Earnings Call Transcript - IDN Q1 2021

Operator, Operator

Greetings, and welcome to Intellicheck's First Quarter Fiscal Year Earnings conference 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 is being recorded. I would now like to turn the conference over to your host, Gar Jackson. Thank you. You may begin.

Gar Jackson, Host

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck First Quarter Fiscal Year 2021 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 in 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, May 4, 2021. 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; then Bill White, Intellicheck's Chief Financial Officer, who will discuss Q1 fiscal year 2021 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. And I will now turn the call over to Bryan.

Bryan Lewis, CEO

Thank you, Gar, and thank you to everyone who has joined us for our first quarter 2021 earnings call. I'm excited by what was accomplished this quarter, but even more so by the greater signs of openings we see, the additional use cases our existing clients have and are putting into place, as well as the deals in play and the increasing pipeline that we believe is on the horizon. When I factor in our three new sales hires, I believe that we are setting ourselves up very well for the coming year. Before I get into all of that though, I'm going to highlight some of our financials. Q1 SaaS revenue grew 24% over Q1 2020, with total revenues down 8% due to fewer ancillary hardware sales versus the comparable prior year period. In Q1 2021, 97% of our revenue was SaaS revenue, and as a result, our gross margin for the quarter was 92%. SaaS revenues in Q1 versus Q4 was also up by 8%, but I would point out that in a normal world, we have consistently seen that there is an approximate 12% drop in transaction volume from Q4 to Q1. I think the smaller-than-expected dip points to some signs of reopening and higher store traffic, which we'll touch on in a moment. We had a net loss of just over $1 million in the first quarter that included $981,000 of non-cash stock-based compensation expenses, primarily related to attracting and retaining talent. Q1 2020 EBITDA was a negative $52,000 compared to a positive $144,000 in Q1 of 2020 and just over $634,000 in Q4 of 2020. Now, turning to signs of reopening and higher store traffic. We compared transaction volumes in Q1 to the previous year to estimate the impact of COVID. Similar to Q4, we continue to see in-store transaction volumes down in the same 20% range. Since Q2 of 2020 was almost a total lockdown, to see how we are trending through April, we compared same-store volumes for clients fully implemented in Q2, 2019. The good news is we're seeing a steady return to normal transaction volumes with the numbers depending on the store generally down in the 10% to 15% range, an improvement on the down 20% we saw in Q1. We believe this is in line with the widely reported trends in mall traffic declines. Logic would suggest that all the retail and bank locations we brought online during the pandemic would also be down in the same ranges. As we look at recent developments with some of our current clients and some of the additional use cases they are putting in place, we believe that there is more good news ahead. By way of background, for those who are newer to the story, when I joined Intellicheck just over three years ago, I focused our efforts on in-store validations of people. This was an important initial step, because it proved our value proposition, demonstrating that our solutions provide the most certainty when you needed to make sure the person on the other side of a transaction is who they say they are. And as our clients tell us, Intellicheck delivers far more certainty than any of the competition relying on OCR. Not only did that focus allow us to sign clients we also signed major reference clients giving us a lot of credibility in the marketplace. At the same time, we knew that we had to do more than just ID validation, especially in the digital channels. It was clear that we needed to become a platform that provided more to our clients, which we have steadily been doing over time. Our first step was to add facial biometrics to the platform, so that if you are not standing in front of me, not only can I be certain that the ID is real, but also the legitimate owner is holding it. We have subsequently added the ability to read the words on the front of the ID to make sure they match what was encoded in the validated barcode. We have in production and we'll be releasing shortly even more key indicators to help detect fraud. We will provide our clients with fraud scores based upon the VPN, mobile device, phone number, and address validation for any digital transaction to provide our clients even more certainty in any transaction. I've said this before about certainty, but it's worth repeating because this speaks directly to our value proposition. Our clients start with us because they understand that it doesn't matter what you do after the first step if your first step is only right two out of three times. Our certainty provides the greatest first step in any transaction. That is why our clients are expanding use cases for the Intellicheck platform for both physical and digital transactions. As we look at the updates on the expanded use cases of some of our existing clients, it really underscores my point about certainty and our value proposition. For those who asked, I will go back to discussing them by the numbers we have previously used to reference them. Financial services company number two is in the process of rolling out to new retailers. One is a footwear retailer with over 1,000 locations. The other is a pet