is less military sales this quarter than last quarter.

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

So recurring is really just for one year?

It’s signed up at the end of the year, that’s the way the defense budget works. Typically, we’ll resign existing customers, expect we haven’t had any drop off, and they will 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, will show up.

How much of that $733,000 was SaaS?

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

Going forward, that would be a very helpful number since Bill Roof mentioned that the focus for this Company is the SaaS business?

Yes, we’ll make sure that happens.

Our next question comes from the line of Anthony Marchese, a Private Investor. Please proceed with your question.

First of all, Bill, I think you do a merciful job in honesty of presenting the Company, so I appreciate the level of detail. I know it takes more time, but I think that shareholders and potential shareholders will get a tremendous overview of the Company. So I do appreciate that. Two questions, first with respect to breakeven, and I realized you don’t know exactly where the revenue will come from. But what level of revenue would that imply whether its fourth quarter or first quarter. What levels of revenue is implied by net income or EBITDA breakeven?

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

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

Yes, depending on the margins, but assuming the margins that we're going to maintain above that, yes.

So that would be, I guess, a significant -- almost 2.5 times that 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 departments, that’s tremendous amount of activity on-boarding, so on and so forth. It sounds like you get a lot of bank for your buck when you sell retail clients or bank. Could you just go through with us in terms of where do you see the greatest amount of bank for the buck, so to speak, and maybe I am 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 deployed police departments. With one, it sounds to me and may be 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?

Absolutely, Anthony. Each one of our verticals had 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 rollout 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. Its 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 have 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, their clients are each different. So if we go to AAA bank and they’ve got 1,000 retailers; each one is going to be different to get installed and trained; each one has its own IT section; they have priorities; they’re doing other things. And so it's just as difficult but in a different way to rollout to retail as it is to police. We think retail is a bigger market. We like the diversification that law enforcement gives us because that law enforcement market helps us get into federal government budget, as well as state and municipal budgets, very different than your commercial world in retail and Age ID. I hope I answered your question with that.

It just seems to me, you take a credit card processor or like even a customer like a Capital One. I mean they have thousands of accounts, and I realized 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 police area, and 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 retail. But the market is significantly, 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 benefit of using your product; they can save money; they can go to their superiors and say look I can save ex-amount of dollars here. So I’m not so sure that in some of the other verticals, the ROI, if you will, is as clear. So that’s what I am saying.

I think that was really well put, Tony. And to be answer to you, 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 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 after the 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; their data secure; they’re not going to be hacked; when they’re on our network and obviously going to cut 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 passed their security audits, is really the top priority 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 and law enforcement is they just stop a bad guy from getting on to a facility or did you save an officer or citizens like, 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.

Our next question comes from the line of Jim Kennedy from Marathon Capital. Please proceed with your question.

Question on your trials for online fraud ID. Can you talk a little bit more about that? Is that process, have you completed some trials there? Is that part of the auditing process? What have been the results? Can you talk a little bit more about what you’re doing online?

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

Hi Jim, thanks Bill. On the online ID pilot, the first pilot will go live the beginning of -- end of April beginning of May. There is a specific amount of development that has to occur, and that you have a card not present transaction with a remote user. So we’ve shored up the authentication process and are happy to go live with one of these major banks that we’ve been discussing here at the end of April beginning of May.

When you talk about a major bank, so that would, that trial would be in conjunction with a retailer, or retailers?

That’s correct. The initial approach is one retailer. But given a short period following that we should 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.

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

No, we’ll know that as this product begins, probably end of the May, we’ll have hard statistics on fraud savings.

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

We’ll have initial evidence end of May, that lifecycle for our credit card payment or process, specifically 60 to 90 days. But we’ll see counterfeit IDs fake credentials being presented at that time and we can associate to preliminary numbers in the bank.

We have a follow-up question from the line of Anthony Marchese. Please proceed with your question.

Thanks for the update on the patent infringement. You mentioned that you were directed to sit down, and I guess my question two folds; one, how long ago you directed to do that; and secondly, just because you direct both parties. Isn’t that something mean that you’ve actually sat down or that both parties are anxious to sit down. Can you just potentially give us a little more clarity on timing and way you are? And I’m not suggesting anything more specific than just an overview.

We have 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 dependence. So we’ll keep everybody posted as we have progress, as we can.

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

Thank you, everyone for joining our call today. We’ve received notice that apparently part of the call was very fuzzy, we apologize for the electronics here. Not sure what caused that. But we hope you were able to gleam 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 have been pushed out due to security audits and other issues with IT teams not being available with our customers, and with federal budgets. Lot of this hit us at the same time. I want to reiterate the good word is that we haven’t lost any business. In fact our pipeline is bigger than it was three months ago and six months ago, and more solid. And we believe that we’re still on track for even a positive end of this year early 2018 due to some of the delays we had experienced over the last quarter or so. We appreciate you joining us today and we look forward to speaking with you soon. Thank you.

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