Earnings Call Transcript - IDN Q3 2020

Operator, Operator

Greetings and welcome to Intellicheck's Third Quarter 2020 Earnings Call. All participants are currently in listen-only mode. A question-and-answer session will take place after the formal presentation. This conference is being recorded. It is my pleasure to introduce your host, Gar Jackson from Investor Relations. Thank you. You may begin.

Gar Jackson, Investor Relations

Thank you, operator. Good afternoon, and thank you for joining us today for the Intellicheck third 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, November 4th, 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 Q3 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.

Bryan Lewis, CEO

Thank you, Gar, and welcome everyone to the Q3 2020 Intellicheck earnings call. From the revenue numbers we just released, you can see that the opening of large regions of the country has had a positive impact on scanned volumes and our sales, which came in at just under $2.7 million. SaaS revenue was $2.4 million, up 47% over Q2, and up 57% versus Q3 of last year. We also posted net income of $32,000 for the quarter versus a loss of $568,000 in Q3 of 2019. And EBITDA was a positive $169,000 in Q3 versus negative $457,000 in Q3 2019. Despite the pandemic, we've seen growth in expanded client usage of our technology solutions, new client onboarding, and successful go-live of some significant clients. Turning now to some of the specifics. Financial services company number two rolled out all the initiatives we discussed on our Q2 call, including finalizing going live with three new retailers and refocusing on credit card underwriting with the fourth sizable retailer that is already a client. During the quarter, we onboarded a 3,700 location beauty supply retailer that was testing in pilot stores last quarter, and is now fully live with our account opening and account lookup use cases. The second retailer is the women's intimate apparel company that went live with their remaining 350 locations, including several in new states to authenticate licenses for both account opening and lookup. Next, we have the gourmet kitchen equipment retailer that also completed its testing in pilot stores during the third quarter. It is now rolling out account lookup across all stores. Lastly, the approximately 1,500 location housewares retailer that we've been working with for some time has brought out their co-branded card and they've begun more actively pushing card acquisitions, so scan volumes should increase. Financial services company number four has expanded their challenged use cases, and are now having customers authenticate themselves remotely if they believe there is the possibility of account takeover, which we think will bring in a significant number of scans. The two Midwest banks we previously discussed had successfully rolled out and are now live in their over 2,200 branches and both are in discussions to expand use of our products into their online channels and their banking apps. We've also increased our penetration of the financial services sector with the signing of a Baltimore-based credit union. They are using our technology solutions for two use cases: new account acquisitions; and account lookups for in-branch transactions. But it isn't just financial services companies in the win column. We have signed one of the largest humanitarian organizations in the United States. This nationally renowned and respected organization provides emergency assistance and disaster relief and is starting with the use case that authenticates military service personnel in the field applying for aid. And let's not forget that there is no hardware required, which is that much more critical when you're operating in the most difficult environments typical of natural disasters. This is done remotely using a mobile device and we believe that there could be additional opportunities for this type of on-site disaster relief authentication. I'm also excited about the signing of a new pilot agreement with a California-based online personal finance company. This company provides a wide variety of financial services ranging from student loans to banking to mortgages. The pilot will begin this quarter and use our no integration web tool. Initially, they will be authenticating users to stop account takeover when calling in to access their account with additional use cases and discussions for post-pilot and integration. I am very pleased with our growing prospects as I see acceleration in the amount of inbound leads we are getting not only from our core financial services market but from new markets as well. These opportunities feature use cases that encompass a variety of applications from standardized testing to companies focusing on real estate transactions. Think about it, any time you're asked to present your license for identity verification is an opportunity to take it a step further and authenticate. In my view, this underscores the fact that the market for authentication continues to grow in a climate of surging incidents of identity theft and fraud further fueled by the COVID-19 pandemic. During this quarter, we also made noteworthy progress in furthering our efforts to make essential investments in the company's future. We brought on a new Vice President of Sales, Mike Ehlers. Mike brings years of experience in both managing sales teams and understanding how to recruit great salespeople given his successful career running recruiting and executive search teams at a number of different companies. From experience, I know that one of the things the best salespeople are always good at is networking and Mike has placed key talent at a number of significant companies. Mike brings the experience we need to make sure that as we grow the team, we are adding the right people and we are knocking on the right doors. Mike's hire is part of a