products and services retailer with 1,500 locations. Both retailers will be using us for new account openings and loyalty account lookups. Financial services company number three has completed integration and has begun Phase 1 rollout for the largest home improvement retailer in the United States. This will be a phased rollout as the retailer has multiple point-of-sale systems, self-checkout, assisted checkout, customer service and commercial checkout. Phase 1 is new account opening at self-checkout. Phase 2 is for the POS for assisted checkout for new account openings. At the same time, the bank is also in discussion with the retailer to add account lookup to all phases. Phase 1 rollout is expected to be completed by the end of this quarter. Financial services company number three is also finally going to begin rollout to the bank branches. While hardware is not our focus as we've said in the past, we will purchase it for clients as an accommodation if it helps the client and we can mark the cost up. Number three, place an order worth up to $2.7 million for scanners for the teller workstations in the branches. We expect all scanners to be delivered by early Q3 and rollout to the branches to begin as soon as July. Financial services company number four is leaning heavily into the digital space. They are in development now to add new use cases including the digital channels for online credit applications for two existing clients. They are also in development to bring live for both in-store and digital use cases a Midwest chain of home improvement stores with over 300 locations. These use cases and new clients are expected to go live by the end of Q3. And the progress doesn't stop there because we have another milestone achievement with this client. Their in-branch pilot to incorporate our platform into their mobile application their employees use for VIP or non-teller transactions was a success and is being fully rolled out. Financial services company number eight, the Canadian provider of buy now, pay later financing was acquired by a company that provides online mobile and branch-based loans and financial services to underbanked customers. Given the success number eight has had stopping fraud with Intellicheck, the new owner is doing the integration work to pilot our platform for all of their online credit applications. Financial services company number nine, the Midwest Bank has completed the work to integrate our platform into their mobile banking app. The release date had been scheduled for this month, but it's currently delayed as they are tweaking their user interface. I believe that the moves by these financial institutions to expand on the success they have had with the Intellicheck platform in the physical use cases and into the digital use cases makes an important statement. It proves that our platform works equally well in both environments. I'm also pleased to share the good news about our robust pipeline. Keep in mind that we don't consider a company a prospect until they've entered into an NDA with them so we can discuss confidential details. So far this year we've signed 25 NDAs with prospects ranging from the top banks we are targeting to potential resellers. I think that this is a tremendous number given our limited sales force, which is why I said on the last call that we would be hiring. And as you may have seen from the recent press releases, we have done just that. We have added senior talent to the team with Garrett Gafke, David Andrews, and Bruce Ackerman. Garrett brings a wealth of product strategy knowledge and is already providing value to the team that I knew he would. David's marketing acumen has significantly increased lead generation. And as a person with a strong track record in sales management, I can candidly say I wish I had been half as good as Bruce. I also said that we'll be hiring salespeople and we've made good on that commitment. We've hired three additional salespeople since the last call, bringing our total to nine. I also want to address a question that has been raised several times. I've been asked why we don't just hire 20 salespeople at a time. Again, coming from sales management and Bruce agrees, if you bring on too many too fast you will fail. The reality is productivity of the team will drop. The new sales hires will not be successful because you can't devote the time to properly train them. And in the end you will lose many of them. We plan on continuing to add to the sales team when we feel we have the bandwidth to effectively train them. That way we know we are properly investing in our talent to make sure we have a productive team. Given what we have accomplished with the limited size of the team we've had, I can't wait to see what we achieve with a larger team under Bruce's direction. I strongly believe Intellicheck has demonstrated its strength and resiliency, underscoring what I shared with you earlier about our accomplishments. Despite the many challenges that we have had from this once-in-a-century national health crisis, we have continued to implement our strategic plan and I am anticipating more positive developments in 2021. We continue to expand within our existing client base which demonstrates the certainty of our platform while at the same time we are signing new clients. We are rapidly expanding into the digital world and offering our clients additional fraud indicators to add to the certainty of person-not-present transactions. We rounded out the team to fill some of the gaps I saw in skill sets. I know that you are as excited as I am to see what we can do with more talented salespeople out there spreading our message. With that, I will turn it over to Bill to discuss the financials.

