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Intellicheck Mobilisa, Inc (NYSEMKT:IDN)

Q4 2013 Earnings Conference Call

March 25, 2014 11:00 AM ET

Executives

Enrique Briz - DGI

Nelson Ludlow - CEO

Bill White - CFO

Analysts

Barry Beckman - Alpine

Amy Norflus - Neuberger Berman

Chien-Ming Wang - IGA

Operator

Greetings and welcome to the Intellicheck Mobilisa's Fourth Quarter and 2013 Year End results. At this time, all participants are in a listen-only mode. A brief 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 Enrique Briz, DGI for Intellicheck Mobilisa. Thank you Mr. Briz, you may begin.

Enrique Briz

Thank you, Operator. Good morning and welcome everyone. Thank you for joining us today for our 2013 fourth quarter and full year conference call to discuss Intellicheck Mobilisa’s results for the quarter ending December 31, 2013 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, 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 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 the use of this term.

I would now like to introduce Dr. Nelson Ludlow, Intellicheck Mobilisa's Chief Executive Officer. Dr. Ludlow?

Nelson Ludlow

Good morning. Welcome to our shareholders and investors. Let me introduce who I have with me on the all today. Our Chairman, Admiral Mike Malone is here and Director, Guy Smith, General Buck Bedard and Mrs. Bonnie Ludlow are also here. And on our management team Bill White, our Chief Financial Officer, and Russ Embry, our Chief Technology Officer, Ms. Heather Flanagan, Director of Marketing and Mr. Robert Streett, Director of Sales joined me as well.

The outline for today’s call is to present the Q4 and 2013 end of year financials. We then discuss our new products, business plans for 2014 and allowing opportunity for shareholders to ask questions.

So let’s talk about the Q4 financials. Revenue for the quarter ending December 31, 2013 is up over double from Q4 the year before, increasing 159% to 1.366 million compared to 528,000 a year ago in the fourth quarter. Adjusted EBITDA in fourth quarter was reduced to a loss of 330,000 compared to a loss of 1.68 million in fourth quarter of 2012 when I was asked to takeover to CEO a year ago.

Net income for the fourth quarter was a loss of about 600,000 or $0.02 loss per fully diluted share compared to a net loss of 1.955 million or $0.07 per share a year ago in the fourth quarter. And we had a busy Q4 in spite of the New Year going into 2014. If you look at our Web site, we posted 31 press releases or copies of new stories that were written about us and our products for this year from Q4 going into this year and some of those highlights let me just mention.

One very noteworthy thing is we installed the product called the IM2620, it’s a proximity PACS reader, which is probably the most advanced ID reader in the world and it was installed in Q4 at one of our nation’s most secured facilities. These ID readers are used in their visitor’s center and it’s being tested to be rolled out in other high-ends national security centers. We also launched Version 2.0 of our mobile barZapp software for sale direct to consumers, which is being sold both by Apple and Google stores via a download to iPhones and Android smartphones.

We launched a new product called State Aware Software it’s an ID scanning product that is now at over 400 locations of a major national wide retail chain. The software facilitates compliance with state requirements and the appropriate use of ID data helping these national wide retailers to comply with regulations. Virtual co-product, easy for them to implement, they don’t have to worry about varying laws between state-to-state.

In January we launched our latest new product called MexiScan ID Check which offers our clients the ability to authenticate Mexican IDs exactly the same as we do with our Canadian and U.S. type relationships. Since October 1st, we received two patents in Q4 2013 and another one in Q1 of 2014 adding three patents for now a total of 80 patents worldwide involving our ID card leading technology.

In mid-Q4, we received a $2 million line of credit from Silicon Valley Bank. And in January 2014, we successfully completed a secondary offering of common stock raising approximately $3.6 million in net proceeds that are being used to fund our continuing research and development initiatives to expand our product line, but particularly to significantly increase our sales and marketing groups.

Through our shareholder meeting we promoted Mr. Robert Streett to Director of Sales and we created a new position of Director of Marketing with Ms. Heather Flanagan. Our sales team has been completely restructured with sales people now focusing on individual markets, some of these markets are military, transportation, commercial, retail, age-related products, hotel, rental car, financial and our newest one, law enforcement. The sales cycle is typically 69 months and with the addition of these new sales guys we expect to see results of this new staff in Q3 and Q4 of 2014.

So, let’s briefly discuss several of our products in the market. So, let’s first talk about military. The military market was the original mainstream of the Mobilisa portion of Intellicheck Mobilisa. In late 2013, the U.S. Army Fort Polk, Louisiana purchased our new generation of ID card readers. These new readers include smart chip reading, as well as combined law enforcement bad guy checks against state and federal NCIC crime databases. NCIC crime database is an FBI database which makes it compliant of a federal law that requires all visitors on military bases to be checked against these databases before gaining access. We’re very excited about this one, because every time we go into a new market I look for a champion, we look for someone that’s innovative, creative and wants to grow into the new market and that’s what Fort Polk is doing. We have several military army ports right now wanting to replicate what army Fort Polk is doing in Louisiana.

