Intellicheck, Inc. (IDN) Q1 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to Intellicheck's First Quarter 2020 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 call is being recorded. It is now my pleasure to turn the call over to your host, Gar Jackson, with Global IR. Thank you. You may begin.

Good afternoon and thank you for joining us today for the Intellicheck first quarter 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, 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 6, 2020. 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.

Thank you, Gar, and welcome, everyone, to the Q1 2020 earnings call. It is amazing how much the world has changed in the eight weeks since the last call. I think I've started every earnings call by letting you know how excited I've been about our performance and what we believe our prospects to be. This time instead, I'll start by saying how saddened I am by the loss of life due to this pandemic. Its impact has been felt in a personal way, one of our team members lost his mother to this disease. Fortunately, I also see hope and recovery, as I am also happy to report that one member of our team has fully recovered from the virus. Both of these teammates have continued to give their all during these trying times. It has humbled me and made me want to work that much harder to ensure our continued success. I am proud of the enduring hard work of all of our team members and remain excited to be part of this team. Looking at our quarterly results. The momentum we had in the fourth quarter of 2019 continued into 2020, at least the first 11 weeks of the quarter. Total revenues for the quarter were just over $3.1 million, is up 8% over Q4 and 144% greater than Q1 2019. SaaS revenues for the quarter were just over $2.2 million, this is down 12% from Q4 as we anticipated due to the lower post-holiday scan volumes, but was up 160% from Q1 2019. I am pleased with the SaaS numbers that validate that we are on track with our plan for Q1. If you recall, we said that 21% of annual scans coming in Q1, 23% in Q2 and Q3 and 33% in Q4. So a 12% drop in a typical quarter would be expected. With great momentum leading into mid-March, and I believe that if we hadn't been impacted by the pandemic, then we would have seen an increase in total SaaS revenues quarter-over-quarter. That being said, it is a different world in the near-term. And undoubtedly this large shutdown of retailers, bars, restaurants and many bank branches will have a significant impact on Q2, more on that later. We also had an unusual amount of hardware ordered this quarter that accounted for 28% of our revenue, resulting in a drop in gross margin. Gross margins typically run in the 85% range. So let me now draw your attention to some highlights in the quarter. Financial services company number one, a top 10 bank, brought live a 10-member duly consortium. This is a newly won client for number one, and it is interesting to note that number one made a condition for them getting the card program to manage their own usage of Intellicheck's Retail ID Mobile to authenticate IDs as a first step of the credit application process. I think this, again, shows that banks can use the fraud fighting power of Intellicheck to gain a competitive advantage and provide better rates on their credit card programs and induce prospects to switch banks for better rates. Financial services company number two, one of the largest providers of private-label credit cards continues to move forward with implementations progressing. We now have 15 implementations completed and have 10 in the pipeline since we renegotiated their contracts, and they continued to work with us to bring more of their clients live. As I said last call, financial services company number three, a top 10 bank, placed a large order for scanners for their teller workstations in Q1. As I also said on the Q4 call, this company's project is significantly delayed on their end. And although they had hoped for a rollout in April, their project is delayed again. On the credit card side of the business, they've been diligently working on their large home improvement retailer and are currently targeting to go live with that client at the end of September. This will be the second of four large retailers that they are trying to get live by year-end. Financial services company number four has completed the rollout of their challenged use cases. Some examples of these use cases include when someone wants to link a pay account, like Google Pay, Apple Pay, PayPal, et cetera, to their account or when someone ask for access to their digital account or if an employee wants to log in to certain systems. They will all be required to authenticate. They are using our person-not-present tools to remotely authenticate the callers driver's license and grant access. Number four continues to find new ways to implement our core authentication tools. Financial services company number six, the provider of subprime unsecured loans, continues to roll out to their over 700 locations with 488 now live. We put out a press release in April about financial services company number seven, the global financial services company providing payments, travel and expense management solutions. They were seeing such a spike in online fraud, they expedited and expanded the implementation of our web product to their call centers with Canada due to roll out as soon as we get 18 approval from the Canadian telecom providers to send text messages. The pilot for the Canadian lender, financial services company number eight, is underway and about halfway through the pilot with great success as we are effectively stopping fraud for them. We are very pleased with the results they are seeing so far. I'm excited to announce that we have two new financial services firms as clients. Financial services company number nine is a regional bank headquartered in the Midwest. They have over 1,100 branches in 10 states. This bank has completed the integration into their teller platform and are beginning to start training their employees on the product. They will be using Intellicheck's technology solutions to authenticate people prior to certain teller transactions, like cash backs, money orders, cashier's check and any transactions $2,000 and above. This client is on our per scan model with monthly minimums, and they have rushed this as a COVID-19 project and are targeting June 15 to have it completely rolled out. Financial services company number ten provides loans for medical procedures and are also on our per scan model with monthly minimums. Their goal is to help health care providers expand their client base and make medical procedures affordable for patients. This client that went live in March is using our web tools to authenticate patients before providing financing. Some of you may have seen the press release we put out