Bill White, CFO

Thank you, Bryan, 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 first quarter ended March 31, 2021. I'll begin with our first quarter results. Quarter-over-quarter SaaS revenue grew 24% to $2,776,000 versus $2,238,000 in the prior year. Total revenue for the first quarter ended March 31, 2021 decreased 8% to $2,863,000 compared to $3,115,000 in the prior year comparable period. Gross profit as a percentage of revenue was 92.3% for the quarter ended March 31, 2021 compared to 77.8% for the quarter ended March 31, 2020. The increase in gross margin was primarily due to sales mix in the prior period as we sold scanning equipment to a bank preparing to roll our software out to their bank branches, which are normally sold at lower margins. Operating expenses that consist of selling, general and administrative and research and development expenses increased by 55% or $1,319,000 to $3,717,000 for the quarter ended March 31, 2021 versus $2,398,000 for the same quarter in 2020. That increase was primarily due to higher stock-based compensation costs and increased headcount and expanded research and development efforts. The company posted a net loss of $1,060,000 for the three months ended March 31, 2021 compared to a net income of $27,000 for the quarter ended March 31, 2020. The net loss per diluted share was $0.06 versus zero in the prior period. Adjusted EBITDA for the quarter ended March 31, 2021 was a negative $52,000 compared to a positive EBITDA of $144,000 in the March 31, 2020 quarter. Interest and other income were negligible for the quarters ending March 31, 2021, and 2020. Now I'd like to focus on the company's liquidity and capital resources. As of March 31, 2021, the company had cash of $12.6 million; working capital defined as current assets minus current liabilities of $13.4 million; total assets of $24.2 million; and stockholders' equity of $22.1 million. During the quarter ended March 31, 2021, the company used net cash of $510,000 compared to net cash used of $341,000, during the three months ended 2020. Net cash used in operating activities was $471,000 for the three-month period ended March 31, 2021, compared to $461,000 for the same period in 2020. Net cash used in investing activities was $48,000 for the first three months of 2021, compared to net cash used of $115,000 for the first three months ended March 31, 2020 and we generated $10,000 from financing activities for the first three months ended March 31, 2021, compared to $235,000 for the same period in 2020. The company has a $2 million revolving credit facility with Citibank that is secured by collateral accounts. There are no amounts outstanding under this facility. 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, 2020, we had net operating loss carryforwards of approximately $17 million. I'll now turn the call back over to the operator to take your questions.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Scott Buck with H.C. Wainwright. Please proceed with your question.

Scott Buck, Analyst

Hi, good afternoon, guys. I know you added some heads during the quarter. I'm curious if there's anything else or any other kind of investment in the business you feel like you need to make, Bryan, to have the right infrastructure in place to maintain the current top line growth?

Bryan Lewis, CEO

Yes. We've put in some marketing tools. They're not overly expensive, but just ways for the marketing team to interact with the sales team, run campaigns, those types of things. As I've said, we will be spending some money on proper targeted marketing. I don't want to do the blast everywhere; to me, it doesn't make any sense. We know who our target audiences are and being smart about it. But one of the things that I really want to make sure that we do is increase the brand awareness of Intellicheck, right? We've got lots of good word-of-mouth from our clients talking to other clients. But I want to make sure that our position is very, very strong because I look at it as – I'm going to go back to that word certainty. We do something nobody else can, and we need to make sure people know that. So I think there will be a little bit more marketing spend.