We also installed these same advanced mobile readers for ID cards of a major national security agency for their visitor’s center. In 2014, we see these markets for these readers as the U.S. Army, the U.S. Marine Corps and additional national security facilities and we are marketing for the first time ever to potential foreign military sales of our military ID validation systems.

Now let’s talk about a program called TWIC or TWIC which stands for the Transportation Worker Identify Credential and that program is run by the Department of Homeland Security. In Q3 of 2013, TSA approved two of our mobile TWIC card readers which required 140 tests by an independent third-party lab to place our product on a list that they call the Qualified Technology List or QTL. Our product was the very first with any company to be placed on the QTL. That resulted in Q4 purchases by the Port of Portland in Oregon and the Port of Stockton in California purchasing our TWIC TSA certified products and we currently have dozens more seaports asking for closing with sea product demonstrations in Q1.

For those of you who don’t know the TWIC, TWIC is an initiative of TSA Homeland Security and the U.S. Coast Guard to provide tamper-resistant biometric identification cards to port facility workers. U.S. Coast Guard and TSA is giving guidance with approximately 550 different locations will require QTL-approved TWIC readers and approximately 1,500 other locations are on the recommended list for QTL TWIC readers. Intellicheck’s TWIC readers are currently used by dozens seaports on both coast of United States all the way from Texas to New York to Hawaii. And we see in 2014, with continuing sales at seaports and the U.S. Coast Guards seeking TWIC readers in 2015.

Let’s talk about barZapp. barZapp in Q4 we released version 2.0 of our age-related product, our barZapp which runs in a smartphone and it works without a barcode reader. You simply use the camera in the smartphone. The process invalidates the barcode on North American drivers’ licenses. This product has given its recognition in Trade Journals’ national publications, even TV news stories which given excellent demonstration of what our technology can do. Bartenders can easily point their smartphone to the drivers’ license to determine if the ID is fake and if the holder is legal age to buy the product. We’re in an age where most college sophomores now have a fake ID. They’re easy to purchase from China. They’re very high-end. They have reflected coating. They are so good that a typical bartender is not going to be able tell, in fact even TSA agents are often not able to tell.

Now alcohol is probably the largest market to this age-related product, but other age-related products such as cigarettes, cold medicine, spray paint, adult material now even two states legalizing marijuana. ID verification and age verification is more and more required. barZapp product works for all those markets. So when you think of barZapp essentially given as a bar, they give it as a barcode that’s being scanned on an ID and we’re zapping that barcode and being able to identify the validity of the ID and the age.

We are currently attending the Las Vegas night club and bar conference right now. Our marketing push is to gain third-party sales to alcohol industry associations, alcohol training organizations, liquor control and education boards as well as used by responsible national restaurant chains.

Now while I don’t claim that barZapp will yield large revenue, it is an outstanding demonstration of what our products can do. An example is we recently demonstrated this product to the U.S. Coast Guard, who’s reviewing our TWIC product, but by reviewing barZapp on their cell phones, one coast guard person was able to show to their boss and they could see exactly the type of products and technology that our company provides. It’s a great demonstration product. It’s a great PR tool.

Now let’s talk about retail and our current clients. Probably one of our best products is to safely apply for a royalty branded credit card. Our technology is that many of the big name retailers and what they do with the same scanner that scans the boxes of purchase that you make, can scan your ID, and you can safely apply for a credit card. That’s opposed to the old fashioned technology of being handed a form, filling out personal information including yourself with security number including bank information, handing the copy of your ID to a clerk and then they have to reenter it in, they make mistakes, they hold up the line. But probably the biggest thing is we had a client LOB that did a study that found that people were 12 times more likely to complete a credit card application, if you do it electronically.

Now-a-days with ID tests and other problems I can tell you for myself, I won’t fill out a form and put my social on it and let them keep a copy of it ID theft is too high of an issue now-a-days more and more of our clients are going to this and what we’re seeing in our sales team as we went from essentially a couple of people working part-time in the retail to beefing up our sales team where we have dedicated people focusing right on this market, it’s probably going to be one of our best markets.

Now, I think some of our shareholders know that we already have existing retailers, so what do we offer these current clients that’s different? In the last year we’ve changed three things to our current clients. Some of our current clients are Target, Walmart, Louis Vuitton, LLB, Toys R Us, Motel 6 so that’s wage that’s different in our last year with our new offerings. First of all the SaaS, our software-as-a-service, it is probably our most important new focus on emphasizing recurring revenue streams via software-as-a-service. We offer this to our new customers and overtime will be shifting our existing customers to this model as well.

Customers pay a monthly or annual fee for a service they have to use. We’re offering this cloud computing service for $99 per year per point of a checkout lane or per device. We do offer some discounts for volume purchases by large clients. This allows them to get better service as their applications interact directly with our servers to always have the latest version of software. Why does the software change? That’s because states change the drivers’ licenses. Every year states come up with a new format and we always have the latest version of it rather than having to update their servers or sometimes it’s a national spread out in many locations having to send copies of CDs or electronically for the Internet update this version. If they talk with our servers they always have the latest version.