on a 40-store Midwest furniture channel. Given that their stores are closed, but people still need furniture, they were taking orders over the phone for curbside pickup. Their problem was payment was in advance, and the card numbers were manually entered for processing. This means a credit card EMV chip is not activated and the retailer was eating the losses. Given how easy it is to buy stolen credit card numbers online, this was getting expensive. They decided the way to stop this was to use our no-integration web product. All they need to do is log into our website and they are authenticating in a person-not-present environment. They send a text to the purchaser, which instructs them to scan the barcode and take a picture of the front of the license. In seconds, the sales associate sees on their screen whether the license is real or fake, their loss is instantly stopped. During the quarter, we further invested in our camera technology capabilities, a feature that we believe is becoming more and more relevant to the online authentication process. We acquired the source code for the mobile and web camera technology that we currently lease. I've spoken in the past regarding my sense that a company that provides this technology might potentially be a logical acquisition from a vertical integration standpoint, so that we own more of a comprehensive product offering. Instead of buying a company, we were able to acquire rights to the source code which our programmers are able to improve upon and build out the product to our specific parameters. We believe that business transaction is carried out on much better terms than the purchase of the company. And in addition to controlling the development, we believe it should pay for itself in less than four years versus continuing to pay the yearly leasing costs. And most importantly, we control our technological destiny. While I'm very excited about what we accomplished in Q4 and the momentum that carried into Q1, the current unfortunate situation in our country and the world impacts our business. The new nationwide stay-at-home orders, however, do not mean 0 revenues. We have a growing online business with 14 retailers, allowing customers to apply for credit on the website and multiple of our financial services companies are using our web tools and the call centers for everything from card applications to account changes. All of our clients, even those on a per scan model, have minimum unpaid payments. Finally, many of our clients were deemed essential services so they remained open. Office supply stores, electronic stores and big box stores that sell everything from grocery to tires remains open for the most part. However, there were still many high scan volume stores that completely shut down. Given the current market and what we know today, we are hoping to achieve about 60% of the SaaS revenue in Q2 that we had in Q1. From there, we anticipate things will begin to ramp back up as more retailers and restaurants open up and we see increased transaction activity. I'm excited to say that we believe that we are beginning to see light at the end of the tunnel. The good news is our company has been 100% capable of working from home. Implementation work has continued. New product development continues to make progress. And as you can see, sales did not stop. Our clients' IT departments can also work from home. So implementations are making progress and the weekly status meetings continue. States are beginning to loosen restrictions, leading to limited and then increasing stores, restaurants and bars opening. Major mall owners are discussing their opening plans and Simon, the nation's largest operator of shopping mall properties, has already opened 49 of their malls, the majority of which are located in states of Texas, Indiana and Georgia. It is important to remember that even during this pandemic, fraud did not stop. Identity thieves just moved online faster. While some of our clients did not think that online fraud is much of an issue, they do now, which is one of the reasons that, in addition to continued demand for our on-premise solutions, we are seeing the increased demand for our person-not-present web and mobile authentication solutions. Fraud has not stopped and neither has identity theft. The reality is that identity theft is not going away. We know that information required for a criminal to take your identity is everywhere, over 8 billion records were breached in 2019. The record-setting pace of data breaches in 2019 continues in 2020, and the cost of identity theft continues to grow. Javelin Strategy & Research published their research in their annual report on identity theft and found that the amount of money lost to identity theft in 2019 grew by over $2 billion to $16.9 billion. Both published research and customers tell us that while new accounts and card-not-present credit card debt is on the rise, growing at an even faster rate due to account takeovers where the criminals complete takeover your savings and checking accounts or get new debit or credit card sent, all easy enough to deal with the right information and a call to a call center. This just recently happened to our office manager. Somebody called her bank, had enough info to convince the bank they were her, that she had moved and had lost her credit card and needed a new one sent. Had that bank been using our call center web product, that wouldn't happen. This bank was financial services company number four, and that is now one of their challenge use cases. As account takeover fraud is growing at a tremendous rate, TransUnion estimates that it grew by 347% in 2019, Intellicheck provides the easiest, lowest friction way to authenticate a person and stop account takeover. The person clicks on a text, activates a camera, and they don't even have to focus, just to put the barcode in the crosshairs and Intellicheck solution does the rest. As we've earlier said, we can even have facial recognition to match a face to the front of the license. As we see more and more need for enhanced authentication, we believe that we are well positioned to respond. I think this is of significant importance because I believe that increasingly enhanced authentication will become the norm. The important takeaway here is that while the coronavirus has put quite a damper on our near-term trajectory, it did not put a damper on my enthusiasm or optimism given the basic fact that the fundamentals have not changed. We still stop identity theft in real-time with over 99% accuracy. Our clients continue to be our best supporters and references. And demand for what we do, we believe, will continue to grow. As our country in Canada work towards a full opening and recovery, we believe we'll be right back on that growth trajectory we were experiencing pre-COVID-19. With that, I will turn it over to Bill to discuss the financials.