Scott Buck, Analyst

All right. Great. That's helpful. Second one I'm curious, you've been at this for three years now. And then given the amount of success that you guys have had, are you starting to see any change in the way your competitors approach either your current customers or potential customers? I mean, are you seeing changes in pricing or anything along those lines?

Bryan Lewis, CEO

Not from our end. If anything, I’d say we're seeing the ability to increase our pricing. And I'll go back to some of the competitive moat things that we have, particularly when we're talking in the physical world. The fact that we work with all the existing hardware that's in place, the only reason that we ended up doing this hardware purchase for number 3 is they wanted us to also authenticate for them passports and that requires something different than the normal check capture machine that they have. So that was the reason for that particular purchase. Otherwise, we work with everything. Nobody else doing OCR can do that. So it is a significant outlay for anybody looking to do it across scale where you need to put in a lot of equipment.

Scott Buck, Analyst

Great. That’s helpful. Appreciate the time.

Operator, Operator

Our next question comes from Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl, Analyst

Hey guys. Just a first question. I don't know if you commented this quarter, but the number of implementations in 1Q? And what does that backlog look like?

Bryan Lewis, CEO

I don't know if you want to quickly look it up. The backlog continues to expand, and Bill and I were reviewing the list recently of what's in the queue. It is strong and robust. I see a mix of new business coming in and growth with existing clients. We are focusing on new hires and our sales team's efforts to acquire new clients, while also having skilled individuals for account management. Everything I've observed indicates that the pipeline for implementations is continuing to grow.

Mike Grondahl, Analyst

Got it. While Bill looks that up for the first quarter, I wanted to talk about the 25 NDAs signed in the first quarter. I assume those vary in size, but can you share some insights on the mix? Are you particularly excited about any larger ones? How do you view them?

Bryan Lewis, CEO

I'm very excited about the names on our NDA list for two main reasons. First, I appreciate the NDAs, especially with larger clients, as they demonstrate real intent; these organizations won't sign them lightly. Larger companies tend to have more checks and balances when it comes to entering into an NDA. Secondly, this allows us to discuss our existing clients, which adds significant credibility to our efforts. Typically, we enter into an NDA as we start conversations about proofs of concept, trials, or pricing, marking an important step in the process. Both parties now have a vested interest. We're focusing on key players, such as the major credit card providers we've mentioned, as well as potential resellers that can help us enter new markets, including various fintech companies involved in buy now, pay later services. Overall, it's a diverse mix of large and medium-sized clients across both physical and digital applications.

Mike Grondahl, Analyst

Got it. And Bill, could you help us, SG&A, R&D and the stock-based comp had pretty healthy step-ups in 1Q. Can you kind of help us think about the quarterly run rate for those three items the rest of the year?

Bill White, CFO

We expect our non-cash expenses to be in the range of $650,000 to $700,000 per quarter, which includes our non-cash equity grants that are amortized throughout the year.

Mike Grondahl, Analyst

Got it. What about SG&A and R&D? What do those two categories look like?

Bill White, CFO

Yeah. I would guide with the ramp-up here in the 25% to 35% range excluding the non-cash expenses. So 25% to 30% for operating expenses, and 35% in non-cash expenses.

Mike Grondahl, Analyst

That type of growth rate is that what you're describing?

Bill White, CFO

No, year-over-year look for about a 25% to 30% OpEx increase.

Mike Grondahl, Analyst

Got it. Okay. Great. And did you ever find anything on implementations in 1Q?

Bill White, CFO

I'll have to – I'll get back to you on that. I was thinking, it was another number, but let me get back to you on that, Mike.

Mike Grondahl, Analyst

Sure. No problem, Bill. Okay. Thanks, guys.

Operator, Operator

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

Roger Liddell, Analyst

Yes. Hey, gentlemen. I'm interested in the $2.7 million hardware sale and just the – for the moment the accounting for it will it be a deferred revenues item and amortized or key to the rollout of software just walk us through anything that would help us on that?

