Greetings, and welcome to the Intellicheck’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gar Jackson, Investor Relations for Intellicheck. Please go ahead, sir.

Thank you, Kevin. Good afternoon, and thank you for joining us today for the Intellicheck First Quarter 2019 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 uncertainties 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, May 1, 2019. 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 Q1 financial results. Following their prepared remarks, we will take questions from our analysts and institutional investors. Today's call will be limited to one hour and I will now turn the call over to Bryan.

Good afternoon, everyone and thank you for joining us for the Q1 2019 Intellicheck Earnings Call. We continue to make progress towards the goals we've set for ourselves and I continue to be excited every day that I walk through the door to our office. I would like to start with some general comments about our growth. Our SaaS revenue continues to grow. SaaS revenue was up 45% quarter-over-quarter and 4% sequentially. We are off to a solid start after our first month of the second quarter and we will believe – we believe we will see our sequential SaaS revenue growth accelerate leading into the third quarter. Notwithstanding the non-cash expenses in Q1, operating expenses were up slightly over Q4, but as we have previously explained, it is largely driven by investments we have made in the business. We needed to expand our implementation team to make sure we had the right number of people with the right skill set to be able to capitalize on the opportunities presented to us. We believe that we are well-positioned to drive solid growth numbers throughout the remainder of the year, which will become clear when I discuss the onboarding process and our current status with a number of key accounts. Although we do not typically onboard new retail customers in Q4, because of the holiday shopping season, the shift to the per-scan revenue model will bake in a bit of seasonality moving forward, given the high volume scans retailers experienced during Q4. Also, we discussed on several of our earnings calls that we no longer do custom development for free. We are in the process of developing a systems integration with a large financial institution that we signed in Q3 and recognized the first of two $185,000 development payments last quarter.…

Thank you, Bryan, and a good day to our shareholders, guests, and listeners. I'd like to discuss some of the financial information that was contained in our press release for the first quarter ended March 31, 2019. I will begin with our first quarter results. Revenue for the first quarter ended March 31, 2019 grew 20% to $1,279,000 versus $1,062,000 for the same period last year. Our SaaS revenue was approximately $861,000 for Q1 2019, a 45% increase from $595,000 in Q1 2018 and it was a 4% sequential increase from approximately $826,000 in Q4 2018. Gross profit as a percentage of revenue continued strong at 85% for the quarter ending March 31, 2019, compared to 90.5% for the quarter ended March 31, 2018. Operating expenses that consists of selling, general and administrative and research and development expenses increased by 13% or $263,000 to $2,306,000 versus $2,043,000 for the prior quarter. The increase was primarily driven by higher non-cash stock-based compensation costs and an increase in development personnel. The company posted a net loss of $1,213,000 for the three months ended March 31, 2019, compared to a net loss of $1,068,000 for the quarter ended March 31, 2018. The net loss per diluted share was $0.08 versus $0.07 in the prior period. Adjusted EBITDA for the quarter ended March 31, 2019 was negative $787,000, compared to negative $962,000 in the quarter ended March 31, 2018. Now I'd like to focus on the company's liquidity and capital resources. As of March 31, 2019, the company had cash of $3.8 million, working capital, defined as current assets minus current liabilities of $3.4 million, total assets of $13.9 million, and stockholder's equity of $12.1 million. During the three months ended March 31, 2019, the company used net cash of $535,000, compared to net…

[Operator Instructions] Our first question today is coming from Shaul Eyal from Oppenheimer.

Hi, thank you gentlemen. This is actually Yi Fu Lee in for Shaul and thank you for providing the deep color on the pipeline for the update for the quarter. My first question is in regards to the gross margin. I know, Bill, you mentioned last quarter that, because, last quarter's gross margin was 93% that it was going to drop-off a bit this quarter. And you guys spoke about the implementation of the team. Can you give us some color on what the implementation of team consists of, like, are they new hiring, new equipment that you guys use?

Good. We had to add personnel, that's the main part of it.

Okay.

So, building the implementation team. Yes.

How big was the add?

The overall engineering salaries are up about $217,000 year-over-year, first quarter versus – this year versus first quarter last year.

Okay. And in terms of like the interest and other income line item, I noticed that the same period of last year, it was like more than double. Were there certain things that led to the drop-off from $13.8 million to $6 million?

