Enrique Briz - Nelson Ludlow - Co-Founder, Chief Executive Officer, President and Director Billy Joe White - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Amy Norflus

Greetings, and welcome to the Intellicheck Mobilisa Inc. Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Enrique Briz, from Dian Grisel International. Thank you. You may begin.

Thank you, operator. Hello, and welcome, everyone. Thank you for joining us today for our 2014 Second Quarter Conference Call to discuss Intellicheck Mobilisa's results for the fiscal quarter ending June 30, 2014, and to discuss other business developments. In a moment, I will call upon our CEO, Dr. Nelson Ludlow, to lead today's call and introduce the members of the Intellicheck Mobilisa management team who will be participating in today's conference call. Before I do that, however, I will take a few minutes to read the forward-looking statements. Certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. When used in this conference call, words such as will, believe, expect, anticipate, encouraged 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 are inherently susceptible to uncertainty and changes in circumstances and the company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. Additional information concerning forward-looking statements is contained under the heading of Risk Factors listed from time to time in the company's filings with the Securities and Exchange Commission. Management will use the defined 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 use of this term. I would now like to introduce Dr. Nelson Ludlow, Intellicheck Mobilisa's Chief Executive Officer. Sir?

Thank you, Enrique. Good morning from Seattle, and welcome to our shareholders and investors. Let me introduce who I have with me on the call today. Our Chairman, Admiral Mike Malone, is on the call; and the management team of Mr. Bill White, our Chief Financial Officer; Mr. Russ Embry, our Chief Technology Officer; Ms. Heather Flanagan, Director of Marketing; Mr. Robert Streett is not on the speaker line but was able to dial in from the road, since he is out making sales; and our newest member of our management team, Dr. Bill Roof, our Chief Operating Officer, is sitting with us here as well. The outline for today's call, I would like to present, first, the Q2 results, the financials; initial progress that we've already made in Q3; I'd like to discuss the results from the special shareholders meeting about the reverse split that happened just about an hour ago; introduce our new Chief Operating Officer and our 2 board members that we've had recent press releases on last Friday and as of yesterday; and then talk about the new products, markets, particularly law enforcement, the TWIC program and our enterprise wireless, which all 3 have been very positive; and then, of course, to allow an opportunity for shareholders to ask questions. So let's talk about the Q2 financials. The revenue for the quarter ending in June was about $1.2 million. That marks revenue down about 30% from the year before, about 10% up from the last quarter. The adjusted EBITDA, as Enrique just talked about, for the second quarter is a loss of about $950,000 compared to a loss of about $635,000 in Q2 of 2013. Now when we raised money with the shareholders earlier this year, we said to look for initial results -- the initial results in Q3 from that sales force. I'm happy to say that we've seen initial results from our new sales team already, particularly at the end of Q2, which resulted in Q2 new bookings at $2.3 million, which is up 109% compared to the previous quarter of $1.1 million. Now I believe one of the best indicators of growth is when new bookings come up, and this is the best quarter in new bookings that we've had in about 3 years, back at the time when we had some larger government contracts. New bookings are also greater than the previous Q2 of last year, and you may remember that, that resulted in the following quarter of Q3 of 2013 being profitable. Overall, I think this is a very good sign. Accordingly, backlog also rose to $1.3 million, which is up 228% from the previous quarter. Now let's talk about bringing in new people. That's also a very good sign of the health and direction of a company's going. Dr. Bill Roof started as our new Chief Financial Officer yesterday. Now I've known Bill for many years. He's a retired Navy captain, he's a federal agent with the Naval Criminal Investigative Service, NCIS. He's got a Ph.D. in software engineering, particularly in wireless communications. He's got an MBA from Loyola. He knows our company, and I think shareholders can clearly see how Dr. Roof can help us particularly grow government contracts, which he's done very well and he did so with his recent company, TechFlow; lead the law enforcement Fugitive Finder program launch; he can add to our wireless team capabilities; as well as if you look, he has health care experience working with startups that were spun off from Cardinal Health. And that's an area our company has not gotten into in the past and so I'm very excited of all the many areas that Dr. Roof can help us in. And I'm very glad he joined our team. Let me talk about 2 new board members that we've recently added. Mr. William Georges is President and CEO of The Georges Group, provider of strategic consulting for corporate operations. But prior to that, he formed a firm where he spent 9 years as the Senior Vice President of a group called The Century Council. And that's a group that develops programs to fight alcohol misuse, drunk driving, underage drinking. You can see the connection for our company... [Technical Difficulty]

Okay, thank you. So let's -- okay, were we talking about new board members?