Bill White, CFO

Yeah. Bryan do you want me to take that one?

Bryan Lewis, CEO

Yes, please, Bill. Yes, please.

Bill White, CFO

You bet. Yes Roger, it will be recognized when it's being shipped FOB shipping point. So the title will transfer when it leaves the dock and the manufacturer. So we'll be recognizing that as it's shipped.

Roger Liddell, Analyst

Okay. And give me some sense of the amount of this could be just a suggestive not right down to dollars obviously. You have had some contracts that are meaningfully off-market now based on the value-added by utilizing the products. And is there a – a backlog of those old contracts or have some of the significant mispriced ones already rolled? And by extension, how do you rate the – how do you describe the situation right now in terms of you trying to get something more per scan to reflect the value added for the customer?

Bryan Lewis, CEO

So Roger, we haven't had any significant contracts roll over or come up for renewal. However, this year we do have two contracts that we consider significant coming up for renewal, specifically number three and four. We will, of course, be looking to extract more value from the services we are providing.

Roger Liddell, Analyst

Okay. I see an explosion in fraud, occasionally we hear from you or just in the press about the figures. I would have thought there would have been more translations for you, and some of your competitors from that unwelcomed expansion in the fraud side. Is there a lagging effect here that I am simply not focused on to explain the disconnect between the explosion figures and you have remedies for that? I would have thought it would be a steeper ramp.

Bryan Lewis, CEO

There are a few factors to consider. The data indicates that fraud losses increase every year, currently estimated at around $56 billion in the U.S. A significant part of the solution is improving education about available options, which is why I want to invest in brand awareness and thought leadership. Many people still believe nothing can be done easily. Our competitors often rely on complicated processes, incorporating facial biometrics, claiming that this reduces fraud attempts. However, this also raises costs and complicates the user experience, as many are uncomfortable being filmed. In contrast, our approach allows us to identify fraudulent licenses without adding unnecessary friction. This can deter individuals using stolen licenses from attempting fraud. There is some inertia in the industry as many aren't aware of our solutions, and some are still working to upgrade their systems to accommodate the data we provide. After the Equifax breach, there was significant concern, and we've observed criminals adapting their tactics to exploit digital channels, prompting our clients to enhance their online security. While we expect continued growth, large banks tend to move slowly due to the weight of their decisions, as they don't want to frequently switch solutions. By increasing our brand awareness, we can make it easier to engage with more clients. A key strategy is facilitating discussions between our clients and prospects, allowing satisfied customers to advocate for us, which carries more authenticity than our direct sales pitches.

Roger Liddell, Analyst

Okay. Final question, regarding the recovery, I'm having difficulty understanding the effects of different variants with some areas reopening while others are closing. Additionally, I'm curious about the impact on revenues from in-store versus digital channels. If the recovery progresses positively, assuming the vaccine plays a significant role and variants may lessen but not completely disappear, where do you anticipate the recovery will originate? Will it come from in-store sales taking away from digital, or do you have other insights?

Bryan Lewis, CEO

Yeah. I think that I don't see it really cannibalizing it. I think people have been talking about the death of brick-and-mortar forever. And it just doesn't seem to happen. A ton of studies show millennials like going to stores. Retail mall traffic had been down, but is around that 20% range, according to have Wall Street article that came out, but is already coming back up. You've got New York, New Jersey, and Connecticut said that they're going to lift indoor restrictions, I think on the 19th. The Governor of Pennsylvania just came out and said they're lifting everything on the 31st. And as soon as 70% of the population is vaccinated, the mask mandates go away. So I think we're beginning to see it. And those are the states that make the real impact, right? Those are the population heavy our clients heavy a lot of our retailers are in those spaces. But I think that the more we begin to see people getting comfortable, because they got the vaccine or they're comfortable, because they don't want it, and they're probably still going out anyway. Those are the things that give me signs of encouragement is these very large states now putting dates and targets on what it takes to fully open. And I think once we get there then, we see volumes return to normal. And if these places are opening up in the middle of next month or the end of next month, I think that shows well for the rest of the year.

