Greetings and welcome to Intellicheck's Second 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 turn the conference over to your host, Mr. Gar Jackson. Thank you. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck second quarter 2019 earnings call. Before we get started, I will take a few minutes to read the forward-looking statements. 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 an 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 forecasts, 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 altered forward-looking statements whether resulting from 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 or as of today, August 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 contacts 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 Q2 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.

Thank you, Gar. Good afternoon, everyone and thank you for joining us for the Intellicheck Q2 2019 earnings call. As you can see for the numbers, the changes we put in place over the past year are making a difference and we continue to March towards the goals we've set for ourselves for 2019. Identity theft is not going away and we believe that we are well positioned to capitalize on stopping fraud and reducing the sales of age restricted products to the under age. Our SaaS revenue was up 79%, over Q2 2018 and was a 30% sequential increase from our Q1 2019 numbers. One-time revenue was up this quarter, because as I have previously said, we no longer do custom development for free. In Q2, we received the second payment for the completion of the development work for the bank we signed in Q3 of last year, which for clarity, I will call bank 3 going forward, since I've been asked to give names to the banks we assigned to help people keep better track of the progress we are making with each of them. I believe growth numbers like these demonstrates that we are a very different company today than in February of 2018, when I joined. On today's call, I'm going to focus on 4 major changes that I've made since joining the company just over a year ago that I believe have led to the growth we are seeing. I reset where we are focusing our resources, how and who we sell, how we price the products, and finally how we implement? First, we identified financial services specifically for the purpose of stopping identity theft, as our primary target market that we believe would be the fastest route to revenue and profitability. The is now…

Thank you, Bryan. In 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 second quarter ending June 30, 2019, which we released this afternoon. I'll begin with the second quarter results. Revenue for the second quarter ended June 30, 2019 grew 57% to 1,558,000 verses 1,001,000 for the same period last year. Our SaaS revenue was approximately 1,121,000 for Q2 2019, 79% increase from the 625,000, we posted in Q2 of 2018. And was a 30% sequential increase from approximately 861,000 in Q1 2019. Our gross profit as a percentage of revenue was 85.9% for the quarter ended June 30, 2019, compared to 91.8% for the quarter ended to 30, 2018. Operating expenses that consists of selling, general and administrative and research and development expenses increased 10% or 196,000 to 2,259,000 versus 2,063,000. This increase was primarily driven by an increase in development personnel and annual bonus plan, which is contingent upon achieving certain goals established by the Board of Directors and compensation committee. The company close to the net loss of 874,000 for the 3 months ended June 30, 2019, compared to a net loss of 1,100,000 for the quarter ended to 30, 2018. The net loss per diluted share was $0.06 versus $0.07 in the prior year. Adjusted EBITDA for the quarter ended June 30, 2019 was negative 785,000, compared to a negative 1,018,000 in the quarter ended do 30, 2018. Interest and other income were negligible for the quarter's ending June 30, 2019 and June 30, 2018. Now, I'd like to focus on the company's liquidity and capital resources. As of June 30, 2019, the company had cash of $3.1 million working capital to find those current assets minus…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Mike Grondahl with Northland Capital Markets. Please proceed with your question.

Yes. Thanks, guys and congratulations on the progress. The first question it sounds like the pipeline or the backlog is got like 12 retailers in it. Three bank branch systems and kind of an auto DMS system. I guess that's not really the pipeline. That's what's on track to be implemented. Is that how you think about that?

Yes. That's exactly the way you look at it, Mike. Those are people that have committed to coming onto the system, it's just a matter of where they are in the implementation queue. Some are in active development, some are beginning to roll out and some are saying this is something that we have resources allocated for on January 1, 2020. So it's just a matter of where they are in that queue. But yes, as opposed to saying, it is a pipeline of people or prospects we're talking to. These are people, who have committed to installing the system.

Got it. Got it. And then was the one-time payment in the quarter for implementation? Was that roughly 185,000 kind of the amount you would call out a quarter to go?

Correct.

Got it. And then, as you work through -- I guess, we really see the first 7 months of the year. Did anything fall out of your funnel?

If you're saying, is there anything that we thought we were going to sign that we didn't sign? I would say the answer is no. We have had a couple of retailers, who might have moved, right. But we've also had a couple of retailers who move left in terms of implementation and the time frames. I think that -- the more that we have committed, the less those movements really matter, because they offset each other. But it's not like somebody come to us and said, I'm thinking about this and then said, no.

Got it. And it's not like, you haven't lost any customers still, right? Your retention is still a 100% or close to that?

Yes. The only time, we ever lose a client is if a bar goes out of business in that one age ID subscription, which is by itself inconsequential. Since I've been here, we've never lost a retailer or a bank.

Got it. Got it. That's what I thought. And then is it probably, for you to rank those banks, in terms of potential revenue?