Sort of.

Okay. Well, so I was concluding that I was very pleased with Dr. Roof joining us and being able to help us with health care, wireless, law enforcement and particularly government contracts. As a whole, Dr. Roof can help us in many areas. And then I want to mention about our 2 new board members. Mr. William Georges joined our board. He spent 9 years as Senior Vice President of The Century Council. Century Council is a group that has programs to fight alcohol misuse, drunk driving and underage drinking. I think you can see the connection of our barZapp program in that. He's also a retired 25-year veteran of the Albany, New York, Police Department, where he rose to the rank of assistant chief. He's also a member of the International Association of Chiefs of Police and the Traffic Law Enforcement Committee to the National Academy. You can see that this is going to help significantly for our law enforcement Fugitive Finder program and barZapp program, and we're very excited to have Mr. William Georges join the board. Also joining the board is Major General Jack Davis. I've known Jack Davis for many years. He's a proven leader in the military, also law enforcement. He was retired as a U.S. Marine Corps 2-starred general in the reserves. He also was in the North Carolina State Bureau of Investigation, so -- and also an NCIS agent in training. So we have strong law enforcement and strong military. Jack has served on the Mobilisa Board of Directors from 2005 until we did the merger with Intellicheck. So again, someone that has experience with the company knows us and has helped successfully grow government contracts and law enforcement in the past. So we're very excited to have General Davis as well. So let's just talk about the reverse split. Just a few minutes ago, our press release went out regarding the reverse split. Let me give you a few pieces of information on that. We reached quorum and the majority of the vote, over 76% voted in favor of the reverse split. We had a very large turnout. I thank the shareholders for being engaged and voting that. We expect to file the paperwork with the New York Stock Exchange MKT market today, and the split may take effect as soon as tomorrow. If not, it would probably be the day after that. When it does go into effect, it will be at the opening and not in the middle of the day, so that shareholders can expect it would open that way. We did the reverse split for several reasons: one, to improve our ability to attract institutional investors; and two, to resolve being up against the cap of shares that we can issue, not necessarily for a financial raise but even just issue stock options; and three, to increase our ability and choices of what markets that we could trade upon. Regarding institutions, many have guidelines on what a share price is needed before they can get into a stock. So the reverse split was recommended to us by both investment banking firms of Aegis who helped us to the raise; ROTH Capital, which has been a long time with our company; as well as our commercial bank of Silicon Valley Bank. The Board of Directors and management supported this decision. But with that said, we did not pitch the reverse split. Bill White and I did not do a roadshow to lobby for a yes vote. We let the shareholders vote based on the information contained in the proxy. Most of the phone calls and emails we received mirrored the vote that we saw, which is that shareholders were clearly in favor of doing the reverse split. Now we've had a busy Q2 and start of Q3. On our website, you'll see that we have posted 29 press releases or copies of new stories since the beginning of Q2. I want to focus on a few key ones -- a few key projects for this call. Let's talk about the Fugitive Finder law enforcement. As you know, this is an app that you can use your cell phone, point at the barcode and it will decode the barcode, decode the driver's license information and send that to an FBI NCIC check. Now there's over 1.1 million law enforcement agents in the United States. We sell subscriptions to this app under our Software-as-a-Service model for $49 a month per device to provide that critical link between NCIC and a law enforcement agent's cell phone. That makes the total available market, or TAM, about $650 million a year. This is an important market, and we're serious about trying to go into this area. Those are just one of the reasons that we've added our 2 new board members and Dr. Roof to the team. I want to relay a story. We were at a sheriff's office a few weeks ago, and when they call to run a driver's license over the radio, the dispatch center charges them $7 for a driver's license processed. Just 7 scans a month, our system has a return on investment. And we found some others that are as high as $29. But on top of that, to have the ability to not have to do it over the radio, to be able to have the feedback, to have the data right in front of you is critical to law enforcement's safety and giving the agent the right information. Just last week, we had an article on PoliceOne periodical, and we received, just in the last week, serious inquiries for requests for sales meetings and trial use of the product from 76 different police jurisdictions in 32 states. Now I want to talk about the TWIC program. You've seen several press releases. We did have a question from one of the shareholders wrote in, what is the dollar amount that we list when we list a project for a contract? We don't have a specific one. If it's a material contract, of course, we're going to do a press release. But also, we also do press releases for some other purposes from time to time. And that's particularly when we're launching a new market and we want our customers to see the products that we're selling and to see the momentum that we're getting. And we are getting momentum. We've had Portland. There was an oil company in the Mideast that's trying our product out. Holt Logistics in New Jersey just installed our product. And then I'm very happy to say the Washington State Ferries for a $333,000 contract to use it aboard their ferries for their workers under the TWIC program. The Coast Guard is looking at this very closely and I'm very excited to have North America's largest transportation ferry system using it. Let's talk about wireless. We continue to do the infrastructure wireless program. We are doing work in several local communities. We're going after several Indian reservations as well. There's federal grants for installing that. I expect to see more work here, more wins, and this is something that's in relatively short term. So at this point, I'll have Bill White, our Chief Financial Officer, will give you more detail on the finances for Q1 (sic) [Q2]. Bill?

