Greetings and welcome to Intellicheck's Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Gar Jackson, Investor relations for Intellicheck. Thank you. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck second quarter 2020 earnings call. Before we get started, 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 are 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 headings of Safe Harbor Statement and Risk Factors listed from time-to-time in the company's filings with the Securities and Exchange Commission. Statements made on today's call are as of today, August 11th, 2020. Management will use the financial term adjusted EBITDA in today's call. Please refer to the company's press release issued this afternoon for further definition, reconciliation and context for the use of this term. We will begin today's call with Bryan Lewis, Intellicheck's Chief Executive Officer; and then Bill White, Intellicheck's Chief Financial Officer, who will discuss the Q2 financial results. Following their prepared remarks, we will take questions from our analysts and institutional investors. Today's call will be limited to one hour. I will now turn the call over to Bryan.

Thanks, Gar. Hello everyone and thank you for joining us for the Q2 2020 earnings call. I'll begin this call by recognizing and thanking my team. While we've always been set up to work remote, the team showed me just how well they could do it. As you'll see from some of the wins and implementations over the quarter, the team demonstrated that they don't need an office to perform at 110%. So, a big thank you to my team. Let's begin with a look at some of the numbers. Obviously, COVID had a major impact on retail foot traffic and our brick-and-mortar retailers. During the Q1 earnings call, we indicated that we anticipated achieving 60% of Q1 SaaS revenue in Q2. In fact, we achieved 75% of that revenue number, with $1.67 million in SaaS revenue in the quarter. While down from Q1 due to the pandemic, it was still a 49% increase year-over-year. Given how much of the country was shut down and for how long, I am pleased with what we accomplished. An interesting development of note is that the shutdown of physical locations made our customers realize how exposed they were to fraud in the digital channels. This move to digital has sped up the adoption of our person-not-present authentication tools, which I will speak about shortly. First, let's look at wins and implementations during the quarter. Historically, I've reviewed each of our top clients on these calls. Because of the increasing number of clients, we are currently reviewing each one has become unwieldy, so going forward I will speak to some of the highlights for the quarter. Financial services company number two is about to bring live four new retailers. In July we brought live a 1,400 locations community retailer selling everything from furniture to food. Turning to the pipeline, final testing and pilot stories is underway for one of the leading suppliers of beauty products with over 3,700 locations. Deployment is expected to begin this month with full rollout by the end of September. Next is a women's clothing and intimate apparel company that supplied branded credit cards which expect to roll out to the remaining 350 stores mid-month. Finally, an over 800 location company with three divisions selling kitchen equipment and furniture is also testing in pilot stores and we expect deployment to begin by the end of Q3. Financial services company number three is still on track to roll out authentication to their 2,000 plus location home improvement retailer in September. We respond to our clients' requests for more biometrics and have started to be more aggressive with facial recognition technology. Financial services company number six has decided to fully authenticate people in a person-not-present situation by ensuring that not only is the government identification document authentic, but that the owner is still in control of it, by supplementing the authentication process with facial recognition. Now, when an applicant gets a text from Intellicheck, it will walk them through three steps. First is to scan the barcode of the license for authentication. Second, is to take a photo of the front of the license. And the third is to take a selfie that can check for liveliness and deep fakes. We notify the client whether the license is authentic, fake or expired. We also deliver a score and a facial match to the picture on the license, coupled with the liveliness score, so they know that the selfie was real. The contract was signed in June and development is underway with the intended target to begin rollout. This is the best-in-breed technology in the digital fraud prevention world and reflects how we as a company are rapidly evolving and underscoring our position as an industry-leading technology solutions company by offering facial recognition. Financial services company number seven, due to delays with the Canadian telecom approval, will now be rolling out Intellicheck to their Canadian call centers this quarter. You remember everything about this client as person-not-present, so they have also decided to add a facial recognition offering as part of their process. They are live with a few call center employees now while they develop training materials for their staff, and we expect widespread rollout by the end of the quarter. Financial services company number nine, the Midwest Bank with over 1,200 locations confirmed that they will fully deploy to all of their branches by September 23rd. Financial services company number 11, which we announced is a new client in a press release in June, has begun their roll out and has told us they expect to be fully deployed this month. I am proud to say that we have signed another interesting new client. Financial services company number 12 is a private investment firm that has several portfolio companies in consumer and commercial finance. They intend to install Intellicheck authentication solutions in three of these portfolio companies. They went live with the first use case being motorcycle financing last month, and the other two are in development. As I said at the beginning of the call, given that the fraud normally happening in-store has moved to the online channels, we are seeing significant interest in the ways we can authenticate from the basic government ID authentication all the way up to our facial recognition offering. We are in discussions with all of our bank clients and several of our retailers to pilot the full stream of government ID and facial technology solutions, and many of our prospects are asking for this as well. What differentiates us from the growing field of competitors in facial recognition is the continuing value of our technology solutions. Many of our competitors also talk about facial recognition; but our clients are realizing facial recognition only has value when it includes the critical first step of determining that the government ID is real. Without knowing with near certainty that it is authentic, facial recognition is useless. We provide that near certainty. Going forward, our implementation pipeline remains robust. Year-to-date, we've completed 17 implementations, including 11 in Q2. We have 32 implementations of various sizes in various stages of completion, as well as 16 waiting to be scheduled. We also rebranded this quarter. I can't tell you how many times I received inquiries from those going to our website and ask me, 'What do you do?' It was clear to me that the messaging surrounding authentication was not coming across. I believe it now does. We make authentication simple. If you haven't gone to our website, please take a look. I look forward to hearing what you think. As we all know, COVID has certainly brought uncertainty to the market. I believe we added some certainty to our future through the capital raise that we did in June. We positioned the company to be nimble and responsive to the market in a way that the company has not been in the past. None of us can predict what will happen with COVID in the future, but we can weather it with our strengthened balance sheet. What I can report is that we are seeing upward trends in scans as states open. All of our postgame clients are now above or near their minimums. As per scan stats, Q2 average weekly scans averaged 48% of the average weekly scans in Q1. We can also see how quickly things can rebound. The week of June 14, when things were generally open in some of the densely populated states was 111% of the Q1 average. As things started to really close, the numbers dropped 25% but for the last eight weeks, we've averaged 100% of the Q1 weekly average. This demonstrates how quickly our business returns when states open. At the same time, it also shows the impacts of closures, as states reclosed in some areas. While we can't predict what will happen with COVID in the fall, I can say that the disease has not stopped us from doing business and implementing customers. This is a testament to both the quality of our product and our team. So in closing, I return to the way we began this call with my thanks to the hard-working team of professionals who have distinguished themselves, even under adverse conditions, where many lost loved ones or even got sick themselves. You persevered and your commitment helped our clients stop many from becoming victims of identity theft during the terrible pandemic. It is an achievement we can all be proud of. With that, I will turn it over to Bill White.

