Good afternoon, welcome to the Intellicheck Q2 2023 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Gar Jackson, Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck second quarter 2023 earnings call. Before we get started, I will take a minute 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 works 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 as 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 10, 2023. 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 Jeff Ishmael, Intellicheck's Chief Operating Officer and Chief Financial Officer, who will discuss the Q2 2023 financial results. Following their prepared remarks, we will take questions from our analysts and institutional investors. Today's call will be limited to 1 hour and I will now turn the call over to Bryan.

Thank you, Gar and welcome, everyone, to the Q2 2023 Earnings Call. Before I speak about our results, some highlights and some of the things we're doing to raise awareness of Intellicheck, I'd like to give a brief overview of who we are [indiscernible] to renew our story. Intellicheck has taken its place as an industry leader and we continue to distinguish ourselves as an exceptional identity validation company because our technology solutions are exceedingly accurate and extremely fast. Many of you on this call are familiar with us but for our newcomers and those of you who could use an update, we are evolving, we are growing and we continue to be focused on refining at every level to expand our penetration in key market verticals. I believe that this growing reputation for excellence has led to our use by some of the largest banks and credit card issuers in the United States and Canada at their teller workstations, call centers, online and in their stores to validate their customers' identities. We are currently in approximately 30,000 retail locations and over 4,800 bank and lender branches, not counting the pilots and adoption continues to grow. I feel equally confident that our demonstrated superior speed and accuracy is key to the fact that 28 state-level law enforcement agencies use Intellicheck to validate IDs. And keep in mind that while law enforcement are the only people that can directly connect with every DMV in North America to validate an ID, they choose Intellicheck. Against speed, accuracy and ease of use are the distinguishing factors. Not to stop there, we're also much more than just ID validation for bars, restaurants, retailers, banks and law enforcement. For example, one of our verticals is our cannabis vending machine clients. To buy cannabis products, the…

Hi, thank you, Bryan. On 2 years of continuous progress that we've been making across all levels of the organizations, we continue our efforts to redistribute our spend and investment into the areas that will fuel growth and profitability. Our second quarter SaaS revenue saw growth across our top accounts versus the prior year, continue to report a higher average price per scan versus the prior year and we continued our progression towards adjusted EBITDA neutral results for the year. As Bryan mentioned earlier, we're pleased to see the continued trailing 12-month growth progression in SaaS revenues each month which has been achieved consecutively for the last 42 months. Continuing to cast a critical light of metrics of our SaaS revenue, it's encouraging to see a 14.7% increase in our average price per scan versus the prior year, while we continue to see sequential monthly growth in our transaction activity. With 1 large customer whose activities are primarily predicated on parsing consumer data at the point of transaction, our average price per stand is up 17% versus last year when adjusted for this customer. I'm also pleased to see that our average price per scan has grown sequentially for the flat last 18 months and we will continue to maintain a focus on the development of this metric. This is especially encouraging as it continues to speak to the testament of value realized by our customers. We are maintaining a focus on ensuring that renewals across the entire customer landscape are including annualized CPI increases and that we continue rightsizing legacy customers that are entering renewal periods. As we previously shared, to drive revenues, we've been shifting our expense focus to have a greater emphasis on SG&A specifically our investment in sales and marketing. We're maintaining our focus on operating…

[Operator Instructions] The first question is from Rudy Kessinger, D.A. Davidson.

Great. the sequential growth was very nice to see. I'm curious if you could kind of attribute that growth quarter-over-quarter to a couple of buckets, I guess, existing customers, scan volumes coming in maybe stronger or higher than expected. Obviously, you called out a few customers that came online. But could you just talk about in more detail the quarter-over-quarter growth that you saw?

Jeff, you ran the numbers, do you want to take that for Rudy?

Yes, I can jump into that. So Rudy, on -- as we mentioned on the call, happy to see the incremental transaction count. We've seen that grow every month and on a monthly basis as well as for the year. On the variance for prior year period, we were up almost 11%. So we saw pricing productivity with existing customers. We saw renewals in excess of -- hold on, I just got that figure in front of me, too but in excess of 96%. So all the metrics we're seeing right now on revenue side are solid.

Okay. And then could you talk about kind of the -- you mentioned some severance and restructuring. I know Garrett departed. Could you talk about -- was there anybody else you let go? Particularly I mentioned on the sales side, if any restructuring on that side as well?

We did a restructuring in the marketing department. We swapped out some -- on the sales side, we swapped out some account managers but nothing that I would call a major restructuring, I would say that we did a big round of hiring and you hope that 80% of the people are -- you made the right decisions on them. But I've said all along that we're going to watch people. If we don't think we're getting what we need out of them, we're not going to spend a ton of time. We're going to make sure that they're productive pretty quick. But the main part of that severance was really Garrett and marketing.

Got it. Okay. And then just the last couple of years now, you've had a very strong sequential growth Q1 to Q2 and then Q3 has been effectively flat versus Q2. I know you're not still giving guidance at this point but just directionally, how should we think about Q3 SaaS revenue versus Q2, given the visibility you have today into projects that are going to come online this quarter?

