Intellicheck, Inc.

Greetings, and welcome to the IntelliCheck fourth quarter and year-end 2020 earnings conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Gar Jackson. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today for the IntelliCheck fourth quarter and full year 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 as 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, March 16th, 2021. Management will also use the financial term adjusted EBITDA on today's call. Please refer to the company's press release issued this afternoon for further information, reconciliation, and context for the use of this term. We'll begin today's call with Brian Lewis, IntelliCheck's Chief Executive Officer, and then Bill White, IntelliCheck's Chief Financial Officer, who will discuss the Q4 and full year 2020 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 Brian.

Thanks, Garner, and welcome everyone to our fourth quarter and fiscal year 2020 earnings call. We continue to show solid growth with total revenue for fiscal year 2020 of 40% over 2019, and SAS revenue up 54% during the same period. During the fourth quarter, total revenue was up 6% over Q4 2019, but more importantly, SAS revenue was up 18% over the same period. Sequentially, Q4 SAS revenue was up 23% versus Q3 2019. We believe that given COVID and the return to lockdowns in portions of the country throughout the year, those numbers bode well for the future. Let me explain. During 2020, we continued to add clients and retailers, and existing clients continued to add additional use cases all through the lockdowns, partial reopenings, depressed levels of retail traffic, and returns to more lockdowns in some markets. Throughout the pandemic, we could immediately see the impact of closings and openings through transaction counts. From June through December, when some places began to partially reopen, albeit with limited traffic and typically occupancy restrictions, we saw an increase in transaction counts of 190%. While this is an impressive sign of recovery from the pandemic, it isn't a complete recovery versus pre-pandemic levels. Same brand transaction volumes for Q4 2020 versus Q4 2019 were down an average of 20%. As many regions of the country were still not completely open, or limitations on occupancy resulting in limited traffic. Even with this decrease in transactions, SAS revenue was up both sequentially and year over year. We believe the increase was due to a number of factors. First would be the new clients we signed over the year and the additional use cases employed by existing clients. Over the course of the year, we executed 32 integrations that were either for new clients were expanded use cases with existing clients. In Q4, we had 10 companies either begin a pilot, sign on as new, or an existing client expanding a use case. Considering that historically implementations have been limited during the fourth quarter peak holiday selling season, this was a good result. With our expanded focus on e-commerce transactions, we had two existing clients add facial biometrics to their person-not-present authentications. During the fourth quarter, we initiated two pilots that had subsequently become clients. One was for a farm supply store with over 120 locations that is using our ID Check online fraud solution. The second was a bank consortium-owned company that helps financial firms detect and prevent fraud. They started with our no integration web product and are now working to integrate our API into their mobile apps and other products. During the quarter, we also signed a credit union located in L.A., demonstrating that we continue to expand adoption of our technology solutions in the financial services market vertical beyond banks. We also continue to expand to new markets with additional uses for our fraud-stopping technology. During the quarter, we signed a California-based company that does tenant screening for rental leases. This is a new vertical market for us and one that, not surprisingly, is a target for identity theft. I think this underscores what I've been saying. The use cases for where you will need to prove you are who you say you are are ever expanding. The second driver of growth is the expansion in the online or person-not-present space. From June through December, we saw a 93% increase in these transactions, with 15 clients either adding the online solution or the addition of new clients that are only e-commerce focused. One retailer that has been with us for a long time saw a 16% increase in volumes during that same six-month period. Drive and growth was a topic I spoke with you about last quarter. You may recall I shared with you my strategic vision that included investments to build on the growth we have achieved. I have taken those initial steps in sales and marketing. In January, we hired a VP of marketing, a needed function IntelliCheck had been lacking. This VP has already had an impact on our messaging, website, and more importantly, driving inbound leads. Our website has been updated to get our key messages across better and faster and will continue to be refined as our messaging evolves. The sales team now has improved marketing pieces and will be adding video to the arsenal to help them sell. I also spoke about hiring salespeople to handle both inbound leads, and more importantly, extend our outreach, particularly within newer markets. When you have the senior vice president of fraud prevention for one of the largest banks in the world calling your product, and I quote, a true game changer in stopping fraud, top five all-time in fraud prevention tools we've put in place, that means it's time to really put the pedal to the metal. To do that, we need more salespeople. We have begun the process and have already started hiring high-caliber talent. We will also be hiring people with proven strategic account management experience. While our large financial institutions continue to expand use cases, I would like to see it happen faster. We believe that people who understand how to strategically plan and execute strategies to build on existing accounts are key to making that happen. Additionally, as I said on the last call, paid placement is becoming the norm. and we will be spending money judiciously to get our message out. We believe that marketing will be a key factor that will help us expand into new markets. And as demonstrated by the new sectors we have ventured into in the past year, it is part of our growth strategy. 2020 was a heck of a year I pray will never be repeated. I'm sorry for those on my team and those on this call who have lost loved ones. At the same time, I am seeing encouraging signs that we are turning the corner. With the vaccine becoming more widely available, hopefully we are that much closer to herd immunity, a fully open economy, and normalized retail traffic. In the meantime, what we have seen and continue to see is that identity theft and fraud doesn't stop for a pandemic and has served to raise consumer and market awareness of the toll it takes. Ultimately, the data tells the story. In the past year, one in five Americans fell victim to identity theft or attempted identity theft. According to a new Harris Research poll, identity theft has become top of mind for three in five Americans this year, and 60% expect they will suffer financial loss as victims of identity theft. The need is there, and we remain confident we have an important role to play. So we will continue to work with new and existing clients to expand the ways we can stop identity theft with our proven technology solutions. In closing, I'm looking forward to 2021 and what we believe is the promise and opportunity it holds for IntelliCheck. I will now turn the call over to Bill to discuss our financial results in more detail.