We emphasize software over hardware by doing this approach and that gives us as a Company better margins. This pay as you go method means easier initial entry for our customers, particularly because they purchase a fee as an OpEx expenditure rather than a CapEx expense. Not only is this a win-win for our customers and the Company, shareholders will find it that provides a more predictable revenue model as we increase our recurring revenue base.

We also added a product called State Aware Software. This is the one that we’ve added just recently in Q4. This product is now being tested at 400 locations of a major national retail chain, the State Aware Software it enables a specific search, storage and processing capabilities depending on which U.S. state that are being used in which ID card is presented and what the use of the software was.

For example, scanning an ID card in New Hampshire for law enforcement purposes is allowed or scanning and saving data for use in a mailing list for example in New Hampshire is not allowed according to state law. So this software we take care of that for our customers. With all the various uses of scanning and verifying our ID, it’s important responsible uses to be aware of these different state laws covering the activity and many of our clients are national retailers who want to ensure they’re safely handling personal identity information with respect to each of the individual state laws. Intellicheck’s State Aware Software would guide users who scan driver’s license or ID cards depending on the state which it’s been used in and what the scan data is intended for.

So let’s talk about the third thing that we’re offering to our existing clients. This was something that we just announced in January of this year. Mexican ID, via our MexiScan ID product. It basically adds a Mexican ID module to complement the U.S. and Canadian drivers’ licenses. There are 41 states or jurisdictions in Mexico and they have -- most of them essentially the same 2D barcode reading capability that our U.S. and Canadian drivers’ licenses have.

Now it’s quite of a big market, not only is it a market within Mexico, some cities have shown that more than 11 million sum as high as 20 million Mexican citizens are living in the United States. Our banking customers have been asking for this product to open up new bank accounts for Mexican citizens. Our hotel customers have asked that we expand our capability for their growth of new hotels in Mexico as a travel destination. So this means business for both our U.S. customers in reading more IDs including Mexican IDs and allowing our customers to expand in New Mexico.

So to recap, what do we offer our current client three things. Software-as-a-service, State Aware Software and Mexican ID scanning to join our U.S. and Canadian drivers’ license reading, each of these products has a separate price and they can select on a menu basis and add these new capabilities to their current capability.

Now let’s talk about cost briefly, as CEO of the Company last year and while we added new products and new sales and had several accomplishments. Let me emphasize that we also reduced our overhead and our overall cost. We reduced labor cost for the year annualized at about $1.6 million. This is incremental reduction from Q1 all the way through Q4 throughout the year.

Further to aiding cash flow, the Board of Directors cut their Board fees for 2013 as well. Some of the directors including Bonnie Ludlow and myself as inside directors took no fees on the Board and further in 2014 the Board reduced their standard fee and shifted it mostly to stock options. And again the inside directors wave all of their fees as they have significant ownership in the Company. The Board of Directors believes in this Company and would rather get compensation via stock options than their traditional path of receiving fees. I’d like to thank the Board of Directors for doing that and their support in this direction.

Now let me speak about one last product in market because it’s one of my most favorite and that’s law enforcement. We shifted the Company last year to mobile focus, instead of large barcode scanners now just with a camera on a smartphone or a tablet we can read ID. That is a big shift. It means our customers don’t require special hardware. So we did the same thing for law enforcement. If you look in our Web site you’ll see that we’ve been testing the products for quite some time on these large barcode scanners that law enforcement could use. What does it do? It scans an ID, checks us around a bad guy list does the exact same checks that you would do in a police car without having to go back to the car to factor in the information on your driver’s license.

The problem with that product it was too big. Where would a cop put it on their belt, where do they have use for it? So with help from focused groups and several smart law enforcement people all around from professors to actual cops and sheriffs and sea patrols across the country to other companies, with their help we shifted this product on to a cell phone.

So it’s another one of our cell phone apps, very similar to our bar application that allows law enforcement, bona fide law enforcement personnel to run an FBI check and a state check just by pointing the smartphone to scan the drivers license right on their phone. This is extension of our defense ID product for military basis, but it opens it up to a much broader market to all law enforcement and places it on that smartphone. There’s over 1.1 million law enforcement agents in the United States. We plan to provide this path under our software-as-a-service model for $49 a month per device to provide a link between the FBI’s NCIC and state databases direct to the cop’s cell phone. We plan to offer this both on iPhone and Android, the name of the product is Fugitive Finder and you will see a formal launch of this product within the next month.

We’ve also been working on future products regarding law enforcement and we successfully demonstrated the product on Google Glass, it’s almost essentially like a Robocop futuristic movie scenario where cops can be wearing high-tech glasses and they can hold a driver’s license in front of the glass and be able to access scan and run that check. Now we’ve recently contacted another company that Aegis is partnered with, it helps us do the financial rights which is called Vuzix out of New York it’s an outstanding company that makes a very high-end product and it’s in my opinion better than Google Glass because it has autofocus it has other capabilities and this is the product that we are testing so while we’ve made a very successful first product demonstration we’re actually shifting this into a potential product and we’re using the Vuzix product to do that.