That's thousands. That's not millions.

Sorry, sorry, thousands, sorry. I am sorry.

Yes. No, as part of the interest income, our cash balance has been decreasing. So we had less interest income.

Okay. And then, you mentioned about the October rollout, stores tend to stop rolling out the implementations. In terms – and then you mentioned that on 4Q that seasonality-wise, that's still going to be positive. Do – should we expect a drop-off for the fourth quarter?

Yes, what I said was the scans go up significantly in Q4, compared to any other quarter. So, when you think about the fact that people are in a way rushing to get stores live by the end of Q3, we will have what's probably the maximum number of stores going in Q4 during the maximum number of scan quarter. So those two things, as we roll more and more of our clients into the per-scan model, should make that a seasonally high quarter.

Okay. So it's going to net out okay. And then, like last quarter, you mentioned about the four banks, 16 retailer pipeline. Since - for this quarter's update, there is already four retailers, right? As well as one that's going to come in end of this month. Can you give us an update on the pipe for the retailers, as of today?

We still have the 16 that we are dealing with. That basically, there is five that we are in the process of where I have a confirmed date that we are rolling them out. The remainder are, like I said, some have scheduled rollout dates. Until I am 100% certain it's going to roll out, I am not going to talk about it and say it's going to happen if it doesn't. And as I said, the retailers – I am sorry, the banks that we are dealing with, their hope and goal is to get all of their clients up and running. So it's – we are continually talking to additional retailers. But if they don't have a definitive date in which they want to start talking implementation, I am not going to say, throw out the number, I'd rather say that we are still at 16 until I can give more definitive dates on when we think some of these people will be going live.

Okay. And in terms of like the hospital opportunity you mentioned, that the new opportunities with the hospital. Can you give us a little more color on what are some of the products that you are launching and like the opportunities there as well?

It's really no new product. If you think about the core of all of our products, it's what we call ID Check. Is the document you're presenting to me real? Is it your license, State ID or military ID. And the hospitals are using us because people will give somebody their insurance card and then go in and get insured, get their arms set and then they come back to me and say, hey, you didn't pay us for your broken arm and all it takes is an x-ray to prove I never broke my arm. So, the fraud is rather large in that sector. And we are basically just repurposing existing product of Retail ID. Who are you? And now we have a record of you coming into the hospital.

Okay, got it, Bryan. And then in terms of like the pipe for this one, is it still an early stage?

Very early stage, very early stage. But there is some large, yes, there is some large groups that we can be talking to you about.

Thank you. Our next question is coming from Roger Liddell from Clear Harbor Asset Management. Your line is now live.

Bryan, following up on these new opportunities. The auto dealership arrangement, I am interested that a provider of software for that business is the repository of your software, I take it. Can you go into some detail there and give us a sense of what do you think implementation speed might be? And are these large retailers or middle-size retailer kinds of opportunities?

Yes, I'd say that's probably more on the small end. The thing if you think about it, every time you walk into a showroom, the first thing they want to do is get your drivers license, so they can scan it for two reasons. One, they want to get your credit report and two, they want to send your information off to all the banks who then want to bid on a loan should you decide to go through a loan with them. So it's a pretty standard practice in auto dealerships. And the thing I like about being integrated with the software, unlike integrating with a retailer's point-of-sale system where there is a ton of customization, these systems are all off-the-shelf. The auto dealer does not do a lot of – they don't allow them to do any customization. So, once it's in the system, as soon as somebody wants it, they can just flip the switch and we've got somebody that's reselling it for us. So that works out pretty good. And there are plenty of auto dealers out there and when we started looking at this, it happens so much more often than I thought that people do go in and actually lease cars or just take them on a test ride and never come back using false credentials. And the return, the reward is pretty good. If you walk in and walk out with a mid-level Lexus for about $50,000, that's quite significant compared to our average retail establishment. So, early days yet. But it's an interesting area for us to look into. And it's one of those things that just really opened our eyes as to how many other markets are there for this. We've been focusing on financial services. But the one good thing I do like about the auto associations, auto dealers, it's they all know each other and talk really well. So, things like going into the NADA Annual Show might be a great way for us to showcase what we do.

But that presupposes a trained sales force in being able to tell dirty jokes in the parlance of – for customers, not tell if the business runs.

