Intellicheck, Inc.

Good day, ladies and gentlemen, and welcome to the IntelliCheck fourth quarter and full year 2021 earnings conference call. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following management's prepared remarks. At this time, it is my pleasure to turn the floor over to your host, Mr. Gar Jackson. Sir, the floor is yours.

Thank you, operator. Good afternoon, and thank you for joining us today for the IntelliCheck fourth quarter and full 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 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, March 9, 2022. Management will use the financial term adjusted EBITDA on 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'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 2021 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.

Thank you, Gar. As you saw in the press release, Q4 SaaS revenue was $3,715,000, up 23% over the same period in 2020, with the gross profit as a percentage of revenues at 92%. SaaS revenue for 2021 was $12,970,000, up 30% over 2020. The year-over-year percentage change was significant, but as always, I want more. So what do we need to do to continue to accelerate our growth? What we have learned over the past few years is that because we have the most accurate validation technology solution, we have pricing power when it comes to both initial contracts and renewals. That said, we are very much aware that it is imperative that we continue to grow a substantive client base. We believe that we are well positioned to achieve this goal. I'll start with recapping the transformational changes we made in 2021 that we believe will serve us well going forward. First was the build out of a proper marketing department. This team has done a number of things to raise both awareness of IntelliCheck and generate inbound leads. During the year, this team updated our branding, rebuilt the website to truly optimize our being picked up in searches, created marketing collateral for the sales team, and most importantly, created targeted online marketing campaigns to, if not create an inbound lead, at least have our name known to make it a warm, not a cold call. The marketing campaigns have certainly paid off. Prior to the launch of these campaigns in April, we basically had zero leads coming in. The inbound leads have been steadily growing, with now over 100 a month coming in and increasing. While most of these have been for age-restricted products, these leads have been across all sectors. Banking, age-restricted, automotive, online notaries, delivery companies, you name it. The smaller age-restricted deals closed quickly while the financial services and banking prospects take longer. The inbound age-restricted leads closed in 2021 had a total ACV of $230,000 with minimal cost of acquisition. That's solid growth in a vertical considering that we did approximately $1 million in age-restricted revenues in 2021. The most important thing about all these leads is they show that the market for identity verification is enormous across multiple and varied sectors. The other thing to note about many of these leads is that they are from companies using the OCR firms some consider our competitors. The companies are unsatisfied with OCR accuracy, have heard of us, and want to give us a shot. Knowing that we have such a large, adjustable market and the resources to increase headcount at the sales force, In 2021, we expanded the sales force, and we've seen the positive effects in two ways. First is that smaller deals are not falling through the cracks and are closing quickly. While each of these deals alone aren't game-changing for the company, they are quick and easy to close, and the ACV will add up over time. Second, the number of deals progressing through the pipeline of mid- to large-size prospects is continuing to increase. However, like I've always said, it isn't about the pipeline, but our ability to close the deals in the pipeline. And let me be candid. I'm not happy with how some of the sales force has been performing, and we are in the process of making the necessary changes. We are going to continue to grow the sales force as we find the right candidates. As I have said on multiple calls, hiring salespeople is always difficult because they are always very good at selling themselves, but sometimes not so good at selling your product. So some of our hires are no longer with us. I've instructed Bruce to focus on hiring seasoned sales executives with identity experience. To that end, two more senior salespeople with industry experience started earlier in March. I've also directed Bruce to institute a series of changes to upgrade our sales training program. Another significant step we took in 2021 was changing our billing to focus primarily on prepaid buckets of transactions that expire after 12 months or a monthly minimum with overages billed in arrears. Prior to this, all billing was in arrears with minimum monthly commitment that did not come close to representing the total transaction volume. Both of the new models have financial incentives for our client not to underestimate the number of transactions. The larger the bucket or guarantee, the better the price. Two notable examples of this are financial services company number four, who in August prepaid for what they thought would be a year's worth of transactions. At best, we estimate that they have 90 days left in that bucket. So basically what they estimated would be a year's worth of scans lasted about nine months. The second was a reseller that sells an omnichannel multibiometric platform to banks. marketplaces, and healthcare systems. They pre-purchased 125,000 transactions with the expectation that it would last for a year. After going live in January, they were already halfway through that bucket. We have been able to continue to raise prices, both at renewal and as we add new clients. As we targeted the age-restricted space harder than we did before, we also took a hard look at the pricing per transaction. Typically, this was sold via an app on a smartphone or tablet with pricing per device. When we looked at the price per transaction, we determined it was far too low and moved all new age-focused clients to either the transaction bucket or the monthly minimum. The results of our efforts is that the transactional price for age-focused clients signed in 2021 are on average six times higher than in previous years. We've also modified our sales approach in the age-focused space by creating a dedicated team. This group has been tasked with renewing all existing clients at the higher rates. As I said, age-restricted SaaS revenue accounted for approximately $1 million of our 2021 total SaaS revenue, and we believe we will see a continued increase in traction through both new customers and price increases going forward. To further aid the efforts in the sales-restricted market, who spent significant time in 2021 on education efforts with legislators in many states. We believe these meetings are extremely important because most state officials do not know how easy it is to get a fake ID. When I speak with a state attorney general or a legislature member and show them a fake from their state, scan it with one of the readily available scanning programs used by many POS systems or handhelds, and that fake passes they suddenly realize why visual inspection and simply scanning do not work. Seeing our technology solutions at work shows them the need for validating, and then they recognize that the laws have not kept up with the technology. We've also been meeting with credible organizations that are active on national and multi-state level on key issues surrounding underage access to age-restricted products. I'm pleased to tell you that we've now formalized a