Greetings and welcome to Intellicheck's Second Quarter 2020 Earnings 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 introduce your host, Gar Jackson, Investor relations for Intellicheck. Thank you. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck second 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, August 11th, 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 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. I will now turn the call over to Bryan.

Thanks Gar. Hello everyone and thank you for joining us for the Q2 2020 earnings call. I'll begin this call by recognizing and thanking my team. While we've always been setup to work remote, the team showed me just how well they could do it. As you'll see from some of the wins and implementations over the quarter, the team demonstrated that they don't need an office to perform at 110%. So, a big thank you to my team Let's begin with a look at some of the numbers. Obviously, COVID had a major impact on retail foot traffic and our brick-and-motor retailers. During the Q1 earnings call, we'd indicated that we anticipated achieving 60% of Q1 SaaS revenue in Q2. In fact, we achieved 75% of that revenue number, with $1.67 million in SaaS revenue in the quarter. While down from Q1 due to the pandemic, it was still a 49% increase year-over-year. Given how much of the country was shut down and for how long, I am pleased with what we accomplished. An interesting development of note is that the shutdown of physical locations made our customers realize how exposed they were to fraud in the digital channels. This move to digital has sped up the adoption of our person not present authentication tools, which I will speak about shortly. First, let's look at wins and implementations during the quarter. Historically, I've reviewed each of our top clients on these calls. Because of the increasing number of clients, we are currently reviewing each one has become unwieldy, so going forward I will speak to some of the highlights for the quarter. Financial services company number two brought -- or is about to bring life four new retailers. In July we brought live a 1,400 locations community retailer selling…

Thank you, Brian, and 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 ended June 30, 2020. Let's begin with our second quarter results. Revenue for the second quarter ended June 30, 2020 grew 18% to $1.842 million versus $1.558 million for the same period last year. Our SaaS revenue was approximately $1.671 million for Q2 2020, a 49% increase from $1.121 million in Q2 2018. Gross profit as a percentage of revenue was 88.6% for the quarter ended June 30, 2020 compared to 85.9% for the quarter ended June 30, 2019. Operating expenses, which consists of selling, general, and administrative and research and development expenses increased 6% or $143,000 to $2.402 million for the quarter ended June 30, 2020 versus $2.259 million for the same period in 2018. The increase was primarily driven by an increase in personnel cost and then the [Indiscernible] was contingent upon achieving certain goals established by the Board of Directors and the Compensation Committee. The company posted a net loss of $760,000 for the three months ended June 30, 2020, compared to a net loss of $874,000 for the quarter ended June 30, 2019. The net loss per diluted share was $0.05 versus a net loss per diluted share at $0.06 in the prior year. Adjusted EBITDA for the quarter ended June 30, 2020 was negative $619,000 compared to negative $785,000 in the quarter ended June 30 2019. Interest and other income were negligible for the quarters June 30, 2020 and 2019. Now, I'd like to focus on the company's liquidity and capital resources. As of June 30, 2020, the company had net cash of $14.6 million; working capital, defined as current assets minus current…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, good afternoon, guys. And congratulations on the progress during the pandemic. First question, with facial recognition, do we think of that as kind of an add on product? Do you up charge for that or charge your fee? How does the pricing work there?

Yes, Mike, thanks -- first of all, thanks for the compliment. Second, it is an add-on and specifically for person not presence authentication. You might have seen from the press release, we put out, I think, a couple of weeks ago, we partnered with a company called Ipsidy to do it. o, we upsell that product when people you know, want to make sure with absolute certainty that not only is the plastic real, but I'm still the one holding it. The way to do that is to make sure that my face matches with what's actually been imprinted on the license. So, definitely an upsell new product for existing clients.

Is that upsell about -- I don't know, I'm just guessing 10%, 20% of their base fee, or how do we think about the level?

I would say that that's one of the hard parts right now to figure out because I -- most of our clients at this point in time, aren't sure how often they're going to be incorporating the facial recognition to it. So I think it's certainly those things that everybody is going to be learning on. I think they're going to want to look and find out with this added friction, what am I losing, because that's always the tradeoff. Is it costing me more business than I would lose to the little bit more fraud I get, because it's somebody with a real ID, they stole it from relative or whatever it is. How do we make sure? So, I think they're going to be playing a bit of a learning game throughout the rest of the year on that.