It's really hard to say, because I haven't gone through and analyze the makeup of each one of their programs, right? So again, if we go back to some of the things that we've discussed at some of the conferences. Bank number two has over 160 private label credit card programs they run. But as I said, I don't think somebody's going to steal identity to get their kids braces, and they do a lot of dental offices and things. So we whittled it down in there, I think it was 57 different retailers that made sense. They are similar to other clients we have on-board. Haven't done yet the same analysis, but it also depends on the size of the retail, some of them have more of the 15 to $5,000 store -- 5,000 store location retailers than others. They're all in that top 10 those, what I'll say and the top 10 does control around 99% of this particular market.

Great. Okay. Thanks a lot.

Thanks, Mike.

[Operator Instructions]. Our next question comes from Ronald Romahauser [ph], a Private Investor. Please proceed with your question.

Hey, Bryan. This is Ronnie Romahauser. I'm a Private Investor. I have a pretty tricky question based on what we discussed earlier in this call. Last week, we saw a breach of Capital One, I don't know, if they're number one, number two, number three, number four, number five, or any of them. But that type of thing, it's huge. I was wondering, how generally would our company be able to take advantage of something like this? If this were to occur to one of our clients? Would we -- would they have to reissue 140 million credit cards? And would we be part of that? And the second part of my question is, there's a big move afoot about securing data. So these breaches that, we had Equifax and we have constant breaches that take place. And if they were to shore up the controls, would they possibly include driver's license verification, or an authenticity, we will have to say that moment. With that cost would be part of some tightening of controls? In hence, that would be a big advantage to us. Could you discuss that?

Yes. So I see, there is a three part question. Part one, how do we capitalize on breaches in a way. And I think the Equifax breach was probably -- I hate to say it bad for people good for us. Because that was a lot of data, and pretty much everything you need to steal somebody's identity that was 145 million American. Studies have shown by Accenture that said, that it takes about 18 months from the date of a breach to the time that the data begins to show up for sale, get season, gets packaged and then get sold. And I believe -- in that put it at Q4 of 2018, would be that 18 months mark, and we did see a spike in fraud attempts. The Capital One breach, we're not really involved in the reassurance of credit cards. I -- maybe the good thing about that is I -- what I've read is, they don't believe that data was published yet by the woman, who hacked them. But it still -- there is a lot of information about 100 million people. And if it is out there, it's just adding to the ease at which criminals can buy the data, which I think makes it all the more important that banks buy a system like ours. As far as cyber security and reaching data. I think that's a completely different market. If you look at how that woman broke in, she found, there was a deficiency in the way that something had been set up by Capital One on the Amazon Cloud. And I don't know whether from her experience at Amazon, she was able to exploit that or find it. But that's certainly not a market that we are -- I don't see how we would bring anything to that other than authenticating that the employees who they say they are.

All right. What about changes that might take place in the future? Would they use driver's license benefit of this occasion, of driver's license to help secure information?

It's conceivable right now I'm focusing on the market that we have right in front of us that I want to be the dominant player in, which is the issuance of credit in the financial services space.

Okay. Fair enough. Thank you.

Thank you.

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

Bryan. The 12 to 18 months lag figure Accenture, I think you said. That's been a constant over the period that you've alluded to it. Is there any thesis for an acceleration, just the things happening faster and an incentive to rush before certain authentication gets in place? Can you just elaborate on that?

I don't know that I've seen it, but it seems logical that just because there's so much data out there, that, I would expect that before, maybe some monitoring gets put in place or other things like that. They might be rushing to use the data. That could be why, I saw myself in 5 package deals. Whereas, I hadn't been involved in anything and the previous year that I've been monitoring myself. This year -- in the first quarter, that's when those 5 deals went down. So it sounds like people are selling the data, packaging the data and getting it out faster.

Okay. So we may see the spike earlier. That would be a nice tailwind. Can you elaborate on the facial recognition that you talked to regarding bank number five? I know Intellicheck had or perhaps still has some intellectual property in that area. But there are pros and cons of facial recognition. So would you take a few minutes and just walk us through how you think it's going to play out?

Yes. I believe in an increasingly mobile world. You're going to need to be able to authenticate people from afar. If I'm in a store, and I'm looking to do something, we can authenticate the license, and then the clerk or the bank teller can visually compare me to the picture on my license and make sure that I'm, who I'd say I am. When you're doing it on a mobile device, that obviously doesn't work. So I look at it sort of as a 3 step process, if you want to be very complete about it. The first step is the application will authenticate that the driver's license is real using the barcode. Then take a picture of the front of the license. And through OCR, you authenticate that what is written on the front, is actually what is encoded in the back. So my name on my license. And doing so, you now have my picture. And then the next step is, let's make sure I'm still holding that license. So take a selfie that proves liveliness. So that it's not just that I'm taking a picture of a picture to compare. But it is actually my face and I am alive and see the match against the photo on the license. And now I know that it's a real license, and I'm still holding it. And now I can continue with that application. So there's a lot of mathematics that goes on in that facial recognition software. And this one particular partner like recognition, we found very good at it. And it certainly worked in the sale the bank five.

Do you foresee other major issuers going this route?

