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spk02: Greetings and welcome to the IntelliCheck second quarter of 2024 earnings call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your hosts, Gar Jackson and Invest Relations. Please go ahead.
spk03: Thank you, operator. Good afternoon and thank you for joining us today for the IntelliCheck second quarter 2024 earnings call. Before we get started, I will take a few minutes to read the forward-looking statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. When used in this conference call, words such as will, believe, expect, anticipate, encourage, and similar expressions as they relate to the company or its management, as well as assumptions made by and information currently available to the company's management, identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the company undertakes no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether resulting from such changes, new information, subsequent events, or otherwise. Additional information concerning forward-looking statements is contained under the Headings of Safe Harbor Statement and risk factors listed from time to time in the company's filings with the Securities and Exchange Commission. Statements made on today's call are as of today, August 8, 2024. 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 will begin today's call with Brian Lewis, IntelliChex Chief Executive Officer, and then Jeff Ishmael, IntelliChex Chief Operating Officer and Chief Financial Officer, who will discuss the second quarter 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.
spk05: Thanks, Garen. Thank you all for joining us for our Q2 earnings call. As we begin today, it is important to look at a milestone that highlights what I continue to emphasize. Fraud and identity theft isn't going away, and a look at the latest data underscores the significance and pervasiveness of the problem. According to the Identity Theft Resource Center, the number of data breach victims has exceeded one billion people for the first half of 2024, compared to 183 million people who were data breach victims in the first half of 2023. That represents more than a 400% increase, and both are staggering numbers. It's worth pausing a moment to digest the impact. Each of these data breach victims are now prime candidates for identity theft and fraud. To underscore that data breaches equal identity theft, remember that in 2023, there was a 13% increase in traditional identity theft losses, where a stolen identity was used to commit a crime. Losses rose to $23 billion, impacting 15 million victims in the U.S. With that as a backdrop, our mission remains clear. We continue to believe that our technology is the most effective at stopping fraud and identity theft, and that IntelliCheck is the best first step in identifying that a person is who they say they are. It's that simple. The IntelliCheck identity platform allows our customers to confirm that the person they are entering into a transaction with is who they say they are, and that they can and want to do business with them, and our customers are able to do it so quickly, easily, and seamlessly without the need for new hardware. Because of our proven technology's high degree of accuracy, this simple first step allows a transaction to go forward with confidence, facilitating the onboarding of new good customers while assuring bad actors will not be successful. In looking at Q2, you will see the value of the strategic moves we have made. You are probably well aware that we are currently heavily dependent on our retailers to drive revenue. We have been successfully expanding our presence in additional market verticals in line with our strategic plan to remain agile as we look to continue to fuel growth. Understand that we are still building on a relatively small base, but one that is growing. This diversification will take time, but we believe we are well underway. Turning now to a brief overview of our Q2 results that Jeff will go over in more detail shortly. Q2 SaaS revenues were $4.6 million, down 36,000 versus a year ago period. We maintained robust expense disciplines showcased by our operating expenses that were down 770,000 or 17% versus the same period last year. The company's net income improved by $726,000 to a net loss of $127,000 for the second quarter of 2024 compared to a net loss of $853,000 for the same period in 2023. A snapshot of market realities gives you an important frame of reference. As it stands today, retail continues to be largely bifurcated with the luxury segment benefiting from high income purchasers, so it's doing relatively well. However, our clients include many apparel retailers who continue to see headwinds from consumer pullback, and this also impacts department and home improvement stores' channels to guide this technique to enable physical ID documents to be presented during an electronic validation flow that uses the end user's phone. These checks can confirm if the documents presented in this session are physical versus printed images or simulated by pointing the camera at another screen, or they can spot edits to the user's picture printed on the front of ID, which is common with generative AI attacks. You may recall we introduced a product called Capture to simplify our clients' remote capture of documents. Instead of doing a lot of programming with two simple webhooks to IntelliCheck, we did it for them. It was completely white-labeled, and their clients never knew it was us. We are now providing a similar tool for clients that want to embed us in their proprietary mobile app. With this new tool, our clients can make one call from their mobile app to launch the IntelliCheck identity validation process. Again, it's completely white-labeled within their app, and their customer never even knew it was us. As we like to say, the best identity experience for your customer that they never knew they had. Before turning the call over to Jeff to discuss our Q2 financial results, I evict feelings as I turn to Jeff one last time to discuss our quarterly results. Jeff, everyone at IntelliCheck is grateful to you for all your contributions over the past two years. At the same time, it's hard to say goodbye to someone I think of so much of personally and professionally. And I'm also delighted to introduce our listeners today to Adam Stragovitz, who will be taking over the role of CFO on September 1st. Jeff and Adam have already been working together on a seamless transition. Jeff has built a solid finance team, and under Adam's leadership, we believe that we are well positioned going forward. With that, I thank Jeff and I turn the call over him to discuss our Q2 results.