Thank you, Brian, and a good day to our shareholders, guests, and listeners. I'd like to discuss some of the financial information that was contained in our press release for the fourth quarter and fiscal year ending December 31st, 2020. I'll begin with our fourth quarter results. Revenue for the fourth quarter ended December 31, 2020 grew 6% to 3,078,000 versus 2,897,000 for the same period last year. Our SAS revenue was approximately 3,012,000 for Q4 of 2020, an 18% increase from 2,557,000 in Q4 of 2019 and grew 23% sequentially over the third quarter of 2020. Gross profit as a percentage of revenue was 92.6% for the quarter ended December 31, 2020, compared to 88.8% for the quarter ended December 31, 2019. Operating expenses that consist of selling, general and administrative, and research and development expenses decreased by 4%, or $110,000 to $2,389,000 for the quarter versus 2,500,000 for the same quarter in 2019. The decrease is primarily due to reduced legal fees and sales-related expenses. The company posted net income of 1,260,000 for the three months ended December 31st, 2020, compared to a net income of 106,000 for the quarter ended December 31st, 2019. The net income for diluted share was 7 cents, versus net income for diluted share of one cent in the prior period. It's important to note that approximately 796,000 or four cents per diluted share of our net income was related to the forgiveness of the PPP loan we received during the year. Adjusted EBITDA for the quarter ended December 31st, 2020 was 635,000 compared to EBITDA of 216,000 in the quarter ended December 31st, 2019. Interest and other income were approximately $800,000 for the quarter ended December 31st, 2020 as compared to $35,000 for the same period in 2019. The increase is due to the forgiveness of our PPP loan of approximately $800,000. Turning now to our full 2020 year results. Revenue for the full year ended December 31, 2020 was up 40% to $10.7 million compared to $7.7 million for the prior year. Our SAS revenue for the calendar year 2020 was 9.3 million, an increase of 54% as compared to 6.1 million in the prior year. Driven by the growth in our SAS business, growth profit as a percentage of revenue remained strong at 86.7% for the year ended December 31, 2020, compared to 87% during the same period last year. Operating expenses for the year were 9.6 million, compared to $9.3 million for the year ended December 31, 2019. Selling general and administrative expenses increased 4% to $5.9 million for the year ended December 31, 2020, from $5.7 million for the year ended December 31, 2019, primarily due to higher personnel costs and accrued incentive plans. Research and development expenses were $3.7 million for the year ended December 31, 2020 and 2019. The company had net income of $558,000 for the year ended December 31, 2020, as compared to a net loss of $2.5 million for the calendar year 2019. The net income per diluted share was $0.03 versus a net loss of $0.16 in the prior year. The weighted average per diluted share count were adjusted under $18 million at year end versus $15.7 million in the prior year. Adjusted EBITDA was $329,000 for 2020, an improvement of approximately $2.1 million as compared to adjusted EBITDA of a negative $1.8 million for 2019. Interest and other income was $818,000 for the year ended December 31, 2020. It's compared to $99,000 for the year ended December 31, 2019. As mentioned earlier, this increase is due to the forgiveness of the PPP loan of approximately $800,000. I'd now like to focus on the company's liquidity and capital resources. As of December 31, 2020, the company had cash of $13.1 million, working capital divided as current assets minus current liabilities of $13.4 million, total assets of $24.3 million, and stockholders' equity of $22.2 million. During the 12 months ended December 31, 2020, the company generated net cash of $9.7 million compared to a net cash used of $1 million during the 12 months ended December 31, 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 $10.7 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 $19,000 for the 12-month period ended December 31, 2020, compared to $1.8 million for the same period in 2019. Net cash used in investing activities was $415,000 for the 12 months of 2020 compared to net cash provided by investing activities of 22,000 for the 12-month period ending December 31, 2019. And we generated cash of 10.2 million from financing activities for the 12 months ending December 31, 2020 compared to 793,000 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 this facility. We currently anticipate there are 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 31st, 2020, the company had net operating loss carry forwards of approximately 17 million. I'll now turn the call over to the operator to take your questions.