That's very true.

So what is your – realistically, what is your bandwidth for bringing on the hospitals and the autos are totally different cultures, languages. The only common thing is the losses.

I think that for the auto dealers, that's the reason that we are – for my preference for that, is that there are really three main dealer management systems, DMS as they call it. My preference is to sell it to them to then sell it out, because they have got an incentive to do it both ways, because they can now prove because most of these DMS systems make money on – there is like a lending tree model. They get paid for every application that they send to a bank for credit. So, they now know that they are sending only good applications, because it's a real card. The auto store owner knows that they don't have to worry about having an expensive car drive off the lot and never come back. So, this is one where we think. I am not always a huge fan of reseller arrangements, because it's not always aligned. This is a really good enhancement to their products and they seem excited to go out and sell it.

And what kind of losses get experienced? I take it that some of these who makes off on a test drive, there is at least a few thousand that one would expect of wear-and-tear or fender benders. So, what are the losses that the dealerships are eating or the financial institutions eating when you are talking cars?

It's generally total. More often than not, it's gone to a chop shop or taken for a demolition derby joyride.

Okay, big bucks then.

Yes. Yes.

Okay, thank you.

Thank you. Our next question is coming from Michael Samuels from Berthel Fisher. Your line is now live.

Hi, Bryan. Just one quick question. The last two conference calls we seem to be focusing on retail. And my question is, what's going on with likes universities, law? I mean we haven't heard much about that. Is that still growing this fast as it should be?

Well that's Age ID, right? So, and in this quarter, we at grew almost double what we did in Q1 2018. So that is – I am going to say, we are seeing very good growth in that area. The one thing you got to find is socially responsible guys. Universities are really good for us. Especially universities that are beginning to sell alcohol at their stadiums. They want to make sure that they are selling to only the right people. So it is growing. Law ID is not growing as fast. And I think it has a lot to do with what I said. There is the officers after go through additional training. There is additional software that they have to buy to put it on the phone. There is annual reviews and what they are finding is Age ID pretty much does the exact same thing without having to have all of that additional training and cost. They will know right away that they are dealing with the right person. And they also can go in and raid bars and do all those things. I think New York State is a great example. They are always putting out press releases about, we raided this bar and we found 80% of the people in it were underage. And they're using our tool to do that. They are using Age ID. The SLA, the State Liquor Authority is using Age ID. So that's the sale that seems to be that's resonating very much with law enforcement. As I said, we brought on three new law enforcement agencies in Q1 and they are our best salespeople. Because they raid a bar. The bar owner usually says, what did you use? They say Age ID from Intellicheck, and we get a phone call. And it’s out. So it's, they are good for us.

So I guess you're just not announcing it like we used to? Because we used to – that was the big thing back then. Now we are not seemed to announcing. Like you just said we signed three up in the first quarter. We haven't seen an announcement on them, that's why I was just curious.

Yes. We'll probably start putting out more press releases on it than we have. There – it's nice when you sell to a law enforcement agency. But, as I said, one of the reasons we are focusing on the financial services area. It is, instead of selling, I am just thinking of how many police departments are there here on Long Island. How many in New York State. Each and every one of those is an individual sale, where an individual chief of police has to sign off on it and all those types of things. Our resources are certainly better focused on – we sign up a bank. As I said, that's a $20 million, in a very conservative estimate, opportunity and I am focusing our resources on bringing in those opportunities. I do have – the way that I teach the young kids to sell is they start working on cold calling police departments and bar owners. And it's a good way to get them out there while they are keeping my senior sales people out in the field, dealing with the financial services groups.

One last question. Going forward for the next as we keep closing these retailers and all that, do you expect revenue to grow exponentially in a 50%, 100% a quarter, coming up?

Yes, I can't say how much it would grow and I can't give those kind of numbers because, quite frankly, it depends on which retailer we bring on. And there are some surprising, some small retailers with not a ton of stores who do very large amounts of scans and then there is large guys who don't do as many scans. So, I can't really give guidance on that, because it depends on the mix of who we are bringing on when.

Right. And once we get retail on, then obviously, the fourth quarter, around the Christmas time, should probably be the biggest quarter for us then.

I think going forward, that will be very – you could probably bet on that. We know, looking back historically, the jump that we see in scans versus the average scans for the first three quarters is significant.