Roger Liddell, Analyst

Thank you, Bryan.

Bryan Lewis, CEO

Thank you.

Operator, Operator

Our next question comes from Omar Anar, a private investor. Please proceed with your question.

Unidentified Analyst, Analyst

Hi. Thanks for taking the call. I've noticed in a lot of your communication to shareholders. You have really focused on banks, security, and anti-fraud within banks. I'm curious how you think about the opportunity in e-commerce, in cryptocurrency, in cannabis sales, in anything you can do with the sharing economy where people have money online whether it's an Airbnb account or an Uber account or a Patreon and they can get attacked by ATOs as well. Curious how you think about that opportunity? How do you think about that sales motion etc.?

Bryan Lewis, CEO

Yes, we are targeting all of those areas. We already have a solid presence in the cannabis sector, which has been supported by our law enforcement clients. Many states that regulate cannabis, such as the Washington State Alcohol, Tobacco and Cannabis, are among our clients. This naturally leads those selling cannabis to want to utilize the same products they are measured against in the sharing economy and similar sectors we are focusing on. That's part of the reason I am eager to hire new salespeople. I observe that my top sales team members are working extremely hard, and I am grateful for their high motivation. We pursued this direction because the volumes related to validations and transactions in retail are significantly higher. It has become an excellent opportunity for us, especially when a large bank trusts our services; it adds a lot of credibility when we can mention that several of our clients rely on us for identity validation. We started in this area because it was a productive initial step. Clearly, there are many other areas where individuals will need to confirm their identities, and I want to ensure we are adequately staffed to capitalize on these important potential revenue streams.

Unidentified Analyst, Analyst

Thank you. I would like to shift the focus slightly. According to channel checks with Jumio and Mitek, some of their lower-volume clients are charged as much as $1 per scan, while their larger clients are charged $0.25 per scan. Do you anticipate your pricing aligning with Jumio or Mitek's higher rates, and how quickly do you think you can achieve that?

Bryan Lewis, CEO

We haven't disclosed our pricing yet, but I want to emphasize that when conducting channel checks, you should ensure whether the data pertains solely to ID validation or also includes facial recognition. Typically, these two aspects go together because our clients report an access rate of 60% to 65% for verifying the legitimacy of licenses using OCR. I’m not certain if that encompasses a fully established price. However, our clients have shared the substantial savings and reduction of reputational risks we provide in two key areas: firstly, by preventing identity theft and secondly, by ensuring our accuracy. We also avoid misinforming clients about the validity of their licenses, which can occur as frequently as misjudging the correct license. Law enforcement, trained to evaluate licenses or IDs based on appearance, finds it challenging, so I doubt that someone in an offshore call center can accurately assess them. This leads to numerous false negatives alongside false positives. Our clients appreciate our services for being straightforward, efficient, and quick. During each renewal, we demonstrate our pricing power, having significantly raised prices in the past and planning to continue doing so.

Unidentified Analyst, Analyst

Got it. Yes. And just to clarify my comment about their pricing was just on the authentication of the ID not with the selfie match or the live video match.

Bryan Lewis, CEO

Got you. Yes. Okay. Thank you.

Operator, Operator

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Bryan Lewis, Intellicheck's CEO for closing comments.

Bryan Lewis, CEO

Well, thank you everybody for joining the call. I'm seeing signs of recovery in the economy and people's health and all those things, which I think is going to bode well for us. I'm very excited about the hiring that we're doing, the caliber of the people that we brought in at every level. Our messaging is improving. Our lead generation is improving. So I think we've got a lot of stuff in the factory that you will that we are really optimizing, which I believe is going to help us to continue to grow and hopefully continue to grow at even faster rates. So, thank you everyone, and I look forward to speaking to you next quarter.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.