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, 2020, which we released this afternoon. I'll begin with our first quarter results. Revenue for the first quarter ended March 31, 2020, grew 144% to $3,115 million versus $1,279 million for the same period last year. Our SaaS revenue, which was approximately $2,238 million for Q1 of 2020, a 160% increase from $861,000 in Q1 2019. Gross profit as a percentage of revenue was 77.8% for the quarter ended March 31, 2020, compared to 85% for the quarter ended March 31, 2019. During the quarter, the company sold scanning equipment to a bank preparing to roll out our software to their bank branches, which are normally sold at lower margins. Operating expenses which consist of selling, general and administrative and research and development expenses increased 4% or $92,000 to $2,398 million versus $2,306 million. The company posted net income of $27,000 for the three months ending March 31, 2020, compared to a net loss of $1,213 million for the quarter ended March 31, 2019. The net income per diluted share was 0 versus a net loss per diluted share of $0.08 in the prior year. Adjusted EBITDA for the quarter ended March 31, 2020 was $144,000 compared to a negative $787,000 in the quarter ended March 31, 2019. Interest and other income was negligible for the quarters ended March 31, 2020 and 2019. Now I'd like to focus on the company's liquidity and capital resources. As of March 31, 2020, the company had cash of $3 million; working capital, defined as current assets minus current liabilities of $3.1 million; total assets of $14.3 million; and stockholders' equity of $12.1 million. During the three months ended March 31, 2020, the company used net cash of $341,000 compared to net cash used of $535,000 during the three months ended March 31, 2019. Net cash used in operating activities was $461,000 for the three-month period ended March 31, 2020, compared to $542,000 for the same period in 2019. Net cash used in investing activities was $115,000 for the first quarter of 2020 compared to net cash generated by investing activities of $7,000 for the three-month period ended March 31, 2019. During the quarter, we generated cash of $235,000 from financing activities for the three months ending March 31, 2020, while we did not have any financing activities during the quarter ended March 31, 2019. The company has a $2 million revolving credit facility with Citibank that has secured collateral accounts. There are no amounts outstanding under this facility and we currently anticipate that our 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 31, 2019, the company had net operating loss carryforwards of approximately $17 million. I'll now turn the call back over to the operator to take your questions. Operator?

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 Securities. Please proceed with your question.