spk04: Thank you, Brian. I very much appreciate those kind comments. I'm pleased with the continued progress that we've been making throughout the organization as we continue our efforts to recalibrate our spend and redistribute investment into the areas that we believe will fuel our growth and profitability, as well as continued improvement in both our net income and earnings per share in results for the second quarter. We are continuing our focus on the metrics of SaaS revenue. As we had previously discussed, we have completed the right sizing of pricing for our legacy accounts. We continue enforcing internal disciplines on CPI increases, and we have continued signing on new customers at higher rates than we have traditionally executed. We remain encouraged by the improvement in our price per scan metric as it continues to speak to the testimony of the value realized by our new and existing customers. We are also continuing to maintain our focus on operating expenses to ensure that we achieve the expected return on our investments in this area. Within the second quarter period, we realized additional benefits of our 2023 restructuring efforts, which contributed to the subsequent improvement in our -over-year net income results. Turning now to our second quarter results. Revenue for the second quarter of 2024 decreased 1% to ,672,000 compared to ,716,000 in the same period of 2023. Our SaaS revenue for the second quarter of 2024 decreased .8% to ,627,000 and ,663,000 during the same period of 2023 and represented 99% of our second quarter revenue. Gross profit as a percentage of revenues was in line with our expectations at .5% for the second quarter of 2024 compared to .5% for the same period of 2023. The result is within our previously discussed range of 90 to 91% and is reflective of our re-architecture efforts as we incurred planned overlap in our cloud expense fees. Our product team has demonstrated that they have been able to maintain reoccurring margins of over 90% throughout the re-architecture process. That being said, we will continue to scrutinize our cost structure with the goal to maintain or improve upon that level. Operating expenses, which consist of selling general and administrative, marketing, and research and development expenses, decreased 770,000 or .3% to ,443,000 for the second quarter of 2024 compared to ,213,000 for the same period of 2023. Included within operating expenses for the second quarter of 2024 and 2023 were $72,000 and $323,000 respectively of non-cash equity compensation expense. Within the second quarter, we recognized $781,000 in software capitalization tied to our re-architecture efforts. While this was higher than our prior guidance, the product team was able to accelerate their re-architecture efforts in the second quarter and complete the process they kicked off in the fourth quarter of 2023. The product team, which was supporting multiple implementation projects, leaned heavier on external consultants to complete the re-architecture efforts within their originally committed second quarter time frame. On a constant basis, adding back in our capitalized software expense or operating expenses as a percentage of revenues increased 128 basis points against the same period of 2023. Turning to net income and adjusted EBITDA. The company's net income improved by 726,000 or 83% to a net loss of 127,000 for the second quarter of 2024 compared to a net loss of 853,000 for the same period of 2023. Net loss per diluted share for the second quarter of 2024 improved by 3 cents to a net loss of 1 cent per diluted share compared to the net loss of 4 cents per diluted share for the same period of 2023. The weighted average diluted common shares were 19.5 million for the second quarter of 2024 compared to 19.1 million for the same period of 2023. Adjusted EBITDA earnings to poor interest and other income, provision for income taxes, sales tax accruals, depreciation, amortization, stock based compensation expense, and certain non-recurring charges decreased by 106,000 resulting in a loss of 70,000 compared to a gain of 36,000 for the same period of 2023. A balance sheet remains strong when we finish the second quarter with 7.3 million in cash and short-term investments. We also continue to ensure we are properly managing our cash reserves which generated 88,000 in interest income during the second quarter versus an absence of interest income in the same period of 2023. Turning now to the progress on our internal initiatives. 2024 continues to represent a year of execution as we will continue to pivot off our 2023 restructuring effort and deploy our spending to meaningful marketing and brand initiatives that we believe will drive top line revenue. As we previously discussed, we have successfully executed on a material shift in our expenses where we have taken previously allocated G&A spend and moved them into support for trade shows, regional conferences, and other brand initiatives. As Brian discussed in our last call, quick strike efforts across the team have resulted in the attendance of six trade shows in the first half of 2024 with additional shows planned in the second half of the year. This is a key call out as the company outside of targeted meetings did not have a physical presence at any trade shows since prior to COVID. While we have historically not segregated our sales and marketing expenses, this portion of our operating expenses are up 21% versus the prior year and comprise 34% of our total operating expenses versus 24% in the prior year. Turning to our R&D expenses, and as we have previously communicated, our R&D spend continued to decrease year over year during the second quarter as we completed our re-architecture efforts within the targeted second quarter time frame. As previously guided for 2024, we expect our R&D will comprise no more than 18 to 20% of our operating expenses moving forward, which compares to approximately 30% during the 2020 to 2022 period, which we then subsequently reduced to approximately 22% in 2023. This change in spend composition has supported the re-architecture of the product platform, which has been a three-quarter focus of Jonathan and the product team, along with the bolstering of our data science efforts, which we expect will result in a higher level of service and reporting for our customers. Overall, we expect a continuously leverage increase in our