larger focus on growth initiatives. As we have stated, we raised capital in the third quarter not only to better position us to weather the storms when the country goes into a major lockdown like we experienced in the spring, but also to aggressively invest in growth drivers. A key initiative now that Mike's on board is to expand the sales team. This is key for several reasons. First, when we did a review of all of our clients, we determined that every single one could benefit from more of our products in expanded use cases or in additional divisions. In the past, we were focused on landing new clients who would typically sign up for one initial use case, which is great for proving out the concept and gaining market share. Our goal now under Mike’s direction is to enroll existing clients for multiple use cases in addition to signing new clients. As a reminder, we do authentication for both on-premise and person-not-present credit card applications, card-not-present applications in transactions, non-receipted returns, and now with the COVID situation growing needs associated with buy online pick up in-store purchases. Add to this the growing need to authenticate people remotely when it has historically been done in person for everything from standardized testing to signing a new lease. The pandemic has accelerated the need for remote authentication and I want to make sure we are staffed to capitalize on the need. Another initiative involves the steps we are taking to continue to refine our messaging, website, and marketing. One thing that has become abundantly clear is that we are often perceived as only a document authentication tool. We have plans in place to change this perception to one recognizing that we are a multiple solution authentication provider. A significant part of this lack of understanding, we believe, has been due to the very sector and product-focused product name and convention that we had used in the past. If I were in banking or credit card processing, would I think a product named retail ID could solve my authentication problem and stop fraud? Not likely. To that end, since the release of version one of our newly designed website just a few months ago, we have continued to work on improvements including how to better reflect the breadth of our relevant use cases. We are making progress as evidenced by Gartner Research including Intellicheck in their market guide for identity proofing and affirmation for their multiple products and solutions. That being said, there is still not the needed level of awareness about our multiple product solutions, so there is still work to be done there. All of our solutions share one commonality. They are all driven by ID check. In fact, some of our older product descriptions even say powered by ID check. ID check is in fact an authentication engine allowing the client to pick the horsepower they need for the use case at hand. Is the person in front of you? Maybe all you need is a license authentication. If they're not, you should probably add facial recognition or any other tool we develop ourselves or apply through partnerships. I want to make sure that prospects and current customers understand that we are a multi-point system that can help them quickly and without friction make a better-informed decision, especially in the person-not-present environment. We are in an excellent position to be as much a dominating force in this space as we are in the on-premise or person-present space because the first step is the most important. Can you be certain that the government-issued ID is authentic? It is our contention, and our clients tell us that no competitor can provide the certainty that we do. What remains clear to me is that we need to expand our efforts to ensure our messages penetrate and radiate in multi-market verticals and we need to invest some money to have the resources to deliver that message. I look at these initiatives as upside; investing in salespeople because you're worried about not being able to cover the range of opportunities is a great thing and we have a strong branding message to start with. It is much better to be able to start from a position of authentication certainty than from authentication concerns, particularly working with the financial services industry where there are significant financial consequences at stake. Before I turn it over to Bill to discuss the financials, let me say that we are cautiously optimistic and believe that any lockdowns will be more targeted and not as severe as we experienced earlier in the year. The good news is that everything that is in our control is on track. Inbound leads, product adoption with existing clients, signing new clients, NDAs being signed, I'm happy with all of that. What isn't in our control, like the COVID resurgence and potential lockdowns, is a concern to me, but we believe that we've taken the necessary steps to be well positioned for various scenarios. As a reminder, our contracts are structured with monthly minimums. So even if things do shut down again, we will still generate revenue from our clients with a brick-and-mortar footprint. Additionally, we continue to grow our online offering and believe that we have significant opportunity to authenticate transactions where people buy online and pick up in-store. In closing, two things we do know: based on scan numbers, people want to get out there and shop and online shopping continues to grow and based on the acceleration in the leads, the market for authentication remains strong, particularly when you have a technology solution that doesn't require the purchase of additional hardware. As always, we will continue to invest in the business with a primary objective to drive top-line growth and capture additional market share. Like I said when I took this job almost three years ago, the market is coming our way. With that, I will turn it over to Bill.