I think it will be a matter of how fast we get some of the banks going. It is generally definitely a quieter period. But I think a lot of it is going to turn around to -- part of the joy of working with large banks is they can be very big deals but it also -- it's sort of a hurry up and wait kind of mentality. So while we don't give guidance, it's not like -- it typically isn't a blowout quarter. But we still expect to see continued sequential growth.

The next question we have comes from Jeff Van Rhee from Craig-Hallum Capital Group.

Sort of a -- of Rudy's question, I guess, as it relates to guidance. I know you don't give the formal outlook here. But to the extent that -- based on what you see in the pipeline and what's in front of you at this point, does '24 from a SaaS standpoint feels sort of like steady as she goes? I mean, we're sort of printing 20% give or take each quarter. I mean is your mindset sort of in that ballpark? Or do you see things that suggest deceleration-acceleration? I know you don't want to quantify specifically but directionally, maybe in those terms?

I don't see deceleration. That's for sure. We've always kind of said that given -- with the sales team that was coming on new. Thankfully, very strong, that we were really expecting definitely kind of more end of the year growth and then more into 2024. I've got to say that the pipeline that this sales team is bringing in is -- has me excited. But again, you get a great pipeline with a bank and they're certainly developing a lot of large potential out there. But then it doesn't matter how much the business people want it, you still have to go through all the stuff for the internal security controls. And that's sort of at the whim of those people. So I think we're kind of steady as she goes but with the caveat that -- when you're hunting whales, sometimes the whale comes in quicker, sometimes it comes in later. So we could see surprises sooner. I like to, in my mind, forecast these whales as they take a lot longer than normal but then you get surprised when you land them much quicker.

Yes. So maybe to follow that then, as you look at your pipeline, I love to hear more, I mean, the breadth and depth of the pipeline, maybe some comparison to the overall -- I don't know how you want to do it, 12-month ARR in the pipe versus 6 months ago. Just how has it -- is there any way you can quantify how it's changed? And then also within that question, is just the composition, is it more onesie, twosies? How is it biased? Big, small? Some color there might help build clarity on the guide.

Yes. Look -- I'll answer it a couple of different ways here, I guess. One is what I'm very happy about is Chris doesn't -- his pipeline is real, he makes sure his team's pipeline is real. So if I look at the pipeline a year ago, compare it to where the pipeline is today, on what was realistic then and what's realistic now, I'd say it's much larger. And the other thing is, since Chris has really divided the team up I think, in a really good format so that we've got people of different skill sets going after sort of different deals and then also dealing in verticals that they're comfortable in -- we have a very good mix of very, very large deals to -- we've got some folks who can turn around an auto dealership or a bar in 2 days. So it's very -- I like the fact that just in the same way that we signed a very diversified group of clients in the quarter. We continue to do that so that we're not sitting here sort of praying that the whale comes in. We've got that, again, that $3,000 to $50,000 a year pipeline really building. And they're doing a lot of that through brute force which is one of the reasons that I want to make sure that we get the branding, the marketing, the messaging out there, right, so more are coming to us than these guys having to go to them.

Yes. Got it. Got it. And then just one clarification. I think you referenced in the call that the TTM scan price up 15%. Is there anything that complicates the math that taking a look at your TTM growth and backing that 15% out and the difference is -- your scanned volumes?

No. I mean -- so the scan volume is up, Jeff. And then on a price per scan effectively on a fully blinded basis. It was up 14% and then again, backing out that 1 customer that primarily -- on par we're seeing that we were up 17%.

[Operator Instructions] The next question we have comes from Mike Grondahl from Northland Securities.

This is Owen [ph] on for Mike tonight. It sounds like there's some momentum rolling in terms of alcohol sales and a growing number of college stadiums and you guys recently signed a big Midwest stadium. I was just wondering if you guys had states to call out there and how are you targeting growth in this vertical?

I'd say the stadiums are certainly -- we've got people who are going out and targeting them. Because I think it's important that -- these people care about it because they make a lot of money off of it and if they get it wrong, usually, the towns look to pull the license, so both the vendor and university lose the money. So they care about doing the right thing. So we definitely have a targeted outreach to them. The good thing is we now have basically a relationship with each one of the major concession companies that serve the universities. They all are sold on an individual basis. Each stadium is sort of its own business underneath kind of the umbrella of concessions company. But given that we now have, I guess, the main 4 are already integrated, know who we are, it's making that process I think -- it should help speed it up and make it go quicker. So it is a target for us. I don't have people going out and knocking on bars and restaurants one at a time. I think that's sort of a waste of time. But what we're looking to do is target Charleston-like things and the Councilman, who was behind this initiative and the original bar owner who are behind this initiative are willing to help us out in any way we can to make this work. So I think doing larger kind of packaged deals like that is where we do outreach. Everything else is sort of inbound. And I think our law enforcement clients are some of our best references or salespeople because as soon a place busted and they ask what are you using, we have a new customer.

The final question we have comes from Scott Buck from H.C. Wainwright.

Bryan, can you remind me -- and apologies if some of these have already been asked. Can you remind me, do you guys charge for your pilot programs? Or is that something you kind of give away the carrot to get people into [ph].