Congratulations on the growth and sort of the operating leverage in the model. It was nice to see net income positive, too. First question for me is, can you guys talk at all about monthly transactions sort of February, March, April? Just so we can kind of get a sense of how April is being affected a little bit.

Yes, I guess, Mike – it kind of goes to the 60% of where we're hoping to be. We were flying along, I'd say, in Q1 until stores started closing down. I think the best thing – the closest thing we can get to giving something is the fact that we anticipate our goal is to get to about 60% of the SaaS revenue.

Got it. Got it. Okay. Do you have any sense for lost revenue in the quarter due to COVID, have you attempted to estimate that at all?

Well, where we are compared to plans is things that we're looking at. Having the world to be shut down is certainly an impact. So, again, as I said, we've got a lot of our clients who are considered essential services, but it doesn't mean that business is back to where – just because they're open, you can't get in the store, you got to buy in advance or you can walk around the store, but they're limiting to maybe 50% of capacity is what – all those things impacts the scan volume. And if you only got 50% of the people in the store, you only – that gives you a pretty good idea potentially what you're saying, what you might see in terms of scan volume.

Got it. Maybe, Bill, could you help us out with just sort of the delta or the difference between the $3.1 million total revenue and the $2.2 million of SaaS revenues? Sort of what's that roughly $900,000 difference between those?

Yes, Mike. During the quarter, we had over $700,000 in hardware sales to a major bank, that's rolling out to their bank branches. So that's really a material portion of the difference. There is ...

Well, we had – yes, part of it was to the bank, part of it was to a telecoms provider. So we had sort of three different clients came in and said we need hardware, which is, from our end of it's kind of an anomaly. Hardware is not our goal. But if we – if it makes it easier for the client to be able to install our system and it's easier for them to order through us, we'll do it. But it's definitely a different margin because we're just – we had a markup to it.

Sure. Any of that planned for 2Q or 3Q that you're aware of?

No, not at this point in time, I don't see anything like that. No.

Okay. And then maybe lastly, of the financial services customers, you're now up to 10, what one or two really stuck out for you in the last 90 days?

By meaning stick out, are you saying who do I see the most revenue from or what I think are large?

Yes. I mean, who embraced you the most or where do you see the most incremental upside?

Well, the thing I'd say is, all of them, once they see what we do for them, embrace us. And I hate to say that I have favorites because it's like trying to pick your favorite child, right? But number four finds all sorts of ways to use us, number seven is figuring out how do they roll out even fast, even faster. Number one continues to be a great partner with us, and I love the fact that it's very obvious they use our fraud fighting capability to get a new client. And I think we'll see more of that. So – and number two, we just keep saying here, here's a new client, one of their retailers that they want to bring on board. So I've got to say, since they're all – the world that we were focusing on with the top 10 banks and then Amex and Discover being the majority of credit card issuers. And since everybody we're talking about is mostly in that space, one thing I've got to say we're doing very well with all of it. And now we're even moving into the super regional banks. I think the health care financing space is going to be really big for us. So I look at them all as, again, we believe we're still just scratching the surface of each and every one of these financial services companies that we have as clients because it's early days of rollout and integration.

Perfect. Okay. Hey, thanks, guys.

Thanks, Mike.

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

Hey, good afternoon, guys. It sounds like you have some delayed implementations, and then you've added a handful of new customers as well. I know at the beginning of the year, you were thinking implementations for the full year would be similar to 2019. Do you mind telling us where you are now and kind of what direction you see that going through the remainder of the year?

Yes. And Bill can give you the exact number because that all falls under him. But the implementations are – the work behind the teams hasn't really dropped off, and that's part of, frankly, our ability to be a remote company and most of our clients also being able to have their IT companies work remotely. Obviously, if a store is not open, they're not rolling out the product. So that might delay the actual first scan, but it doesn't mean that we're not working on the integration and the logistics behind the scene. And Bill, do you want to – what's the number of implementations that your team is working on now or has scheduled?

Yes, Bryan. In Q1, we completed six integrations, and we have 34 integrations in-flight currently.

Okay. Great. That's helpful. And the current team is sized to be able to handle that kind of volume? Or will you need to add some heads there?