Yes. Thanks, Nelson, and a good day to our shareholders, guests and listeners. I'd like to discuss some of the financial information that was contained in our press release for the second quarter ending June 30, 2014, which we released this morning. Our quarterly report on Form 10-Q is also filed with the SEC this morning. Revenues for our second quarter ending June 30, 2014, was $1,197,000 compared to $1,721,000 for the previous year. Booked orders for the 3 months ending June 30, 2014, were approximately $2.3 million. Our gross profit was $749,000 for the quarter or 63% of revenues compared to $960,000 or 56% of revenues for the second quarter in 2013. The increase in percentage is primarily due to the focus on identity systems, which typically have a higher margin. Operating expenses, which consist of selling, general and administrative and research and development expenses, decreased 1.51%, or $28,000, to $1,851,000 for the quarter compared to $1,879,000 for the 3 months ending June 30, 2013. Adjusted EBITDA for the quarter ended June 30, 2014, was a negative $952,000 compared to a negative $635,000 in the quarter ending June 30, 2013. The company posted a net loss of $1.101 million for the 3 months ending June 30, 2014, compared to a net loss of $919,000 for the same quarter last year. As of June 30, 2014, our backlog, which represents noncancelable sales orders for products not yet shipped, services to be performed, were approximately $1.25 million, increasing 10% from $1.14 million at June 30, 2013, and 228% above the $381,000 at December 30, 2013. Interest income and expense were negligible, and we have a net operating loss carryforward of approximately $43.6 million. I'd like to now focus on the company's liquidity and capital resources as of June 30, 2014. The company had cash and cash equivalents of $3.8 million, working capital, defined as current assets minus current liabilities, of $2.8 million, total assets of $20.8 million and stockholders equity of $18.6 million. During the 6 months ending June 30, 2014, the company generated cash of $3,541,000 compared to using $1,090,000 for the 6 months ended June 30, 2013. Cash used by operating activities was $1.643 million compared to $1.121 million in 2013. We used cash of $63,000 in investing activities in 2014 compared to $40,000 used in 2013, and we generated cash of $5.247 million from financing activities in 2014 compared to $70,000 in 2013. On April 10, 2014, the company completed a public offering of 2,617,000 shares of common stock at a price to the public of $0.80 per share. Net proceeds to the company from the offering before expenses was approximately $2,094,000. During 2011, the company entered into a 2-year revolving credit facility with Silicon Valley Bank. In 2013, the company extended this line to October 15, 2014. Management is currently in the process of renewing this credit facility and anticipates renewal prior to the maturity date. The maximum borrowing under the facility is $2 million. Borrowings under the facility are subject to certain limitations based on a percentage of accounts receivable as defined in the agreement, and are secured by substantially all of the company's assets. At June 30, 2014, there were no outstanding borrowings and unused availability under the facility was $360,000. We currently anticipate that our available cash, as well as expected cash from operations and available under our revolving credit facility, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. Now I'll turn it back over to Nelson.