Got it. And then on financial services, customer number two, I think you've said -- but you might have broken up, four new retailers are all on track. One was in July with 1,400 stores. And then there was a beauty -- leading beauty supply with 3,700 locations and a women clothing store. They are all coming near-term, is that what you were implying?

Yes, so those are all piloting or completing rollouts that have been paused or those types of things. So, either brand new or a completion of something that that got paused while they are doing some other work.

Got it. Okay. And then just lastly, what activities sort of online would you call out is your pipeline is the mix kind of shifting to online support or how do we understand the robustness of that?

What I'm definitely going to say is when -- I don't think many of our clients were really thinking about fraud in the online channel as much as they began to think about it, when that was the only way you get into them. And I think that they realized that they had some significant holes there. And began talking to us how do we fill those holes? Certainly we know that financial services company number one has been a big proponent of getting the ability to do authentication online through their retailers' websites. I think now when we saw that more things went to call centers and/or completely online, they began to look at how do they implement it, and how do they get it done? Obviously, those things require development work on their end. If they're not going to immediately just use our website that we can stand upfront usually they want to get this stuff integrated. So I would say that in talking with the sales team, it's something that all the clients are talking about. And now they're figuring out, what it is we're going to do. How do we build sort of a waterfall of -- is it just a license? Is it the license in the front? The back of license and the front of license. Is at the back, the front and the face. And, again, I’m kind of seeing – I’m talking to some of this new people are learning curve as they figure out how to put it in. So my take on it is, it’s probably is going to speed up adoption of some of these things, but it's going to be interesting to see how well it is taken. And again, because they want to figure out that friction doing maybe additional steps versus what they lose through card abandonment.

Got it. Okay. Hey, thanks a lot guys.

Thanks, Mike,

Our next question comes from the line of Scott Buck with B. Riley FBR. Please proceed with your question.

Hey, good afternoon, guys. I was curious, what's the percentage of swipes or scans that are coming from or came from brick-and-mortar in the second quarter versus the -- call it year-end 2019? And what does that look like today?

So let me see if I get the question, right? What percentage of the scans come were brick-and-mortar in Q2 versus the end of last year? Did I get that right, it’s the part one?

Yes. Just trying to think during pandemic, post-pandemic versus pre-pandemic.

What I'd say is, certainly look at the vast majority of scans come in through brick-and-mortar I think, you can just say that 49% versus Q1. That's definitely low in terms of scans across both things. And I think one of the things that helped us again was the fact that even if you're on a per scan model, there's minimums that have to be paid. And again, many of our clients are -- were considered essential services, and their -- those stores were open. But scan volume is definitely down. Across all clients, online scans are a small, but growing portion of what they're doing. So if you go back to the typical in a normal year 21% of scans is Q1, 22% -- I'm sorry, 23% in Q2 and Q3, 33% in Q4, you can kind of figure out that there was a heck of a drop in terms of the foot traffic and what we saw, and certainly not made up yet, because of the low adoption across all clients of doing person-not-present authentication. I think that's -- it's going to be growing in the future.

Okay. Great. That's helpful. Second one, you made some progress with some new, I guess, bank customers this quarter. I'm curious, how you're sourcing those customers? And whether that's a vertical that you're actively pursuing or these folks are approaching you?

I'd say, 50-50, right? So, but they're also beginning to talk to each other, which makes the inbound calls from the sales team certainly much warmer than they used to be. We don't do anywhere near the advertising and some of our competitors, but we certainly get a lot more business because I think of our advocacy and our clients all talk to each other. So that makes warmer calls and cold calls. And certainly, some of our wins, since I've been here and we started developing our names for ourselves had been inbound calls to us, because they spoke to either a retail competitor or a banking competitor. Because as I said in the past, they might compete in terms of I want market share, but they all cooperate when it comes to fighting fraud because they know that it impacts each one of them. And the more they help each other, the more they can stop it. So, again, probably, the wins in the quarter, I’d say, 50-50.

Great. I appreciate that, guys. Thanks a lot.

Thanks.

Thanks, Scott.

[Operator Instructions] Our next question comes from the line of Roger Liddell with Clear Harbor Asset Management. Please proceed with your question. Roger Liddell, your line is live.

Yes, I'm sorry, mute button. All right. The press release several weeks ago about Ipsidy was obviously full of interesting potential, but I don't know much more than I did before reading the press release as to just how it integrates and what each party brings to the JV, if it is in fact, set up as a JV. So could you just go into any texture that would help us?