Thank you, Bryan, and 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 ended June 30, 2020. Let's begin with our second quarter results. Revenue for the second quarter ended June 30, 2020 grew 18% to $1.842 million versus $1.558 million for the same period last year. Our SaaS revenue was approximately $1.671 million for Q2 2020, a 49% increase from $1.121 million in Q2 2019. Gross profit as a percentage of revenue was 88.6% for the quarter ended June 30, 2020 compared to 85.9% for the quarter ended June 30, 2019. Operating expenses, which consist of selling, general, and administrative and research and development expenses increased 6% or $143,000 to $2.402 million for the quarter ended June 30, 2020 versus $2.259 million for the same period in 2019. The increase was primarily driven by an increase in personnel costs. The company posted a net loss of $760,000 for the three months ended June 30, 2020, compared to a net loss of $874,000 for the quarter ended June 30, 2019. The net loss per diluted share was $0.05 versus a net loss per diluted share of $0.06 in the prior year. Adjusted EBITDA for the quarter ended June 30, 2020 was negative $619,000 compared to negative $785,000 in the quarter ended June 30, 2019. Interest and other income were negligible for the quarters ended June 30, 2020 and 2019. Now, I'd like to focus on the company's liquidity and capital resources. As of June 30, 2020, the company had net cash of $14.6 million; working capital, defined as current assets minus current liabilities, of $13.2 million; total assets of $25.4 million; and stockholders' equity of $22.1 million. During the six months ended June 30, 2020, the company generated net cash of $11.2 million compared to a net cash used of $1.3 million during the six months ended June 30, 2019. On June 23, 2020, the company completed a public offering of 1,769,230 shares of its common stock offered to the public at $6.50 per share, resulting in net proceeds to the company of approximately $10.6 million after deducting underwriters' discounts, commissions, and operating costs paid by the company. Intellicheck intends to use the net proceeds from the offering for general corporate purposes and working capital. Net cash used in operating activities was $262,000 for the six-month period ended June 30, 2020, compared to $1.6 million for the same period in 2019. Net cash used in investing activities was $110,000 for the first six months of 2020 compared to a net cash provided by investing activities of $14,000 for the six-month period ended June 30, 2019. We generated cash of $11.6 million from financing activities for the first six months ending June 30, 2020 compared to $268,000 for the same period in 2019. The company has a $2 million revolving credit facility with Citibank that is secured by collateral accounts. There are no amounts outstanding under the facility and we currently anticipate that our available cash as well as expected cash from operations will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. As of December 31, 2019, the company had net operating loss carryforwards of approximately $17 million. I'll now turn the call back over to the operator to take your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, good afternoon, guys. Congratulations on the progress during the pandemic. First question, with facial recognition, do we think of that as kind of an add-on product? Do you upcharge for that or charge your fee? How does the pricing work there?