No. I would say that the current team could handle probably even double that. We don't need to go on site. We – it's all completely done virtually. We – part of what we did in 2019 was the professionalization of that team and we've got packages. When somebody says they're ready to go, here's a package. We send them everything they need to be able to test and get the data to us in the way that we need. So it's – I'd say they're really good. Eventually, might I look at hiring somebody to do customer support? Most of the time, our customer support doesn't do – it's nothing to do with any of our large retail clients. It's some borrower and they're locking themselves out of the web application and needs to figure out how to get a new password. And that's also something that we look at, probably cheaper to outsource that, right? So you get a call center that can do password resets. So we don't anticipate a major amount of employees needed to make a company even twice the revenue.

Great. That's helpful. And last one for me. Yesterday, you made the announcement of your first foray into the health care space. How do you think about that vertical longer term? What's the opportunity there versus what you've been doing on the financial services side? And how should investors think about your ability to ramp up in that space?

Well, I think that certainly, there's a large industry, I guess, of people that provide loans into that space. And there's also, I think, a significant amount of fraud that goes on in the insurance space. So the next thing I want to make sure the guys are working on is, make sure we are talking to all the major insurers, Medicaid, Medicare, Aetna, the folks we get our insurance from Blue Cross Blue Shield, whatever, what do they need in the way? I'm told from doctor friends of mine that there is fraud in this space and identity theft happens. So again, we're such a simple solution. Do you need something embedded into the system? Or do you just need it on a phone and scan a license and weed out the bad guys? What I like is we are definitely set to be able to deliver authentication on-prem, off-prem with multiple delivery vehicles. So my hope is that there is something significant to be had there for us.

Great. Appreciate the color, guys. Thanks a lot.

Our next question comes from Jeb Armstrong with Clear Harbor Asset Management. Please proceed with your question.

Good afternoon, Bryan. I hope you guys are well.

Yes, you too, Jeb.

I just wanted to fire a question at you about your interest in getting a loan via the Paycheck Protection Program, your thoughts surrounding that.

We did. I think that the – if you look at the types of companies that they were looking at, I think for this, we fall right into it being – thankfully all 34 employees are still employed. So we thought it made sense, and we did.

Was there anything that you're able to get because of that? How much were you able to get? I guess, is the question.

$796,100.

Okay. Okay. Was that after the end of the first quarter?

It was in April.

It was in April. Okay. Okay. I wanted to turn to the press release you put out just at the end of April, talking about providing free online the – providing a free 90-day – cost-free 90-day trial and sort of your thoughts around that. And how you think you'd be able to monetize that opportunity?

Well, I guess a couple of things we looked at. Certainly, the statistics we were seeing showed that online fraud was happening more and if you look at the furniture company that we were looking at that use it now for the credit card purchases and curbside pickup. As a team, we are talking about it and it really kind of annoyed all of us that in this really crazy time, the last thing I need to do is to have my identity stolen. And in 2019, the cost that consumers bore on this fraud doubled to $3.5 billion because so much of it is – it's hard to prove it wasn't you. So I guess a couple of things. One, in a very altruistic manner, we decided, you know what, let's stop this. And then my bet is if somebody uses it, they realize, they see how good we are at what we're doing, then hopefully, we can monetize it. But right now, what we just decided, as a company, we wanted to do was let's not make a bad situation worse for somebody who might be unemployed, might – considering not have the wherewithal to even pay their bills and then they're screwed by a crook stealing their identity.

Have you – has there been – how much interest has there been so far in accepting that free 90-day trial?

I think there's been definite interest. The sales teams are talking to people about it now. And the good thing from our end is, again, what we're offering them is this simple web product, which all they need to do is log into a website and there's no integration required. They can be up and running as soon as they're comfortable with it.

Great, thanks, Bryan. Have a great day.

You too, Jeb. Have a good day.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call over to Bryan Lewis for closing comments.

Closing comments are always the part that I always forget about, I never write them into my script. But I just want to thank everybody. I've spoken to many of the investors. What I'd like to say is, I want to thank you for your continued support in the company and the team. It means a lot to me. We're working through this. I see good things happening, hopefully, on the other side. And I just hope everybody stays healthy. So thank you.

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