Yeah, sure. So Ipsidy has done the development the sort of the math behind facial recognition. Basically it's a matter of measuring vectors on your face, and then comparing those to the vectors of a photo and to see if there is a match there. And the two things are it is in fact me in that photo. And we started working with Ipsidy a while back, one of the things I liked about them is, they brought out faster than most the ability to do this both in a web application as well as in like a mobile app. And many of our clients wanted it started off with a web app because they figured that most people probably think about signing up for a bank account online, I'm going to do that through the web. And then after my client, I'll download the app. So that made a lot of sense to us. So we started talking. Our development teams work very well together hand-in-hand and in a way it is sort of a joint venture. We figured out pricing where there's a markup that we get, that makes us happy. They get their share, that they're happy. The software is exceptionally resides our stuff in the cloud, so it's seamless to the client. But it's -- the client wouldn't know that it's a single step process. It's just a matter of then what our clients what they want to do, which steps in the process that they want to do, the one, two and three, the back, the back of the front or the back of the front and the face.

Okay. And is this transformational? Or could it become transformational for the company or simply a highly attractive opportunity among many?

I think that is the world moves to more person not present, this is going to be an absolute requirement that you can match my face to whatever it is, whatever that government ID is that you're looking to use as an authentication piece. So I think a lot of people say they have it. There are certainly a lot of companies that can do facial recognition. I think it just continues to add to sort of what we do in a matter that gets us deeper and deeper into our clients. As I said in the prepared remarks that facial recognition does not matter if you can't tell, if the license or the government ID is fake to begin with. And as we know, a lot of fakes get passed, doing things not through what we know about the barcode. So you can't tell with near certainty that the license is real, then it doesn't matter at all. Facial recognition is completely useless, because I've just matched a fraudster to a fake. So it's not helpful. It's certainly something that everything one of the clients was talking about. And I think that there's a lot of bad press about facial recognition you're hearing it. But this is a very different thing. Like this isn't just cameras on all the street corners mapping where Bryan Lewis is walking to. This is Bryan Lewis as opted in to say that, yes, I want to apply, I understand that you need to see my license, and you're going to compare my face to it. So that's -- I think it's going to become a larger and more use methods of authentication fully. I think just the same way when I started here two plus years ago, a lot of what we were doing with educating clients about how to use an ID to authenticate. Now we’re just taking a step further and saying, here's how we can certainly make sure that when a person is not standing right in front of you, they are real and they are in control of the real document.

Okay. And you've referred to the -- we'll call it lower visibility of Intellicheck with its superior solution relative to sub-competitors. Is this something? How do you intend to address this lack of visibility?

I think, it's one of the things that, I got going with the woman who runs PR threats and understands this. We're looking at issues thankfully mastering all the places that we should or could be, and what we're going to work on in this cost effective plan to get our name out there. Certainly, more than we have, once people -- once we start talking to people and they hear our story, they're amazed. So I think it's going to be fun to do. We’ve certainly now, part of our presence that we raised is with some of the companies that do research in these spaces. And we've begun to whereas before, we were never mentioned any things. We are getting mentioned more and more in research on ID authentication, and getting mentioned in a very positive way. So the likes of the gardeners and the javelins of the world who often get hired by -- banks or large companies to figure out what they should be doing in this space, now know us and are talking about us. So it doesn't really take a ton of money. It just takes a plan and a path and that's certainly what we're putting in place. And honestly, the rebranding was, you know, the first step in that, certainly we've seen, even just the people who now following us on social media, are coming from companies that are, big companies that we definitely want to get into. So I think our presence is becoming known more. And now we're just working on the plan to control and better run the messaging.

Okay. Thank you.

Thanks Roger.

Our next question comes on the line of Jeb Armstrong with Clear Harbor Asset Management. Please proceed with your question.

Hi, Bryan, how are you?

Hey, Jeb. I'm good. Yourself?

I promise I didn't have the finger on Roger's mute button. I wanted to sort of dive into the question of competitive landscape a little bit more, not just as it relates to authenticating IDs but other ways of looking at fraud prevention and sort of the gist of my question is surrounds other ways that -- that companies may go about doing that, in particular, a large national institution talks about using machine learning to detect fraudulent activity. And to get ahead of it from that perspective, do you see that as something is there as -- as a competitive threat to the landscape? Or is that a completely different type of technology?