Bill White, CFO

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 third quarter ended September 30, 2020. I'll begin with our third-quarter results. Revenue for the third quarter ended September 30, 2020 grew 40% to $2.699 million versus $1.930 million for the same period last year. Our SaaS revenue was approximately $2.451 million for Q3 of 2020, a 57% increase from $1.564 million in Q3, 2019 and a 47% sequential increase from $1.671 million in Q2 of 2020. Gross profit as a percentage of revenue was 89.1% for the quarter ended September 30, 2020 compared to 86.6% for the quarter ended September 30, 2019. Operating expenses consisting of selling, G&A, and research and development expenses increased by 6% or $128,000 to $2.38 million for the quarter ended September 30, 2020 versus $2.252 million for the same quarter in 2019. The increase is primarily due to higher personnel costs. The company posted net income of $32,000 for the three months ending September 30, 2020 compared to a net loss of $568,000 for the quarter ended September 30, 2019. The net income per diluted share was zero versus a net loss per diluted share of $0.04 in the prior year period. Adjusted EBITDA for the quarter ended September 30, 2020 was $169,000 compared to a negative $457,000 in the September 30, 2019 quarter. Interest and other income were negligible for the quarters ended September 30, 2020 and 2019. Now, I'd like to focus on the company's liquidity and capital resources. As of September 30, 2020, the company had cash of $12.8 million, working capital defined as current assets minus current liabilities of $12.7 million, total assets of $23.9 million, and stockholders' equity of $20.8 million. During the nine months ended September 30, 2020, the company generated net cash of $9.4 million compared to net cash used of $1.6 million during the nine months ended September 30, 2019. On June 23, 2020, the company completed a public offering of 1,769,230 shares of common stock offered to the public at $6.50 per share, resulting in net proceeds to the company of approximately $10.7 million after deducting underwriters' discounts and commissions and offering 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 $311,000 for the nine months period ended September 30, 2020 compared to $2.1 million for the same period in 2019. Net cash used in investing activities was $408,000 for the first nine months of 2020 compared to net cash provided by investing activities of $15,000 for the nine-month period ending September 30, 2019 and we generated cash of $10.1 million from financing activities for the nine months ending September 30, 2020 compared to $456,000 for the same period last year. The company has a $2 million revolving credit facility with Citibank that's 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, 2019, the company had net operating loss carryforwards of approximately $17 million. I'll now turn the call over to the operator to take your questions.

Operator, Operator

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.

Mike Grondahl, Analyst

Hey guys, good afternoon. Congrats on the progress. Hey specifically, how many new customers went live in the third quarter? And in October? And maybe what I'll describe as just a pre-holiday rush, are you signing up more or getting a few more live pre-holiday?

Bryan Lewis, CEO

We've started rolling out new initiatives and, as usual, there's a lot of interest from people trying to engage with us, typically involving the collaboration between retailers and their banking partners. The positive aspect is that we're successfully onboarding clients outside the retail sector, utilizing our no integration tools. We can quickly set up a website for them, which they can use to authenticate users locally or nationwide. We aim to maximize what we can accomplish before the total lockdown is implemented. As for the exact number of new clients we've brought on board, I'm not certain, but perhaps Bill from the implementation team can provide some insight. We likely have a small handful of new clients.

Bill White, CFO

Yes. We – about a dozen Bryan about 12.

Mike Grondahl, Analyst

Got it. And the two regional banks, were they early in the quarter or late in the quarter? I'm just trying to kind of get their timing throughout.

Bryan Lewis, CEO

Yes. Mike, I think they were kind of throughout the quarter. It was a phased rollout throughout the whole quarter.

Mike Grondahl, Analyst

Got it. And then the home improvement client you've been working on for a while. Did that go live? Or what's the update there?

Bryan Lewis, CEO

They're working with the bank that's being slow. So they're not going to go live. I can tell you in our projections we weren't counting on much of it just knowing that bank is but they're certainly saying they should be Q1.

Mike Grondahl, Analyst

Got it. Well, nice to know it’s coming in. Congrats again, guys. Thank you.

Bryan Lewis, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Scott Buck with H.C. Wainwright. Please proceed with your question.

Scott Buck, Analyst

Hey, good afternoon, guys. Just a couple for me. First, did you have any of your customers or retailers paying at the minimum during the third quarter?

Bryan Lewis, CEO

No. Everybody hit – or I don't know Bill did anybody – I don't think anybody did. You know..

Bill White, CFO

Yes, I'm thinking of the major customers Bryan they were above minimums but we might have had a couple of smaller customers at the minimums that weren't open.

Bryan Lewis, CEO

Right.