partnership with Responsibility.org, This organization plays a leading role in the fight to eliminate underage drinking. It is active in all 50 states, as well as at the national and local level. This organization is supported by 11 of America's distillers who have expressed a commitment to responsible drinking. We expect to announce additional partnerships resulting from these endeavors. Thankfully, more and more companies are looking to do the right thing. but there are still many major corporations out there that put profits ahead of actually doing the right thing. Hopefully the fear of the $60 million plus lawsuits for wrongful death, move them to do the right thing. And if not, we believe that legislative changes should mandate it. So returning to rate increases, it is important to note that these rate increases on renewals continue to be robust with many of them starting in Q2 of this year. For example, During Q4, we renewed our department store chain client with just over 1,100 locations with a 33% increase effective in Q2 of 2022. In that same period, we renewed the 1,000 location off-price department store chain where we parse not authenticated for applications to a three-year deal. Year one is at the same price and now includes the no receipt return use case which should substantially increase transaction volumes. In year two, the price increases 87%, and in year three, it increases 33%. Another growth area in both 2020 and 2021 has been digital adoption. This has increased dramatically, and the data bears this out. From the initial beta clients in early 2019, The number of clients using us exclusively for the digital channel or for both physical and digital has grown 550% with more than 50 digital clients across multiple market verticals, including online banking, credit card issuers, background checks, delivery service, and automotive dealers. And as a testament to our digital capabilities, in Q4, we signed a California-based online bank. This was notable as it was a direct steal from an OCR competitor. Development has begun, and we anticipate Q3 implementation. The initial use case will be for account opening. Another exciting development in late Q4 is that we began a security audit necessary to start a pilot with another top-five bank. As I've said many times, these can often take six months or more to complete before their information security teams allow our computers to connect. I'm not worried about passing the audit, as all of our banking clients put us through one every year. The initial use case for this client is retail banking, but their teams are already discussing additional physical and digital use cases with us. Now for what I consider the most transformational step forward as we enter 2022. You may have seen the press release last week about Platform 2.0. This new platform allows our clients to do more than just authenticate a person. We now have the tools in place to take it to the next level so that they can not only be sure that the person is who they say they are, but also determine if the authenticated person is someone they want to do business with. As I have said, this transforms us from a company doing strictly, is it really John Doe to is it really John Doe, and I know that he is someone I want to do business with through multiple validation signals, and I know it internationally as well as domestically. We currently have two clients live on the platform and seven new and existing clients onboarding, and additional clients are now planning on migrating to the platform. Keep in mind that Platform 2.0 now incorporates multiple facial biometrics vendors, allows for OCR validation of international documents, And in the next few weeks, we will be releasing sanctions lookups, PEP, address lookups, social security lookups, with more signals to come. All of these are upsell opportunities. Why is this new platform important? Identity, especially in the digital world, is about more than an ID. All of our clients perform additional diligence before doing business with the person, whether it's opening a bank account, providing a loan or credit card, or opening an investment account. We also know that our clients were forced to choose another ID validation vendor for international documents. IntelliCheck was one very accurate and important step in that process. Again, just one step for one region in the world. We believe that Platform 2.0 allows IntelliCheck to move from simply a North American ID validation company to a global identity company, which is crucial as the world evolves and becomes more digital. We built platform 2.0 in collaboration with our clients and input from prospects. By providing them multiple global steps in the identity process through one connection, we reduce their costs and friction, something every company is looking for. We believe the number of clients migrating to this platform proves this point. I was speaking with a rather smart person the other day who said to me, there's a hostile world out there, and he was right. Hostile actors continue to increase the amount of identity theft. Underage drinking, vaping, and cannabis use continue to be a problem. We believe that we are uniquely positioned to address all of these problems. NOW is about pressing the right levers to drive continued and increasing growth, and we believe the changes we put in place in 2021 are the right levers. Brand awareness has improved, leading to quick revenue in the age-restricted space, along with the growing pipeline of financial services companies. We believe our lobbying efforts to update ID validation laws in the age-restricted space will bear fruit over time. We believe that our ongoing refinement of our sales team will allow us to capitalize on both existing markets as well as new verticals where we are just beginning to penetrate. The build-out of Platform 2.0, featuring additional multinational ID and KYC capabilities, we believe provides significant growth opportunities ahead both with new and existing clients. With all of these exciting developments, tempering this is financial services company number two, which recently began a project that will enable them to extend credit to tens of thousands of additional merchants. This required financial services company number two to put a code freeze on all other development, which meant multiple retailers that have been expected to go live in the first half of the year will not. The above-described project should be an interim delay to our short-term growth if they expect to resume integrations in the September timeframe. We believe this short-term pain now represents a likely long-term gain as these new additional applications will need validation. This is very likely going to impact our Q1 results, and although we still have a few weeks remaining in the quarter, we currently anticipate our first quarter SAS revenues will be in the range of $3.2 to $3.35 million. Moving forward, I'm happy to say as part of a general business review, we analyzed churn rate. And since 2018, the company has not lost a single major client to anything other than bankruptcy. And all the financial services clients have grown their use cases. I believe the reason for basically zero churn is the certainty we provide. And I always think it's best when your clients say it for you. So as Lieutenant Joe Jewell of the New Hanover County, North Carolina Sheriff's Office told the Port City Daily News about our technology solutions, he said it worked flawlessly. He went on to say the Sheriff's Office tested 12 companies that claimed to be able to spot fake IDs and IntelliCheck was the only one that worked accurately. I've never heard anyone say that about the competition. I will now turn the call over to Bill, who will go over our Q4 financials.