Operator? Thank you, and I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Mike Rondle. From Northland Securities, your line is now live.

Yeah, thanks, guys, and hope all is well. Any initial comments on January and February, just kind of how that's trended in the new year? And then secondly, I think you mentioned on the e-commerce side maybe two clients or customers using the facial biometrics. are they paying a premium for that or can you kind of help us understand that offering a little bit more?

Yeah. So I guess working backwards where I can remember it, Mike. So yes, there is a premium that's paid for the facial biometrics. So it's an upsell to them. I will say that a lot of people, you know, are interested in the facial biometrics, but it depends on the use case. depending upon how much friction they want to introduce into it. It tends to be more for things like a banking account opening or applying for, you know, sort of a substantial loan. Those are the types of things that people are using it more for than just, you know, an authentication. So it's one of those things that I think people want to see that you have, but I don't see it being used very much anymore. other than for maybe applications where the authentication isn't as accurate or certain as ours. They use it as, you know, a need almost to weed out bad guys who might not want to get their picture taken. In terms of volumes, you know, we've definitely been seeing an increase over time. I wish the world was more open than it is and the vaccine was more out there. So, you know, I'm disappointed that we're not as open as we have, you know, what I'd love us to be. but I am also very excited about the fact that we continue to add clients. So, you know, we're seeing growth even with places that are still partially locked down or have occupancy restrictions.

Got it. And then maybe just as a follow-up, I think I caught the 32 integrations in 2020. And then I think that 10 new pilots in 4Q are, were incremental to that 32. Anything you can give us on sort of new customers or new use cases and that momentum?

Yeah, so it wasn't 10 new pilots in the period. It was 10 new people coming on. Two of them were pilots. Most of our clients don't pilot much anymore because it's easy for us to give them tools to see how well it works. So for the most part, those were the large integrations that required, you know, our tech team to talk to their tech team to connect. That doesn't include some of the things that we do that do not require any integration. So if somebody is using us on a mobile device or other of those things, I don't count those as a large integrations one, because they're not, you know, usually as large in terms of revenue. But it also, you know, it's, doesn't take a lot to get those things going. You know, that's more like law enforcement, smaller jewelry stores, bars, cannabis places, things like that.

Got it. Okay. Hey, thank you, guys.

Thanks, Mike.

Thank you. Next question today is coming from Kara Anderson from B. Riley & Company. Your line is now live.

Hey, guys. Thanks for taking my question.

Thanks, Kara.

Just wondering if you can expand on where you stand with the sales investments a little bit more, you know, in terms of how many people you've hired so far, what their expected ramp is, and then the expectation for the number of hires for the balance of the year.

So far we've hired one. I'm probably going to be adding like three salespeople in total, one account management person to add to what we have on the team. Obviously that will be rolled out. Part of it is I don't want to bring in people so fast I can't train them, but what we are seeing is that we're able to get people from the space who I think will ramp very quickly, people who are used to dealing with the efficacy of the other systems that are out there, and they come in and we let them play with what we have and they see how accurate we are, and they tend to be very excited to come on board. So I think the fact that we're going to hire people who understand the identity authentication space will help with that ramp period.

And then I think last quarter you guys put an expected investment kind of growth rate, which is inclusive of these hires. Correct me if it's wrong, if it was 10% to 15% for 2021 and whether or not that still holds true.

I think that as I looked at the market potential we had out there and what I feel we're leaving on the table by not having more salespeople and more brand market awareness, I think that I'm looking to increase that spread out over the year. I think we've been very smart in terms of we don't just go spend money willy-nilly, but I do think given the amount of clients that we have who are saying things like that, that VP of fraud that I quoted, uh, who will act as references for us. I think it's really time for us to kind of match, uh, some of the Salesforce sizes of our competitors, because we do have, in my opinion, a much better way, much more, um, uh, certain way of authenticating a person. becoming much more important in a person not present environment as many things do go online. And we are much simpler to put in place and to use. Much easier for somebody to scan the back of a license than take a photo. Because what I'd say, you know, anybody on the call, try and take a photo of your license without glare on it. That glare is going to get in the way of authenticating anybody who's trying to authenticate through templating. We don't have those issues and that provides certainty. I think it's going to help us really grow, but I need the people to get that message out there.