Yes, we're in talks with a lot of people about it. Any one of the banks that is moving to online enrollment is looking to have this technology. So I would say that it is something that banks, one through four, are also talking to us about.

Okay. Timeframe is this a one quarter of one year or two year?

Really depends on the particular banks and what their innovation teams are doing. And I'll say some banks move at warp speed and others that, like going to the DMV of old, in terms of how quickly things move. So, I anticipate, this is something that will probably take several quarters to get completely done. I will also say that it's going to take a long time before more things, most things are mobile, as opposed to in person. So it's -- to me, the big revenue stream is still our bread and butter business of authenticating somebody at a physical location.

Thank you. Finally, the FDA opportunity or if it's in FDA some other entity that propagates a standard or let's called a performance standard. Is that a one quarter or one year or two year, that's going to happen? I understand, you are not asking anybody to put this into their model. But can you give a sense of the probability of it happening and what's the timeframe?

If it's -- if they're going to put anything in legislation that says authentication. I think it's going to happen soon; those bills are all being written and they'll pass in short order. There's already some states or cities that have raise the age to 21. I believe everybody I spoke to in DC understood the fact that without authentication, it's -- they'll never be able to do it. I took a ton of fake licenses with me, and especially licenses from the state, so the people that were meeting with. I dropped them on the table. And they were shocked that they couldn't tell, and it's their own state, they're pulling out their licenses and comparing it. And then they realized how good these fakes are. Now, just a matter of, are they going to fight enough to get that through. And I don't know, I haven't seen anything come out of Washington in a while. So it knows what will actually happen. I'm thinking that there are some of the larger companies that are realizing that they really have to do something from a PR standpoint. And for the standpoint of they also legislation could be that they're not allowed to sell these products. And I think they'd rather have the revenue stream, the people who should be buying it, and block those that shouldn't be. Because that's really been the whole problem with the age restricted marketplace. The law only says that you need to visually inspect the license. I mean, you know these fakes are good enough that that doesn't work anymore. And there are plenty enough people out there, who would rather say, Hey, I comply with the law, and know that they're selling beer or tobacco products to a kid and pocket that revenue versus not pocketing the revenue and doing the right thing. So we got 86 new people last quarter, who wanted to do the right thing. I hope it's a trend that growth.

Okay. Thank you.

Thanks Roger.

Our next question comes from Scott Buck with B. Riley. Please proceed with your question.

Yes, good afternoon, guys. So I'm curious. Can you tell us how many of the banks at the current level of implementation or profitable on a standalone basis?

I'm not quite sure how to answer the question. I mean, what we've done for the most part is they're going to pay us a minimum that's going to cover most of our expenses for the hardware and other things like that. We're running at 85% gross margins, as is we don't expect that to change at all going forward. So I'm not quite sure how to answer that, I don't really, you got better idea.

I guess, what I'm really asking is each incremental relationship profitable from day one?

Yes. Yes, it is. Yes.

Okay.

The first can model takes into consideration and our cogs are so 15%. So, yes, we're profitable from the first day in the first slide.

Okay. That's perfect. Second question, obviously, there's a lot of implementation work to do. What kind of capacity do you guys have to go out and market to banks numbers 6, 7, 8, 9, I guess?

This is from an implementation standpoint, it's -- we could be doing 20 banks at once.

Okay.

It's really, from our end of it, we've done that girls giving me a shot face, since I'd be pointing my finger at him. But from our end of it, it's just teaching them generally. Two things we need to do. Teach them how to make sure their scanner is sending us the data we need, in the format that we need. And then how to write to our SDK or API. So from our end of it, it's mostly education. It's not like we're doing custom programming to bring somebody up, who's going to code just to our normal specs. And where we do have to do custom coding, it's got to be -- I'm not going to do it for a teeny tiny thing. It's going to have to be a big bank, and we charge them for it now.

Right. Okay, that's perfect. I appreciate it, guys.

Thank you.

Our next question comes from Mike Grondahl with Northland Capital Markets. Please proceed with your question.

Yes, guys. Just a follow-up. I think you talked about retail scans being up 8% year-over-year and SaaS revenue was up 79% year-over-year. So just help me think about both of those numbers. Are you basically getting it all on price? Because you've gone to the per click model and the 8% scan volume, I think that excluded that one bank. But just help us understand those numbers.

You got to remember; the age restricted products go into that growth numbers as well. Some of it is price, for sure. Because as I said, we -- changing the pricing model, and bringing on clients that we're paying us in the matter that we wanted. But I think is really what made the difference. So the banks two and three and four beginning to pay us on -- well just three and four beginning to pay us on SaaS revenue on a per scan model is a big part of the difference, as well as the innovative dedicated team that we have selling a lot of HIV that helps.

Okay. Okay. Thanks.

There are no further questions. At this time, I'd like to turn the call back to Bryan Lewis for closing comments.

So thank you, everyone, for joining us on this call. I'm very happy that the changes that we have put in place are making a difference. I think you'll continue to see that throughout the year. And I look forward to our Q3 call. Thank you everyone and have a good night.

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.