Scott Buck, Analyst

All right. Perfect. Second, well I assume there was finished with implementations at this point in the year but what does the pipeline look like today for 2021 implementations versus kind of where you were a year ago looking at 2020?

Bryan Lewis, CEO

I'd say that our implementation pipeline continues to remain relatively static because as soon – for as many as we bring live we've got that many new ones that come on board. So it's been – Bill does a great job of and his team of getting people running and out the door and the sales teams and our clients are doing an equally good job of bringing in new things into the beginning of the funnel of the pipeline. So I'm very happy with how we look in terms of the prospects to bring live going forward.

Scott Buck, Analyst

Great. And last one. In terms of OpEx thinking about next year besides adding some hedge in sales, is there any other kind of outsized expense or project you're looking at for the year?

Bryan Lewis, CEO

Not looking at a ton of steps. Obviously, I want to add developers. We've talked about that always salespeople, a little bit on the marketing things. But we're not talking about major stuff probably somewhere between an increase of 10% to 15%.

Scott Buck, Analyst

Okay. Perfect. I appreciate it. That helped guys. Thank you.

Bryan Lewis, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Kara Anderson with B. Riley & Company. Please proceed with your question.

Kara Anderson, Analyst

Hi, good afternoon. I first wanted to ask about the gross margin. Just sort of can you comment on the staying power of that? Just kind of the non-fact-based revenues lower than they were historically?

Bryan Lewis, CEO

Obviously, it's tied to the more we sell in hardware, which is really not our game. Again we always do that as an accommodation to clients. It's not something that we do. We go out and try and do. It's just – if someone finds it easier to get the hardware through us, we do it. So I think that we'll see that change depending on a couple of things. One would be some of the products that we're selling facial recognition, it's through a partner. So as facial recognition increases, depending on the mix of the products between partners and what we're selling ourselves that could change. Certainly for our core products, Bill has been pretty out of it since before I got here and the entire time that I have been here that we do expect that to be in that 85% range. But again as product mix comes in and changes that could change as well.

Kara Anderson, Analyst

Got it. And I think you mentioned when you were talking about the implementations and maybe I heard it incorrectly some were for online. Are any of those also using the facial recognition partner? Or all of them? Just maybe comment on that or clarify.

Bryan Lewis, CEO

Yes. We've got a handful that are either in production, using it now live, or they're testing or in pilot, seeing how it impacts their business, how well it works, those types of things. Those that have gone in production very much like it. They're certainly not doing it on every scan. Some of our clients are saying, sort of, I'm worried about it and I want to maybe go that extra step, because they can choose whether or not they want to with each interaction to determine whether or not they want to go facial or not.

Kara Anderson, Analyst

Got it. And then lastly for me. Can you comment on how volumes this quarter, I guess, through the month of October are trending maybe versus pre-COVID levels?

Bryan Lewis, CEO

We are up about 13% compared to October of last year. We're noticing an increase in activity through online channels and call center interactions, which indicates that while not everyone is visiting stores, our online tools are performing well. People are out shopping, and even if malls aren't as crowded as before, those who are going out seem to be doing so with a clear intention to shop, which is typically beneficial for us.

Kara Anderson, Analyst

Got it. Thanks so much.

Bryan Lewis, CEO

Thank you.

Operator, Operator

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

Roger Liddell, Analyst

Hello, Bill and Bryan.

Bill White, CFO

Hi, Roger.

Bryan Lewis, CEO

Hi, Roger.

Roger Liddell, Analyst

You released a press release, what, just a week or so ago on Ipsidy and the collaboration that you are now entering into or furthering. Bryan, as I recall in the past you weren't dismissive of the opportunity in image processing, facial imaging, for all the reasons you laid out. What has changed to make you now a lot of move forward on this? And does it have great open-ended legs? Or is it simply a segment of the suite of products?

Bryan Lewis, CEO

There are a couple of things to mention. First, a press release was picked up and re-released by a media company, which surprised us all. I'm not dismissive of facial recognition; I believe it has its place in the market. Partnering with experts in this area makes a lot of sense since many people excel in it. We've worked closely and effectively with Ipsidy, and I see it becoming a significant product for us. I want to ensure that we offer a multi-faceted system; when clients come to Intellicheck, we can provide various signals to authenticate individuals, rather than just a simple yes, no, or expired status on a license. For example, in New York State, someone can request a new license to be sent to an alternative address, which can lead to legitimate licenses being misused in crimes. We can inform clients that this is a recently reissued license, prompting them to reconsider their credit decisions. The same concept applies to facial recognition. It will increasingly play a role, although there are valid concerns about demographic bias. We chose a partner that utilizes models without apparent bias. However, until there is widespread comfort with this technology, it may not be adopted as widely as document authentication, but it will grow, and I want to ensure our clients have access to these tools if they want them.