Well, I'd say that, that is a completely different type of technology. And then certainly, I would say that, even on my competitors, if you go to their websites for ID authentication, all talk about AI and machine learning. It's just because they're trying to figure out how to template the final license a lot better than they do. But it's really, there's sort of two worlds here that, we need to break apart. And I think one of the things that we can do with facial recognition is make sure that we can remain a dominant player in the second world, first world which we're really you know -- if you look at the bank stream are probably one of the main, if not the main player and in my opinion is enrollment, because that's where you need to make sure that everything is real, and our efficacy in weeding out the fakes and making sure that no fraudsters get in. That's the first step. Now, the second thing, because one of the largest growing methods of stealing identities is no longer just opening up your accounts, but its account takeover and everything from your -- your bank account, your investment accounts, going in and clearing out. I've had this happen with friends who were like, their AmEx points get completely cleared out turned into, gift cards and gone, so, how do you make sure that account takeover isn't happening and a lot of places weren't doing anything about that. So there is a lot of guys out there with machine learning tools where they say -- they can tell by the way you type on the keyboard or the way you fill out forms, they're going to know that that's not you and stop it. I think a…

I appreciate the insight. Thank you so much.

Thank you.

Our next question comes from the line of Doris Rossiter with Shattemac Capital Management. Please proceed with your question.

Hi, Bryan, this is Doris. Congratulations on all your good work.

Thank you. It's a team as I said.

Yes. I just wanted to follow-up on one of the prior callers question on -- it's Ipsidy joint venture, it's a practical matter. I'm wondering, how if somebody's face changes, you have your license. Here in New York, my driver's license, I have it for eight years from the time the picture is taken until I have to renew it. Some people their face changes dramatically over eight years. They either gain weight, they lose weight, they grow a beard, they -- different things change their hairstyle. I'm just wondering if -- if the technology can incorporate -- can factor those things and how is that addressed?

Yeah. That sort of through the mathematics of what they do, and one of the things we like about them, and certainly, you know, as we tested, and certainly there are people tested, we're kind of all in the same boat. The picture on my Jersey license, I think the same thing as eight years old. And I wish I looked a lot more like that eight year old picture than I do today. But if it matched me fine. The other thing that, I liked about the technology and what they can do is, again, it's you don't always need to go back to the picture. The way they've got it set up, which I think makes sense is there's mathematics behind your face. And that can be stored because it's not PII, I can't replicate your face with that, but I can match the next time we need to do a facial match and selfie to that, that vector. Now, I know they matched. Now I could throw out the old vector, and I'm starting with a fresh one, so they can kind of as your face evolves over time, it'll know that without knowing it to you, if that makes sense, right. It's sort of the data storage mathematics that can't replace -- that can't recreate your face, but it will know a face matches it. So it is, certainly if it is, if there's been a drastic change, it'll be hard. And, maybe it means you have to go into the bank to get things done first time, but after that, it shouldn't be a problem.

Okay. I'm just wondering, if they provided any if Ipsidy provided any statistics on number of false alarms, or need to take another route to go into the bank instead of presenting remotely? Do they give you any -- give us any statistics on how many cases or how frequently the facial recognition may not actually work?

I don't have hard stats on that. But what I can say is, we had looked at multiple vendors in this space. And, had tested, multiple different vendors, even incorporated some other vendors into our products as well. I think that, all of them are very good at the Ipsidy technology and the way that they implemented it was better, which is why, we jumped into a much deeper partnership. For the most part, I'm going to say it works. There's obviously going to be outliers and again, I think right, this is very, very different technology than you're quickly running through a store and they want to figure out, who you are -- or again that camera on a building on a corner. No, because it is you're taking a very good image of yourself, because it's your -- your cell phone right in front of you. I think the results are very good. But it's certainly something that we'll watch and we what we do know from working with them, when we see things, popping up, they can refine the mathematics of their code to account for things.

So it -- it can -- they can refine it over time if it's --

Oh, yeah, yeah, absolutely, absolutely. We saw it even during our testing with them.

Okay. Okay. Thank you. And good luck.

Thank you. Thank you very much.

There are no further questions in the queue. I'd like to hand the call back to Bryan Lewis for closing remarks.

Thanks. This is the part I always forget to write closing remarks. Next time, I better remember. So, yeah, all I am going to say is -- hopefully, we figured out a way to get beyond COVID. And people get better and shopping gets picks up, which, we certainly are seeing at least in the scan steps. I want to go back and thank my team. It's been a very transformational time for I think everybody in business and my team came through with flying colors. And I look forward to speaking with you all again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.