Yes, Mike, thank you for the compliment. First, it is an add-on specifically for person-not-present authentication. As mentioned in the press release we shared a couple of weeks ago, we have partnered with a company called Ipsidy for this. We upsell that product when clients want to ensure not only that the card is real, but also that I am the one holding it. The way to achieve that is by ensuring my face matches what’s imprinted on the license. So, it is definitely an upsell new product for existing clients.

Is that upsell about, I don't know, maybe 10% or 20% of their base fee, or how should we consider the level?

I would say that that's one of the hard parts right now to figure out because most of our clients at this point in time, aren’t sure how often they're going to be incorporating the facial recognition into it. So I think it's certainly something that everybody is going to be learning on. I think they're going to want to look and find out with this added friction, what am I losing, because that's always the tradeoff. Is it costing me more business than I would lose to the little bit more fraud I get because it’s somebody who's with a real ID that they stole it from a relative or whatever it is? How do we make sure? So, I think they're going to be playing a bit of a learning game throughout the rest of the year on that.

Got it. Regarding financial services, customer number two, I believe you mentioned that four new retailers are on track. One was added in July with 1,400 stores, and there’s a leading beauty supply chain with 3,700 locations, along with a women’s clothing store. Are they all expected to arrive in the near term?

Yes, so those are all piloting or completing rollouts that have been paused or those types of things. So, either brand new or a completion of something that got paused while they are doing some other work.

Got it. Okay. And then just lastly, what activities sort of online would you call out? Is your pipeline shifting to online support or how do we understand the robustness of that?

What I can definitely say is that I don't think many of our clients were considering fraud in the online channel until it became their only access option. They realized they had significant gaps and started discussing with us how to address those gaps. We know that a leading financial services company has been a strong advocate for enabling online authentication through their retailers' websites. As more transactions shifted to call centers or entirely online, they began exploring how to implement these solutions and get them operational. This requires development work on their part, especially if they want to integrate rather than just use our readily available website. In discussions with the sales team, it's clear that all clients are focusing on this now, and they're determining what our role will be. They're considering various aspects, like whether it’s just a license, or a combination of the front and back of the license, or more comprehensive solutions. I've noticed some newer clients facing a learning curve as they figure out implementation. My perspective is that this will likely accelerate the adoption of these solutions, but it will be interesting to see how receptive they are, especially as they weigh potential friction from extra steps against the risk of card abandonment.

Got it. Okay. Hey, thanks a lot guys.

Thanks, Mike.

Our next question comes from the line of Scott Buck with B. Riley FBR. Please proceed with your question.

Hey, good afternoon, guys. I was curious, what's the percentage of swipes or scans that came from brick-and-mortar in the second quarter versus call it year-end 2019? And what does that look like today?

So let me see if I get the question right? What percentage of the scans came from brick-and-mortar in Q2 versus the end of last year? Did I get that right, it’s part one?

Yes. Just trying to think during pandemic, post-pandemic versus pre-pandemic.

What I'd say is, certainly look at the vast majority of scans coming from brick-and-mortar. You can see that 49% is low in terms of scans across both areas. One factor that helped us was that, even in a per-scan model, there are minimums that must be paid. Many of our clients were considered essential services, and their stores remained open. However, scan volume is definitely down. Online scans are a small but growing portion of their activities. In a typical year, the breakdown is that 21% of scans occur in Q1, 22% in Q2 and Q3, and 33% in Q4. This shows a significant drop in foot traffic that has not yet been compensated for, partly due to the low adoption across all clients of person-not-present authentication. I believe this will grow in the future.

Okay. Great. That's helpful. Second one, you made some progress with some new, I guess, bank customers this quarter. I'm curious, how you're sourcing those customers? And whether that's a vertical that you're actively pursuing or these folks are approaching you?