Got it. And then just one more for me. I'm just thinking about the first quarter. You know, you did comment about volumes there, but should we expect that you can grow through the seasonality of 4Q given the dynamic in some states like California, which regressed in reopening in December, and just the general holiday shift that we saw that moved online this year versus in-store?

Well, you know, we did grow in Q. I mean, that's the thing that gives me a lot of optimism about the future. There were a lot of places that went to some pretty regressive seasons. you know, lockdown, shutdowns, whatever you want to call them during that period, you know, as they saw COVID cases rises, yet we still grew. And at the same time, we still signed new clients, you know, who were, you know, I'd say barely active in Q4. And the fact that, you know, as I said, same store, you know, scans, you know, when I look at, you know, clients that were fully up, you know, in 2019 versus, you know, 2020, the fact that their scans were still off, even with the partial openings, 20%, you know, if that goes back to normal, that I think, you know, bodes well for us. And I would assume that also anybody that knew was signed on, they probably have depressed floor traffic as well. So I'm looking for the, you know, hopefully retail comes back as everybody gets vaccinated and, you know, feels comfortable going out. But at the same time, we're obviously focusing on making sure that all of our clients understand how to use our digital channel products to authenticate when the person isn't there.

Sorry, and thank you for that. Just one more for me that I thought of, and I'm sorry if I missed this, but did you talk about the pipeline, how it looks today for 2021 versus, say, a year ago?

Are you talking about what we have in terms of integration queue and those types of things?

Yes.

Yeah, it's the same. It seems pretty much as soon as Bill and his team move somebody off, we've got somebody else coming in. So that pipeline has stayed consistent. My only goal now is to make sure as we're bringing in new salespeople, I really tax Bill's implementations team capabilities. by bringing in more people faster.

Thank you.

Thank you.

Thank you. Our next question today is coming from Scott Buck from HUA Wright. Your line is now live.

Hey, good afternoon, guys. Just a couple from me. First, looking at 2021 and 2022, Is it safe to assume that a lot of the new clients coming on are no longer kind of the legacy brick and mortar retailers, but it's a lot more of the banks, the credit unions, the specialty lenders, and maybe some of the, you know, call centers? And if that's the case, you know, have you kind of exhausted the retail side?

I'd say it's a combination of all of the above. And then I would also say in no way, shape, or form have we exhausted the retail side. You know, our clients, you know, our bank partners, if you will, you know, the ones who issue the white label credit cards still have plenty to go. And that's where a lot of our pipeline comes from is, you know, a lot of it comes from them and a lot of it comes from, you know, the sales and the new accounts coming in from our sales force. But it is a combination of, you know, new markets. You know, like the, the company that's checking, are you who you say you are when you want to remotely get that lease, uh, to traditional stores where you are walking in, uh, and applying for stuff and then new, uh, financial services firms that need to, you know, open accounts. And then thankfully we still have a lot of business that's coming from our existing large bank clients who are finding. new areas within their organization to use us. So I like the fact that while we still have plenty of runway with the existing kind of retail credit card space, we're broadening who we're selling to and how we're selling to make sure that we're across a much broader spectrum of clients.

Great, that's helpful, Brian. I'm curious, as you add some of these new markets, should we expect a smoothing of the seasonality?

I guess. I don't have enough data to say some of these markets are seasonal enough or how they are. But I guess if we're going into things that are not related to holiday shopping seasons more and more, I would say yes. You know, how quickly that happens, I'm not sure. Right.

Okay. And then last one, I think this is the, you know, third quarter in a row where gross margins have run, you know, meaningfully higher than the 85% target. Should we start to look at maybe bumping that up for 21 and 2022, or are you guys, I don't know, still kind of directing people towards 85%? Yeah, I think we're comfortable.

Yeah, comfortable with that. I don't know, Bill, if you want to comment on that.

Yeah, you know, we didn't have really much in the way of hardware orders, Scott. You know, so from a mixed product perspective, you know, I still think 85 is a good number. It's a conservative number, but I think it's a good number to go with.

Great, guys. I appreciate the time. Thanks, Scott.

Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, I just want to thank everybody for tuning into the call. I want to thank my team for, I think, doing an excellent job during what has been, you know, a very trying year for all of us. And I truly do look forward to 2021. I was able to get my vaccine and I feel good and I'm happy about that. and I hope we all stay happy and healthy and good, and I look forward to when we can all travel again, and so many of the people that are on this call that I haven't seen in almost a year, I look forward to seeing again. So thank you all very much.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.