You’ll see that our emphasis is going to be more on mobile applications that continue to be beneficial for the Company and shareholders there is an increasing demand for mobile applications and wearable computers such as Vuzix Glasses is just going to be one of those.

So at this point let’s have Bill White our Chief Financial Officer give you more detail on the finances and then I’ll come back and do a recap and then we’ll take questions. So, Bill?

Bill White

Thank you, 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 fourth quarter ending December 31, 2013 which we released this morning. We anticipate that our Annual Report and Form 10-K will be filed with the SEC this afternoon.

Earnings for our fourth quarter ended December 31, 2013 increased 159% to 1.366 million compared to 528,000 for the previous year. Booked orders for the three months ending December 31, 2013 were approximately 1.28 million compared to 2,017,000 for 2012. Our gross profit in the quarter was 889,000 or 65% as a percentage of revenues. For the first three months ending December 31, 2012 our gross profit was 46,000 or 9%. The percentage change is primarily result of a $670,000 adjustment to 2012 Q4 wireless revenue notwithstanding the adjustment gross profit was approximately 60%.

Operating expenses which consist of selling, general and administrative and research and development expenses decreased 510,000 to 1.49 million for the three months ended December 31, 2013 from 2,002,000 for the three months ending December 31, 2012. Adjusted EBITDA for the quarter ending December 31, 2013 was a negative 330,000 compared to a negative 1.681 million in the same quarter last year. The Company posted a net loss of 600,000 compared to a net loss of 1,955,000 for the fourth quarter ending December 31, 2012. As of December 31, 2013 our backlog was approximately 381,000 compared to 1.236 million for the same period last year.

A summary of our financial results for the 12 months ending December 31, 2013 and 2012 are as follow; revenue for the 12 month period ending December 31, 2013 was 7,299,000 compared to 8,803,000 last year. Adjusted EBITDA was a negative 1.324 million in 2013 compared to 1.114 million in 2012. Net loss was 2,424,000 or $0.09 per diluted share for the year ending December 31, 2013 compared to a net loss of 2,260,000 or $0.08 per share diluted for the same period in 2012. Operating expenses decreased 1.112 million to 6,930,000 in 2013 versus 8,062,000 in 2012. Interest income and expense were negligible for the quarter and we have a net operating loss carry forward of approximately 41.2 million.

I’d now like to focus on the Company’s liquidity and capital resources. As of December 31, 2013 the Company had cash and cash equivalents of 224,000, working capital defined as current assets minus current liabilities of negative 720,000, total assets of 17,902,000 and stockholders’ equity of 15,356,000. During the 12 months ending December 31, 2013 the Company’s net cash of 1,461,000 compared to generating 292,000 for the same period last year. Cash used from operating activities was 1,451,000 compared to cash generated in 2012 of 346,000. We used cash of 81,000 in investing activities in 2013 compared to 184,000 in 2012 and cash provided by financing activities was 71,000 in 2013 compared to 130,000 in 2012.

During 2011 the Company entered into a two year revolving credit facility with Silicon Valley Bank which was renewed in 2013. A maximum borrowing under the facility is 2 million. Borrowings under the facility are subject to certain limitations based on accounts receivable as defined in the agreement and are secured by substantially by all of the Company’s assets. At December 31, 2013, there were no outstanding borrowings. And unused availability under the facility was 594,000.

Recurrently we have affected a universal shelf registration statement on Form S-3 with the Security and Exchange Commission under the shelf registration statement the Company may offer to sell, from time-to-time in one or future offerings, common stock, preferred stock, warrants and units. The aggregate initial operating price of all securities sold by the Company will not exceed 25 million. And pursuant to SEC rules, the Company may only sell up to one-third of the market cap held by non-affiliate stockholders in any 12-month period.

At January 14, 2014, the Company announced the closing of another written secondary public offering of 8,947,000 shares of its common stock, offered to the public at $0.45 per share. That closes to approximately 3,644,000.

I'll now turn it back over to Nelson.

Nelson Ludlow

Thank you, Bill. So let’s summarize. In Q3 2013 we had a positive EBITDA of about 300,000 and technically we were profitable. In Q4, negative EBITDA also of about 300,000. I call this running the Company at roughly breakeven. We’re shifting our customer base to Software-as-a-Service and with each new SaaS or cloud-based client we can raise the floor of this recurring revenue. Since that time we’ve raised funds, we’ve used it to grow and hire new sales and marketing -- and push some in the marketing side of our Company, we have new products coming out and particularly I am excited about Fugitive Soft Finder in our law enforcement market.

Overall I believe we are headed in the right direction. I am very optimistic about the future of our Company. As the Company rule we don’t make forecasts. First, our approach is to under promise and over delivery. Secondly, if we shift from enterprise of one-time purchase to Software-as-a-Service, revenue would be lumpy and it’s going to be difficult to accurately forecast. So at this point let’s take questions. We’ll be glad to do our best to answer any questions that people may have. Please clearly state your name, what organization you are with, and who you are asking the question to.