Thanks, Bill. Okay, let's summarize. As you know, we raised funds early in the year. And after we raised the funds from Q2, we significantly beefed up our sales and marketing team. We hired a Chief Operating Officer. We've added 2 new directors to the board, all strong in law enforcement, as well as individually in the alcohol market, military and health care. As we said earlier on the call -- or earlier in the year, we expected to see our initial first results from this new sales team sometime in Q3. And we saw some nice results already at the end of Q2, with bookings up to $2.3 million. So we are on track with the business plan that we shared with our shareholders in January, and I'm particularly excited about the new law enforcement product. At this point, I'd like to take questions. We'll do our best to answer any questions that people may have. Please clearly state your name, what organization you're with, and who you're asking the question to. Just so you know, we have our speakers spread out several locations in the country, so it may take us a second to get to the right person through the line. But we will do that. [Operator Instructions]. So at this time, operator, we will take questions. Thank you very much.

[Operator Instructions] Our first question is coming from the line of Amy Norflus with Neuberger Berman.

You've announced a bunch of great contracts of recent. Can you tell us a little bit more about the contracts and what they mean? So you state cloud model scanners, readers, how much of this is onetime? How much of this is ongoing? What the recurring revenue looks like, and how we should understand the press releases. And then my second question is you stated bookings in the quarter were over $2.3 million. How does that differ from the backlog? So in the bookings, does that include current revenue that was in the quarter? Or just to get a better understanding how we should understand the way you categorize bookings, current sales and then the backlog. And how quickly does it take to flow onto the revenue stream?

Good questions. Yes, thank you. We did -- a lot of activity has happened in June and July. We had installed several TWIC programs. The TWIC program has both a purchase of equipment price and then a reoccurring revenue apiece. We are offering a new capability in the last 6 months, which is we host the TWIC reader program. Port of Portland, for example, very much wanted us to do that. Their facilities did not want to have to manage this. And so we've done that. Since then, our other guys the -- reports for the oil company, and also the Holt Logistics have also done that. So this has been a good decision. We're all going in that direction where we host it. We get a reoccurring revenue stream. It's running slightly above 20% of the overall project, is how that works. So Holt Logistics is in New Jersey, an oil company is using it and a port, which is interesting because all 3 are slightly different, but you have TWIC requirements. And let me put the fourth one in there, the Washington State Ferries system. The Washington State Ferries system uses it for its workers, when they get onto the ferry. But what's very cool for them is that those readers also have the capability of reading driver's licenses and with this -- another small piece of equipment, passports, all through the exact same system. So it's a one-stop-shopping type of ID system. You can scan TWIC cards, driver's licenses, military IDs, passports, the whole deal, and that gives customers the capability to whatever project they've got. Ferry system does go in and out of Canada, so they do have that type of requirement. What I was especially happy about is we competed against the big companies such as Morpho on these contracts, particularly the Washington State Ferries system. And we did -- we won. So I think we're doing very well on that. So was there any other question that you had?

No.

Okay. Oh, actually, now I do remember the other question. You asked about the bookings versus backlog. No, we use the standard definition of bookings was work that was signed into contract within Q2. Backlog is the amount that was remaining that will carryover into following quarters. We have more backlog and more bookings at the end of this Q2 than we did Q2 previously. And you may remember that, that Q3, we went profitable. Some of the backlog that was from previous -- from the previous Q2 had to do with some wireless work that was spread out over several years. And most of this work that we've got will be earned out in Q3. It's installing at a port. It's installing at a military base. It's putting it at a ferry system and so -- or a grocery store chain. So these are things that we're putting out relatively quick. This year, we just earned a lot of stuff in the very last few weeks that could not be converted into Q2 revenue, but will show up as Q3 revenue. Okay?

If there are no further questions at this time, I would like to turn the floor back over to management for any additional concluding comments.

Well, I appreciate the shareholders' comments and support while we did the reverse split. We will move out with that process. Bill and I have the paperwork to send to the New York Stock Exchange MKT market. We're going to do that. And we're going to keep shareholders informed in November time frame. We have our shareholders' meeting. We welcome you to attend that. And look forward to putting out more press releases and having a good Q3. So thank you, all, for attending today's conference call.

Thank you. Ladies and gentlemen, this does conclude today's public conference. We thank you for your participation, and you may disconnect your lines at this time.