I'd say it's 50-50, right? They're also beginning to talk to each other, which makes the inbound calls from the sales team certainly much warmer than they used to be. We don't do anywhere near the advertising that some of our competitors do, but we certainly get a lot more business because I think of our advocacy, and our clients all talk to each other. So that makes warmer calls and cold calls. And certainly, some of our wins since I've been here and we started developing our names for ourselves have been inbound calls to us, because they spoke to either a retail competitor or a banking competitor. Because as I said in the past, they might compete in terms of wanting market share, but they all cooperate when it comes to fighting fraud because they know that it impacts each one of them. And the more they help each other, the more they can stop it. So again, probably the wins in the quarter, I’d say, 50-50.

Great. I appreciate that, guys. Thanks a lot.

Thanks.

Thanks, Scott.

Our next question comes from Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question.

Yes, I'm sorry, mute button. All right. The press release several weeks ago about Ipsidy was obviously full of interesting potential, but I don't know much more than I did before reading the press release as to just how it integrates and what each party brings to the joint venture, if it is in fact, set up as a joint venture. So could you just go into any texture that would help us?

Yeah, sure. So Ipsidy has done the development of the mathematics behind facial recognition. Basically, it's a matter of measuring vectors on your face and then comparing those to the vectors of a photo to see if there is a match there. The two things are it is in fact me in that photo. We started working with Ipsidy a while back, and one of the things I liked about them is they brought out faster than most the ability to do this both in a web application as well as in a mobile app. Many of our clients wanted it starting off with a web app because they figured that most people probably think about signing up for a bank account online. I'm going to do that through the web. And then after my client, I'll download the app. So that made a lot of sense to us. So we started talking. Our development teams work very well together hand-in-hand and in a way, it is sort of a joint venture. We figured out pricing where there's a markup that we get, that makes us happy, and they get their share, that they're happy. The software exceptionally resides in our cloud, so it's seamless to the client. But the client wouldn't know that it's a single-step process. It's just a matter of then what our clients want to do, which steps in the process that they want to do – the one, two, and three, the back, the back of the front or the back of the front and the face.

Okay. And is this transformational? Or could it become transformational for the company or simply a highly attractive opportunity among many?

I think that as the world moves to more person-not-present, this is going to be an absolute requirement that you can match my face to whatever it is, whatever that government ID is that you're looking to use as an authentication piece. So I think a lot of people say they have it. There are certainly a lot of companies that can do facial recognition. I think it just continues to add to sort of what we do in a manner that gets us deeper and deeper into our clients. As I said in the prepared remarks that facial recognition does not matter if you can't tell if the license or the government ID is fake to begin with. A lot of fakes get passed, doing things not through what we know about the barcode. So you can't tell with near certainty that the license is real, then it doesn't matter at all. Facial recognition is completely useless because I've just matched a fraudster to a fake. So it's not helpful. It's certainly something that every one of the clients is talking about. And I think that there's a lot of bad press about facial recognition you're hearing it. But this is a very different thing. Like this isn't just cameras on all the street corners mapping where Bryan Lewis is walking to. This is Bryan Lewis has opted in to say that, yes, I want to apply, I understand that you need to see my license, and you're going to compare my face to it. So that’s – I think it's going to become a larger and more used method of authentication fully. I think just the same way when I started here two plus years ago, a lot of what we were doing was educating clients about how to use an ID to authenticate. Now we’re just taking a step further and saying, here's how we can certainly make sure that when a person is not standing right in front of you, they are real and they are in control of the real document.

Okay. You've mentioned the reduced visibility of Intellicheck compared to its competitors with its superior solution. How do you plan to address this issue of visibility?

I think it's one of the things that, I got going with the woman who runs PR and understands this. We're looking at issues, thankfully mastering all the places that we should or could be, and what we're going to work on is a cost-effective plan to get our name out there. Certainly, more than we have, once people start talking to people and they hear our story, they're amazed. So I think it's going to be fun to do. We’ve certainly now, part of our presence that we raised is with some of the companies that do research in these spaces. And we've begun to whereas before, we were never mentioned in anything. We are getting mentioned more and more in research on ID authentication, and getting mentioned in a very positive way. So the likes of the Gardners and the Javelins of the world who often get hired by banks or large companies to figure out what they should be doing in this space, now know us and are talking about us. So it doesn’t really take a ton of money. It just takes a plan and a path, and that’s certainly what we're putting in place. And honestly, the rebranding was, you know, the first step in that. Certainly, we've seen, even just the people who now following us on social media are coming from big companies that we definitely want to get into. So I think our presence is becoming known more. And now we're just working on the plan to control and better run the messaging.

Okay. Thank you.

Thanks, Roger.

Our next question comes from the line of Jeb Armstrong with Clear Harbor Asset Management. Please proceed with your question.

Hi, Bryan, how are you?