Please also limit the questions to one or two questions, and if you have a follow-up question, please rejoin the queue so that others may have an opportunity to ask questions. So at this time we’d be glad to answer your questions and I’ll hand it to the operator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Barry Beckman with Alpine. Please proceed with your question.

Barry Beckman - Alpine

Nelson, how are you doing, we met during the road show and you are doing everything you said you were going to do and I congratulate you for it. My question goes to what the cash burn rate do you think will be in the upcoming quarters as you ramp-up yourself in and everything else? And how long do you think that current offering will last for the company? And would you do a strategic deal with someone, I think a credit card processing company or something like that to do a strategic deal, to get perfect match or something like this?

Nelson Ludlow

Hi, Barry. Yes, I remember and thank you for the question and thank you for visiting us on the road show. The cash burn rate is quite small. We successfully had the Company running close to breakeven, even with the addition of new sales people. You may see a slight cash burn to Q1 and Q2. We expect the shift out of that in Q3 into Q4. Now it changed slightly, but we believe that the punch in that we will be able to carry it forward and not need to do an additional raise based upon the current plan.

Now we may -- if why would we do an additional raise, well the reason is that that could happen with the purchasing other companies, other directions in addition. But right now the rate that we have will continue to handle the sales and marketing growth that we did and so essentially it’s exactly as we said on the road show, and in that direction. The strategic deals, there are several of them that makes sense. Credit processing companies, you’re seeing more and more companies now doing mobile payment on the cell phone. Mobile IDs are going to be one of the things of the future.

What I like, is I am always looking for a killer app that touches everybody with nearly 280 million drivers’ licenses in North America, almost every man, woman, teenager has one in their wallet and purse and we get to right the software around those applications, whether you are getting into a rental car, or whether you are checking into a hotel, whether you’re age-related product at a bar, whether you are getting on an airplane from TSA or now our newest one law enforcement, those are all opportunities wherever you show an ID there is an opportunity for our applications.

Patterning with big companies where there are insurance companies, grocery store chains, rental car companies and having them where they step out because they know the markets better than we do, but we know the technology and the ID cards better than they do, it’s an excellent partnership and those are the ones that we’re seeking out.

Operator

Thank you. Our next question comes from the line of Amy Norflus with Neuberger Berman. Please proceed with your question.

Amy Norflus - Neuberger Berman

Hi Nelson. Good job in turning on the Company. Can you give us a little bit more insight of what you think some of these new things that you are going on will turn it revenue and how do we quantify them. So, the TWIC you gave us specifically number of ports, what does it mean for revenue, when should it hit revenue some of the other options that you are talking about, like more…?

Nelson Ludlow

Okay, yes absolutely…

Amy Norflus - Neuberger Berman

And how much is mix during recurring revenue?

Nelson Ludlow

I’m sorry. You faded out in the last question again.

Amy Norflus - Neuberger Berman

And what’s the recurring revenue do we start to see?

Nelson Ludlow

Okay. So, let’s talk about the TWIC one that you mentioned and then I’ll talk a couple of other quick markets there to highlight in. The TWIC market we believe, we’ve already made sales in Q4 because of the new products. There are other companies that have recently added to the TSA list. IMD competition is good I mean I don’t view it as bad I view it as a big sign because it demonstrates other companies also believe that the TWIC market has value. We’ve competed against several ports recently and we’ve won, and we believe that’s we have not only a very competitively priced product and the best product and we do one thing that the other TWIC leaders can’t do and we call it TWIC plus and it’s not all that we read that specialized Homeland Security Card we also read drivers’ licenses. And that’s a big deal.

If you have a port and somebody happens to have one of these TWIC cards and I’m betting that several people on this phone call who don’t know what a TWIC card is and there are going to be people and visitors and truck drivers and people that go to that seaport and say I don’t know what TWIC cards are either. And so -- but they do have driver’s license and so you want to be able to read both, and we’re the guys that do that, so I’m very glad to go head-to-head with that. I did mention the specific number there is 550 locations Coast Guard as they change guidance later in 2014 or 2015. Coast Guard has notified us that they intend to buy equipment themselves to enforce this on their ships and through the ports and they intend to purchase in 2015. We believe that we will typically see most of our sales in that in Q3 that’s because the government’s fiscal year ends 30 September.

Let’s talk military basis, again there is some competition in that space. There is a company called Eid Passport, they primarily do the navy. We have somewhat different products, but if you Google them and read about it, there is a recent article and some controversy the navy is using their product but was under a lot of controversy. In our case, the army bases are looking at our product, we were recently at a Marine Corp base and we think the Marine Corp, it picked up. There are 16 Marine Corp bases across the United States and what they call it Continental United States or CONUS and there is approximately 70 some army ports in locations across the Continental United States. Each of those purchases fall into the category of between 0.25 million and a 0.5 million of equipment, the recurring revenue for both TWIC and military is on the lower-end approximately 20% of the purchase falls into a reoccurring type of format.