Roger Liddell, Analyst

Next, regarding chargebacks, they have become a significant concern over time. Chargebacks are costly, and retailers have strategies to avoid or reduce them. The figures are surprisingly high, around $17 billion last year, and seem to be on the rise. Is the increase in chargebacks, rather than issues with credit card usage, becoming a notable factor driving the need for our solutions?

Bryan Lewis, CEO

One of the key focuses I have with the sales team is the account lookup use case, where a customer forgets their credit card and wants to make a charge. Those scans are significantly more frequent than those for new account openings. This increase is partly due to retailers trying to protect themselves against chargebacks. We're discussing this with retailers and banks, educating them on alternative uses for our tools. A substantial portion of chargebacks is also attributed to friendly fraud, where a legitimate transaction is disputed by the person who made it. It's not identity theft; it's direct theft because the individual makes a purchase and then denies doing so. By authenticating the license at the time of purchase, we can confirm that the transaction was indeed made by that person, regardless of whether it was online, over the phone, or in-store. When considering various factors, we often cite identity theft at about $16.9 billion. Additionally, chargebacks amount to roughly $17 billion, and synthetic identity theft adds another $6 billion to $8 billion. There is a significant amount of loss we can help mitigate. Many of our clients are utilizing account lookup or account opening, or both, on their websites, but we see opportunities in every client where there is at least one use case that we could address. This highlights the need for a larger sales force to educate clients on how we can support them and the potential savings available.

Roger Liddell, Analyst

On the humanitarian, the large humanitarian organization. This is interesting and that it certainly would get recognition so it is wonderful to have that organization as a reference. But in fact the cash registered as an emergency unless there's a disaster and they're repeating out there in the field? Or is there an annual type C maybe you're doing it pro bono, but is there anything you want to share with us on this particular opportunity?

Bryan Lewis, CEO

You're right, Roger. I hope that it was never necessary for these situations, as that would imply we haven't encountered any major issues needing assistance. I anticipate it will focus on scenarios where there is a genuine requirement for support. They are starting with a specific use case where funding is designated for military service personnel, and they aim to broaden this initiative. They have substantial financial resources and are eager to ensure the aid reaches the appropriate individuals, particularly considering the significant fraud that emerged during COVID, including the theft of unemployment benefits. It's evident that criminals lack ethics and tend to exploit crises. Discussing their involvement in press releases is a positive reference, but I would prefer that the name recognition translates into actual assistance, as that would indicate a better overall situation for everyone.

Roger Liddell, Analyst

Okay. And finally on the call centers, which looked to be a very significant opportunity within your client, your current client base. But revenues would be variable because you have a suite of products, the client, the customer service rep can employ at any given moment. So is the leverage showing up the fulfillment of the opportunity that you envision earlier?

Bryan Lewis, CEO

I'm very pleased with what we're observing in the call centers. Specifically, for the financial services company that accounts for about half of the revenues from call centers or online channels, we're seeing substantial volume. I anticipate this trend will continue to grow due to the profitability of account takeovers, where it's faster to access money through such means. The reputational risk is prompting banks to increase authentication measures to better protect themselves and their clients. They're starting to communicate to clients that the need for authentication is for their protection. This is why the financial services company is expanding their challenge use cases and increasing flags for potential account takeovers, leading to more authentication requests. In my view, especially in the person-not-present environment, this represents a growing market.

Roger Liddell, Analyst

That's great. Good report.

Bryan Lewis, CEO

Thanks.

Operator, Operator

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

Bryan Lewis, CEO

So thanks everybody for coming on to the call and thanks everyone, the analysts for the great questions. I just also want to thank my team who continues to do exceptional work in certainly odd times. So it's a pleasure working with them. They deserve the credit certainly more than I do. So thanks to them. Thanks to you all for being on the call and stay healthy and we'll talk to you next quarter.

Operator, Operator

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.