Right. Thanks a lot. Good job.

Thank you.

Thank you. Our next question is coming from Amy Norflus from Neuberger Berman. Your line is now live.

Hi, Bryan, great job. I think you are doing a really good job growing the retail business and giving us more details about it, which is great. Maybe the next quarter, if you can maybe please give us a slide presentation, because, I feel like I have to go back now and read the transcript, because the numbers were really great and I wrote them down really fast. But if it were something to compare and contrast, that would be really helpful going forward. Can you also talk about the sales force? Do you have enough salespeople? Do you need to add more? You said we have enough money to last us for the next 12 months. But kind of what are you thinking, where you want to be? And what's the sweet spot in ramping up and all that stuff?

Again, here is what I’d say. Paul Fisher, our Head of Sales and I, we're always talking, are we right-sized? Do we need more? Certainly, one thing is if we – we're always looking for good salespeople because they pay for themselves. And so they are usually a smart, easy add. At this point in time, I think we are good. I think as we start to think about some of these new areas and new markets that might represent an easy – again, a sale to one entity that could bring in lot of revenue, we will look to hire people.

Okay. And what is the biggest pushback that your sales people are getting? So you are going in and you are presenting this opportunity, you are saying, we can save you money. We have data. What's the biggest pushback? I mean, why isn't it an easy to sell? Or maybe it is an easy sell.

Part of it is inertia, just the because people – one of the things I believe that we are finding is, in the past, I’ve talked about shiny new toys and all the cool things people thought they could do, which they are finding out they can't. And it's an industry that people are beginning to realize they can solve simply. And I think that we've done a lot of education with our existing clients to have them become clients. And now they are becoming the best references that we have. They are the ones who are talking to the fraud, risk people at other credit card issuers and saying, you need to talk to Intellicheck. So, part of it was educating them on what we could do, educating to the fact that it is legal to do. I think another thing is we did not make it very easy for somebody to integrate with us. We almost made them ask all the questions to get it done. Part of what we changed over the past year was to provide proper implementation packets with everything they need to get going. We've proven ourselves to the bank partners that we know what we are doing. So they are now bringing us to their retail partners so that we can explain it and we are driving the process. So, I think that the fact that we are getting more and more adoption will make it easier to do. When we first started doing this, I would go back to nobody gets fired for buying IBM. Well, we would do something drastically different than IBM, so people were worried and like, is it right, can I do it? Now we are becoming IBM. So people know that it's a simple thing to do. Those are all the things that in the beginning that we had to overcome, it was an educational sale.

Gotcha. Gotcha. And the last question, you stated that the fraudsters are realizing which retailers have this? Is that because they are just going in with this fake ID and just getting turned down?

Yes. They get to know what's going on. We were out, I remember, Paul and I, last fall, we were out visiting some of our clients in the Midwest area and we went into one of the furniture stores and we were talking to the guy who ran that region and he said that they realized that they had been installed and rolled out in some of the stores in the region and they realized nobody was coming in there anymore. But the stores that they had where they didn't have it installed yet, they were getting whacked on fraudulent credit cards. So, they know. This is, again, very organized. Whenever you read about somebody getting arrested for this credit card fraud, where they've opened up 300 new credit card accounts, it's not just one person. It's always a ring.

Is there any chance that we'll be able to find out who some of your retail partners are?

I am doing my best. It's funny, though. They all talk to each other. If I bring in any prospect, we've got people at all the banks and the retailers who are like, sure, have them give me a call. Just give me a heads up that they are going to call. You don't even have to ask for my permission. Just let me know so I take the call. But they also seem slightly reticent to put their name out there and just admit that they are victims of fraud when everybody knows that everybody's victims of this fraud. 14.4 million Americans in 2018, $14.7 billion eaten by banks, right? It's – why they want to pretend, it doesn't exists, I don't know when every research report proves it does.

Got it. All right. Perfect. Well, keep up the good work.

Thanks, Amy.

Thank you. That does conclude our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Just like to thank everybody for dialing into the call. We are happy with the quarter. We are happy with the fact that, as I said, the changes we put in place and the discipline and the accountability and everything that we are doing is showing results. And as I said, we expect to see the continued results and rollouts of the retailers throughout the year. And I look forward to our next earnings call.

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.