Our retailers, there is 332 Tier 1 retailers. I mean they do a 1 billion a year or more in revenue. We’re at less than 20 of them. We have some of the biggest, we have Walmart. We have Carter. We have many others that I just mentioned. We also have Verizon and AT&T and if you go into one of those ports and you are trying to buy a new iPhone just scan with a tablet your driver’s license, and they do that just to get you through the line quicker.

Now, that’s a product that we’ve shifted last year into a $99 per point or per location. That’s re-occurring revenue each and every year. It provides a much better service model that as we’ve told you before, that we’ve signed up a new retailer and they must prefer the Software-as-a-Service as they grow out their source. It was very difficult in the old days to make a sale because it was an all or nothing and they would often make us do lots of test roll out of 50 or 100 stores all at our cost until they finally signed up for this. We don’t do that anymore. Our product works and we -- they buy it right after that, they want to try it in 50 stores, times 20 points to sale then that it comes up to a 1,000, then they have to buy a 1,000 units and that’s what they do. So, a much better re-occurring $99 per year on that and then the law enforcement thing that’s exactly how we’re selling it, $49 per month per device, they can scan as many, give as many tickets they want, scan as many IDs as they need to do, that is $49 a month just like an add-on cell phone service charge and so that’s how we’re doing it.

Operator

Thank you. Our next question comes from the line of Chien-Ming Wang with IGA. Please proceed with your question.

Chien-Ming Wang - IGA

I have a few questions for Nelson. So first one is regarding the -- so you mentioned of course marijuana market right, so this is the key growth for a medical marijuana or which is recreational marijuana on it, how the product those pays from minors? This is question. What are your plans? So this is my question. The second question is, if you heard some news about Malaysia missing airplane actually four people used fake IDs, the passport IDs and ink would that bring -- that’s a big issue for all people right. So what is your plan for the international flight? Yes, that’s the second question. Thank you.

Nelson Ludlow

Chien yes, thank you for your question. The first question I believe had to do with medical marijuana. There are several states that allow medical use of marijuana. I think it’s possibly a dozen, to 12 to 15. There are two states now Colorado and Washington States that actually not just medical use, but for recreational use for marijuana. It’s very similar to the cigarette market. Technically cigarettes are often at age 18 and you have to show identification. The City of New York talks about requiring age 21 and having to demonstrate if they validated that age requirement.

The cool thing about the barZapp application is it already works right out of the box to do that. You can set up multiple age differences. There was even some discussions in the FDA of a morning-after pill and whether the age was 15 or 16 and there were lots of different discussions. Congress can change it to whatever age they need, the states can change it around, our software is smart, it knows what state, it knows what ID and it knows what user is using the port. And it allows them set different age triggers to do this.

It also records the necessary information that make some compliance with the states, 46 of the 50 states have certain requirements of recording drivers’ license information and buy cold medication and that’s because people use it to make meth. And so each time may add more and more of these laws and new things, we have a product that already do that and which ID card that they’re going to show that validates age, there is really only one. And that’s the drivers’ license or identify card. We’re the ones that have patents on that. We’re the ones that have a product on that. And it’s already for sale in our business to consumer market right through Google and right through Apple.

So our barZapp product is doing that. We’ve already contacted both states of Colorado and the States of Washington to talk to their marijuanas are it is what they’re call it, they’re still sorting out how they’re going to require adding states statute how they require to read IDs. We’re encouraging that the technology with us right now to verify that year of legal age to buy those products. So great question, I think it’s going to be a growing market for more and more age-related products and the ones that we don’t even know about in the next few years.

Regarding the Malaysian airline incident in passports, I think most our listeners know that there were two people on that plane that had stolen passports, two Iranians who have stolen passports. But they may be surprised to learn as it’s not that unusual. There are people travelling around on fake documents it is a problem for TSA. TSA has discussed several times about creating an initiative to scan IDs and to match them to the boarding pass. We have a patent that was issued in the last couple of years where the patent examiner use the very example of scanning a travel document which is a boarding pass to and a travel identify document which is the drivers’ license. That’s our patent. We look forward to TSA implementing that technology.

And if you search in our Web site, you will see that Senator Chuck Schumer did a press conference at our New York facility a couple of years ago, a few years ago after the Time Square bomber tried to runaway and got out with his Connecticut drivers licenses and got an airplane out of JFK and was flying away. And he bought a ticket with cash last minute and although he was on the no-fly list. They didn’t do that. What our listeners need to understand, I want to emphasize to them is that Homeland Security is prone to different layers of securities what’s on the Web site and one of those layer of security is identify checking. That’s where you go through the line, you pull out your driver’s license or passport and they shine a little light on it. But if you think about it, it’s just a little black light. What are they looking for? They’re looking for a reflective coating which is not all states IDs, and essentially the training is if you see reflective coating, good and if you don’t see a reflective coating also good, it’s not a test.