Hey, Jeb. I'm good. Yourself?

I promise I didn't have the finger on Roger's mute button. I wanted to sort of dive into the question of the competitive landscape a little bit more, not just as it relates to authenticating IDs but other ways of looking at fraud prevention and sort of the gist of my question surrounds other ways that companies may go about doing that, in particular, a large national institution talks about using machine learning to detect fraudulent activity. And to get ahead of it from that perspective, do you see that as something is there as a competitive threat to the landscape? Or is that a completely different type of technology?

I believe that is a distinctly different type of technology. Even among my competitors, their websites for ID authentication emphasize AI and machine learning as they try to improve their templating for final licenses. However, we need to differentiate between two worlds here. With facial recognition, we aim to maintain our strong position in the enrollment space, which is crucial for ensuring authenticity and effectively identifying and eliminating fraudulent activities. Account takeover has become one of the main methods for identity theft, where fraudsters gain access to bank and investment accounts and drain them. I've seen this happen to friends whose points were completely cleared out and converted into gift cards. The challenge is preventing account takeovers, as many organizations have not taken significant steps to address this issue. There are providers using machine learning to analyze typing patterns or form completions to prevent impersonation, but I believe a simpler approach is effective. For example, when customers call to request changes to their bank accounts, they are now sent texts to verify their identity. As we focus on acquiring accounts and engage with our clients, partnerships will play a vital role. It’s quite difficult to impersonate someone’s face. When a customer wants to perform actions like transferring funds, we can streamline the process through an app that triggers ID authentication, ensuring that the person’s face matches what’s stored in their account. I see this as two separate markets: one where we might not have a dominant presence, and another emerging market driven by the rapid increase in account takeover fraud, which rose by 74% last year as fraudsters capitalized on this opportunity to generate greater returns.

I appreciate the insight. Thank you so much.

Thank you.

Our next question comes from the line of Doris Rossiter with Shattemac Capital Management. Please proceed with your question.

Hi, Bryan, this is Doris. Congratulations on all your good work.

Thank you. It's a team effort, as I said.

I wanted to follow up on a previous caller's question regarding the Ipsidy joint venture. Specifically, I'm curious about how the technology addresses the fact that a person’s face can change over time. For instance, my driver's license in New York is valid for eight years from the time the photo is taken until it needs to be renewed. During that period, someone’s appearance can change significantly, whether through weight gain or loss, growing a beard, or changing hairstyles. I'm wondering how the technology accounts for those variations.

That is something that, through their mathematical approach, we appreciate. As we've tested, and as others have tested, we're essentially in the same situation. The picture on my New Jersey license is around eight years old, and I wish I looked more like that picture than I do now. However, if it matches me, that's fine. What I find interesting about the technology is that you don't always need to refer back to the original picture. The way it is designed makes sense, as it utilizes mathematics to represent your face. This representation can be stored without identifying personal information, so it can't recreate your face but can match it when needed. Once a match is made, the old representation can be discarded, starting fresh. This means as your face naturally changes over time, the system will recognize that without needing to reference your old image. If there is a significant change, it might require a visit to the bank for initial setup, but subsequently, it should not be an issue.

I'm wondering if Ipsidy provided any statistics on the number of false alarms or whether there's a need to take a different route to the bank instead of presenting remotely. Did they give us any information on how many cases or how often the facial recognition may not work?

I don't have specific statistics on that. However, I can say that we evaluated several vendors in this area and conducted tests with various options, even incorporating some vendors into our products. I believe that all of them utilized Ipsidy technology effectively, but their implementation was superior, which is why we pursued a deeper partnership with them. Overall, I would say the technology works well. There may be some exceptions, but it's quite different from scenarios like quickly identifying someone in a store or using a camera on a street corner. Here, you are capturing a clear image of yourself using your cell phone right in front of you. The results are generally very good. We will continue to monitor this, and we have learned that when issues arise, they can adjust their code to improve accuracy.

So they can refine it over time if it's necessary.

Oh, yeah, yeah, absolutely, absolutely. We saw it even during our testing with them.

Okay. Okay. Thank you. And good luck.

Thank you. Thank you very much.

There are no further questions in the queue. I'd like to hand the call back to Bryan Lewis for closing remarks.

Thanks. This is the part I always forget to write closing remarks. Next time, I better remember. So, yeah, all I am going to say is hopefully, we figured out a way to get beyond COVID. And people get better and shopping picks up, which we certainly are seeing at least in the scan stats. I want to go back and thank my team. It's been a very transformational time for I think everybody in business and my team came through with flying colors. I look forward to speaking with you all again next quarter.

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.