Generally, we charge but it can be a case-by-case basis but generally we charge for pilots. And it can be sort of a different type of pilot you get up to a number of transactions or things like that. But put it this way, I'm not going to lose a deal because somebody huge says, "well, we don't pay for pilots." I mean, we're like, "I don't care" because I know once we're in, we're in.

Right. Right. Okay. That's helpful. And then I'm curious, how do you guys explore it? Or are there potential partnership opportunities that could get you in the door with a meaningful number of potential customers?

Yes, that's exactly the whole program that really -- Jeff is building the infrastructure for us to do it. So we're going to have proper deal registration and all that. We have a lot of folks that currently are reselling our products but we need to formalize the program. And there are absolutely -- we've targeted and have been in discussions with people that need solid identity validation in different verticals. And so -- but we've got folks that are reselling us in automotive. We've got some folks that have embedded us in think -- to scan for age-restricted products. We're talking to people that provide software, say, in the title insurance space. So we're definitely -- that is where we think we could get a lot of growth next year. I'm happy to be intel inside, like I said at the beginning of the call, that a lot of people have -- we've seen you go through our system. You just never knew it was us because -- where somebody just asked for your license, you don't know that it's us doing it. I'm happy with that model. And again, if it can get me in places. And I think automotive is always a great example. There's something like 16,000 rooftops out there. I don't want to knock on every one of them. But if I can get the software provider that is in most of them, to integrate our system, that's a quick and easy win.

Yes, that makes a ton of sense. And then I guess last one for me. Is it fair to suggest that you'll be managing the business at this kind of breakeven adjusted EBITDA level, as long as you see meaningful revenue opportunities that just take a little bit of additional investment?

Yes, we're going to -- look, I think that we're going to invest prudently, right? I'm not a big fan of spending cash on wild goose chases and things. If it makes sense, we're going to do it. If we continue to grow the way that we are, our margins suggest that there should be enough for investment and also building up the cash pool. We know where we need to invest. We know what that dollar amount is and it's not tons and tons of money. So -- our goal is to be EBITDA neutral until we know that where we're at and then after a certain point, we can't help but be EBITDA positive no matter what we do.

Yes, one of the biggest questions we've got since I started was at what point are you guys going to hit adjusted EBITDA neutral? And so rather than throw highly aggressive aspirational goals out there 2 years ahead. It's like let's just go ahead and let's that, that adjusted EBITDA neutral which we are tracking for and we'll be hitting this year. If you take a look at our trailing 12-month adjusted EBITDA we're just under negative $200,000. So we're tracking towards that in Q3 and Q4 coming up, that would bridge that gap. But to Bryan's point, we're going to continue investing in the business but expect to see that ROI too. And if we don't find that expected return, then it's going to fall straight to the bottom line, if you can see that meaningful driver at the top line.

That's helpful. I guess I'll try to squeeze in one more since I'm at the tail end here. How do you think about the current marketing efforts? And how often do you revisit what kind of ROI you might be getting on your marketing?

So that's one of the things that we're looking at. And I think one of the reasons that we decided to make some changes in that and also why we've hired an agency to help us with that. I think we got a lot of people who are really good in sales at the company but marketing is definitely a different animal. And again, that's sort of where we're going to put some money out to get -- to make sure that we're doing it right and that they're measuring and telling us what we're doing, helping us, as Jeff said earlier in the call that we're really reanalyzing our whole digital spend, where we're getting what we wanted out of it. And these folks are suggesting that we weren't, so that's why we put it on pause while we figure out how to get it done better. So everything that we do, that's one of the reasons that I'm so -- Jeff is on board, he's crazy analytical and looks at all this in detail. So we will be analyzing it. We know that our messaging wasn't getting through. Having the head of fraud at one of our biggest banks say, "you guys messaging -- I'm happy to talk to you any prospect you have but we got to help you with the messaging." So we're always looking at it and we're working on it.

Scott, when you take a step back -- when you take a step back, Scott and you look at what we will have the ability to reallocate in the coming quarters coming year at $2.1 million, it's a lot of spend and you're also going to ramp that spend up appropriately. You just don't drive that within the first few quarters. And as Bryan mentioned, driving a revised brand strategy and the rollout of that is a multi-quarter as we're rolling out the channel partner program in the more formalized way, we expect to launch that in Q4 with realizing top-line increases, new pipeline generation, all of that going into '24. But again, $2.1 million, at least for this stage of this company at is a lot of channel back into sales and marketing, we're rightsized on the G&A side. We are rightsizing on the product side. Jonathan is doing a tremendous job there. So our spend can almost go entirely into that sales and marketing side.

Ladies and gentlemen, that was our final question for today's conference. I will now hand back to Bryan Lewis for closing remarks. Please go ahead.

Thank you. Thanks, everybody, for joining us today for the Intellicheck Q2 earnings call. Just as a reminder, we'll be presenting at the Sidoti Conference this Thursday -- this coming Thursday. If you're interested in participating, we put out a press release earlier this week with the details. And with that, I'll say thank you and have a great evening.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.