The right way to do this is to scan IDs and then use the information from that check it to the boarding pass and better yes check it through the no-fly list. This is technology that can be used right now in December on our Web site. A television station took our barZapp application and said why isn’t Homeland Security using this to scan drivers’ licenses instead of using that little light. I recommend our listeners go to our Web site take a quick look it’s an outstanding two, three minute video that shows the product and use, if you want to demonstrate it to your friends what we do or see how it works or if see how Homeland Security could see it. This ABC News station that did the story did an outstanding job and you will see it demonstrates clearly what could be done.

Let me just emphasize one thing, we do read passports, passports is an open standard that many companies read and we do that as well. So coupled with our passport readers and TWIC card readers into open standard we also read drivers’ licenses, taking very tremendously Homeland Security in that ABC News story admits that there is nearly 2,000 travel documents that are acceptable for someone to travel. How could a person possibly do it and we need computers to help.

Operator

Thank you. Our next question comes from the line of Robert Edwin, a private investor. Please proceed with your question.

Unidentified Analyst

Yes, good afternoon gentlemen. I am really at a loss to figure out why our sales aren’t five to six times where they are now. And yesterday obviously there was a huge increase in the volume of our stock. Can you tell us how many shares do insiders continue to own? Have insiders bought any stock recently? And what’s it going to take to get the federal government to wake up to the realities of the world and how our products are going help them with these problems? Thank you.

Nelson Ludlow

Yes, thank you Edwin for the call, I appreciate that. Okay, so let me take the questions. First of all on insider, till now we have not, I don’t believe anyone has sold any shares. We would obviously issue a Form 4 and we’re compliant with that. I don’t believe in 2013 that any director officer sold any shares. We’re believers in this Company. I think you also heard that the Board of Directors have shifted their compensation towards stock options and stock, again because they are believers in this Company.

The last question I think the real key one, what is it going to take to get the federal government to wake up to this? Well the ABC News asked us to comment on that story which was rather critical of TSA and we’ll seeing it is that the viewers to use to comment on that. And the reason -- and they said why because we’re hopeful that TSA would use our technology. We provide the technology we think that we have a very good solution. Unfortunately there will be more incidents whether they are terrorists related or unknown related such as the Malaysian one that will cause people to keep looking at that. The one thing I think you can count on is that security is an issue that’s not going away.

I do want to caution our shareholders that while TSA and the government is one obvious use for our technology, it’s just one of them and we certainly don’t put all our eggs into that basket, in fact our commercial side is the fastest growing one. It turns out getting you through the rental car line fastest, being able to get your AT&T cell phone better, being able to apply for a credit card so that a retailer can get their customer to spend four times more the bank is happy because they’re getting the credit card, but most of all the customer is willing to sign up for that credit card. Why, because it’s safe.

They don’t want to pull up their name on a piece of paper and do -- that technology is gone. Those days of using a pen and paper and filling out a form and handing it to a clerk to make Xerox copies of it and give it to someone to use through various reasons hopefully that goes away, and I think it’s rapidly going away and people are shifting to doing it safe, electrically scan the ID and let you enter in your own social on signature tax or fax, that you answer your questions. That’s the safer preferred way. So we’re emphasizing frankly our commercial markets. The retail, age-related products, hotel, our cell phone company, those are our fastest growing markets and we’ve been putting most of our energy in that. While we do that we still have an offering for the federal government if and when they do that ID card scanning. Thanks Edwin.

Operator

Thank you. Our next question is a follow-up question from the line of Barry Beckman with Alpine. Please proceed with your question.

Barry Beckman - Alpine

Hi Nelson and it’s a follow-up for the legal development question and when you look at the recurring revenue nature and what you’re doing there. Is there any upfront cost that the retailer or authority needs to make, it’s like hardware, I guess there is something that needs to be purchased to read your card or whatever or the license. In addition pay $99 or whatever they pay so who pays for the equipment to read that this license and if it’s yourself or do you provide it for free what’s your sort of payback period and your cost of providing the device, the hardware device to the company?

Nelson Ludlow

Yes, thank you Barry that’s an excellent question, so to read the barcode you need some equipment to scan that barcode, it turns out it’s very nice for our retailers because most of them already have a point of sale barcode scanner right at the point of sale. So the same scanner that’s scanning the boxes usually can scan the driver’s license. Now the one caveat on that is sometimes people have seen what’s called a one dimensional barcode which is just a bunch of single lines which is like a UPC price code what you will see is most of the barcode scanners nowadays are an imager that actually can do what’s called the two dimensional barcode.

For our shareholders’ if you take out your driver’s license you flip it over there you see a larger barcode that has a lot of dots in it that barcode is called the PDF417 it’s the standard 2D barcode most imagers do that so usually when we walk into a retailer the amount of new equipment they have to buy is zero. On a rare occasion AT&T for example when they rolled out scanners in the stores to be able to do it this was essentially a new scanner while they had one at a point of sale they want to put it on to a tablet they want people to walk around the store and be mobile and be able to scan your ID and that was a new equipment purchase in most cases we do offer hardware from some of our very good partners of Internet, Motorola , DAP, Weber and Honeywell these guys make barcode scanner equipment and we’re partnered with these guys and we can offer that equipment to our clients.