OPEX spend against our anticipated growth in the latter half of 2024 and into 2025. While we have been significantly increasing program spend on the sales and marketing side of the business to drive top-line revenues, we believe we are still properly structured in our headcount and expect a 2024 year-end headcount that will be approximately equal to the headcount we finished with in 2022. We believe that we now have a significantly higher caliber team that has the financial support and data analytics to drive the growth that we expect this brand should be able to achieve. As mentioned in earlier remarks, we continue to stay focused on our cost structure, which when adjusted for previously mentioned software capitalization, continues to show improved leverage versus prior years. The results is consistent with our focus on bringing down our operating expenses as a percentage of revenues, which averaged 135% of our SaaS revenues during the 2020 and 2022 period. We remain committed to improving our adjusted EBITDA results for the year, a commitment which we exceeded last year and now puts us on a position to start moving our results into a more positive position for 2024. As discussed in our last call, improved adjusted EBITDA results for 2024 will be the combined disciplines of executing on our revenue plans, ensuring consistency in our gross margins, and holding all the team accountable to their FY24 operating budgets. During the prior quarter, we also discussed the continued cultivation of partnerships and the development that was being done with recognized hardware companies, and I'm encouraged by the foundation that has been getting laid over the last three quarters since the program was initiated. Since the proper launch of the program in the fourth quarter, we have finalized agreements with 21 partners and have another 10 scheduled to sign by the end of Q3. This partner count is higher than we were originally targeting, so the key focus in the second half of the year will be fully activating these new partners and generating meaningful bookings and revenues to fuel growth in 2025. We've been actively cultivating new partners across identity access management platforms, hardware OEMs, as well as an expansion of our real estate and automotive partnerships, which Chris had originally started cultivating. In consideration of our second half 2024 outlook, we expect to see continued gross margins of approximately 90 to 91% while we continue to improve our architecture and data intelligence capabilities. We also expect to see continued leverage in our operating expenses as a result of the expense initiatives we implemented in 2023. As previously discussed, we expect the non-cash component of our spending to decrease by 400 to 500 basis points versus 2023 with 90% of that being total stock based compensation. In closing, I want to thank everyone on the IntelliCheck team for allowing me the opportunity to join them and providing the necessary support to make the meaningful changes we have over the last two years to us. I'm pleased that we've been able to leave Brian and Adam a solid financial reporting and forecasting platform, an improved and healthy auditor relationship, and a remediation of open historical accounting issues that existed prior to my arrival. I'm confident that all the necessary support mechanisms are in place for Brian and Adam to focus on accelerating the growth opportunities that are available to this company. I look forward to listening to our K3 results with all of you in November hosted by Brian and Adam.
spk02: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. And the first question comes from the line of Jeff Van Rooi with Craig Hallam Capital Group. Please proceed.
spk01: Hey, guys. Thanks for taking my question. This is Daniel on for Jeff. Just on the retail, if we could double click on that and the headwinds there, are you seeing the retail customers coming back on actually use cases, the number of locations that they're deploying a solution, or is this more just them seeing less volume and naturally having less account openings, less card not present uses, et cetera?
spk05: Stop using the product or stop using it in any form that they used to use it before. And unfortunately, the only time we're seeing that they're using it in less stores is because they're closing them. So we've got one of the retailers that comes to us through a bank is talking about shutting down 300 stores. We had one retailer, as we discussed, that comes directly to us, declared bankruptcy and is shutting down all of their stores. So there's a combination of that. And then I think just we're seeing less traffic in a way. Certainly credit card debt is up huge. Delinquencies are up. So I think part of it is just consumers are having problems with credit. And I don't think they're shopping as much, which shows in some of the retailers, you know, their earnings. So, no, nobody is not using it in any way that they used it before. Nobody is not using it in stores that are open. It is really some economic factors, bankruptcies and downsizing of the retailers.
spk01: Makes sense. And then just last quarter, you quantified that the retail volumes is being down, I believe, 10 percent year over year. Do you have that number this quarter?
spk05: Yeah, overall, they're down about 16 percent year over year. And it's a variation. Like I said, electronics and sporting goods are up. And then everything else is down, varying levels, depending on which particular vertical we're talking about. Apparel and department stores and home improvement are all slightly different, but for the most part, down.
spk01: OK, thanks. The quantification is super helpful. And then just last of all, how would you advise us thinking through modeling this going forward in terms of the retail decline and how you would think about that playing into the next few quarters relative to this one? Thanks.
spk05: Look, I think it's in a way, it's hard to say because I think a lot of it's tied to, you know, however the economy does. You know, so I'm kind of looking at this is, you know, what I'm excited about is if you think about it, our largest revenue sector is down 16 percent. But we're flat, which in my mind shows that diversifying into other sectors that aren't as dependent upon consumer credit really matters. And then.
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