What you’re going to see though is we’re probably doing less and less of that. They already have barcode scanning equipment also with the invention of our new software this year being able to do it to your camera you don’t need a barcode scanner anymore. Now with a smartphone now with the camera inside a tablet you could simply point the camera got it. So one of our clients already had a set of iTabs for example that they had purchased and they wanted to use it to greet customers if anybody has been to an Apple store they actually greet you at the front and they ask you what your name is and then they help you go through the store. That’s a shift the time it makes for the shopping experience and into a positive one and having a greeter rather than just say hey hello how are you doing actually have a tablet to scan your ID and do something helpful with it to get you to the right location or do so something apply for a credit card return merchandise whatever it is.

So it’s been a quite a change so bottom-line not a lot of hardware is needed. We’re a software Company they don’t really need to purchase much, sometimes they’ll have to make some slight software modifications to help implement it into their process when they do our software team usually gets paid a non-recurring engineering fee or an MRE it’s usually a small amount and that’s why we have very high gross margins typically in the high 60s and 70% category and as we shift out of hardware more into software that number should grow.

Operator

Thank you. Our next question comes from the line of Joe Brunini, a private investor. Please proceed with your question.

Unidentified Analyst

Hello Nelson congratulations on a good quarter compared to prior year.

Nelson Ludlow

Thank you, Joe.

Unidentified Analyst

One thing I want to commend the Board is taking the compensation stock as the stockholders one of the biggest things we look for in a Company and I think that shows a lot of confidence and I follow it closely and none of your current manager hadn’t sold and they’ve been purchasing when they were allowed to and I know you have a very stringent restricted period out there. So that’s a big plus from a stockholders’ perspective.

The second thing your patent on your threat level it’s just and think of you a little inside I’ll make it real quick but I recently travelled internationally and used the barZapp at three of the ports within United States prior to travelling overseas and it even once at a level the supervisor that they were so impressed on the immediate access that they had. But I do believe even though you have many, many avenues for revenue that this is a tremendous opportunity. And how does that threat level patent integrate within that scenario of analyzing the driver’s license and verifying it?

Nelson Ludlow

Yes thank you for the comment Joe. Yes, we did have patent issue recently about threat level and now that the fact it was one in my name the way the patent works is there is different checks and tests that we do and it adapts to the threat level. There is lot of different aspects to it for example we look at how rare names are we look at the individual information on an ID card. If you take a John Smith on an ID card and you match it to a John Smith on a bad guy list you’re going to get a lot of matches. I think we’ve all seen in the old days where somehow ladies going through the TSA check line and they’re just ripping their luggage apart and they are pulling her out of the wheelchair and they’re doing crazy stuff it’s just as embarrassing and long and frankly we could do a better job. And that’s because her name just happens to be common enough name to someone else on the terrorist list or the watch list or no-fly list.

With an ID card, and you scan that, you have a whole bunch of information. You have date of birth, middle name, address, height, weight. You have a whole bunch of comparative information that could be matched to other information on local or in a law enforcement product to other lists. And when you do that you want to match it intelligently. You don’t want to say, hey look, it’s John Smith, must be the exact John Smith, but it is not.

So what we are trying to do is accurately identify and we do more detailed tests that adapt based on threat levels. If it is a very high threat level, and there is a lot of things going on, then it’s going to have match more easily and say I don’t know how cop, TSA agent law enforcement person, you need to take a better look and manually do this. If it is a lower threat level, it adapts and it actually does it in a more detailed way and lets the computer do more of the matching. So it adapts to the actual situation.

Let’s put -- and your last comment about the -- you showed at the several quarters and they were excited. This company in the last year, we shifted the business model. We’ve created 18 products. The technology is very solid. We have 18 different patents around it. The Company -- in the sense I used to be college professor in computer science, only give a grade, I’d say we will get barcodes doing a; on technology, in patent protection creating new products that are very, very good. Where our company has been weak in the past we didn’t even have a marketing department. We had an extremely small sales department. What often happens is people don’t even know that this technology exists. They haven’t been contacted. They are unaware of it. They don’t know the return on investment and so what you are going to see in our company, is that we have added marketing, we’re about to launch a new Web site. We are making it easier for customers to buy. We’re making it cleaner on why they should buy this product, and how they get a return on investment. How to sell it to their boss to say yes to buy? Why should TSA do this? So this is a very cool technology.

The time has come, it makes sense and you’ve seen -- since we have done this raise, we more than doubled our sales team and we’re working on tripling it. So that’s the direction that’s going to be. It’s going to take a couple of quarters to increase that to the top and bottom-line. But it is going in the right direction. So I want to thank the employees for working so hard, that they’ve been doing. I want to thank the Board of Directors for their confidence and taking their compensation in more deferred ways rather than in cash and I want to thank the shareholders for their recent investment in this and sticking with and securing our Company. This is a very cool technology that not only makes sense, but literally saves lives. And I appreciate everyone’s good questions today in the conference call. Thank you very much.

Operator

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

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