Greetings! And welcome to the Intellicheck Q3, 2023 Earnings Call. At this time all participants are in the listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gar Jackson. Thank you. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck third quarter 2023 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 Security 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, 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, November 8, 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 Q3, 2023 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 good afternoon, and thanks for joining us everyone today, for our third quarter 2023 earnings call. It was another solid quarter of year-over-year growth, with SaaS revenues up 17% versus the prior year quarter. I am beginning today's call with an update on some of the recent changes we have made as an organization. As I have shared with you before, I have continued to review organizational needs with an ongoing focus on staffing as a critical component in building our company and accelerating revenue growth. I continue to believe that key to our continued progress is putting the best people into operational positions that will enable us to drive growth and significant product evolution. Since Jonathan Robins came onboard as our VP of Engineering, he has made significant contributions and is engaged with our customers to really seek out what they need and address any issues or concerns that they might have. His efforts reflect our renewed focus on being proactive in partnering with our customers, recognizing that one size doesn't fit all. Without getting too deep into the technical details, here are just a few highlights regarding what Jonathan and his team have accomplished so far. Recognizing that we need to reduce transaction abandonment, Jonathan led the team in the redesign of our digital user interfaces to simplify the customer experience during ID validation. We believe that this reduction in abandonment will drive additional revenue, but more importantly, will help our clients onboard additional clients faster and more efficiently. The team has redesigned our API and servers to improve security and reliability. We are no longer dependent on only one cloud provider. We are now platform agnostic, and this provides a tremendous amount of flexibility that had been previously lacking. Again, this is something…

Thank you, Brian. I'm pleased with the continued progress we've been making across all levels of the organization as we continue our efforts to redistribute our spend and investment into the areas that will fuel our future growth and profitability. Our third quarter revenues were 19% higher versus the prior year. We 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. We are pleased to see the continued trailing 12-month growth progression in SaaS revenues each month, which has been achieved consecutively for the last 45 months. Continuing to cast a critical eye to the metrics of our SaaS revenue, it's encouraging to see an 18% increase in our average price per scan versus the prior year as we've continued the right sizing of legacy accounts and have enforced internal disciplines on CPI increases. This is especially encouraging as it continues to speak to the testament of the value realized by our customers and that we continue to have pricing power. We also continue to maintain our focus on operating expenses to ensure that we achieve the expected return on our investments in this area. Within the Q3 period, we made additional changes to the product group. We saw the promotion of Jonathan Robins to CTO, as well as new hires to increase the skill set of the group across the engineering, development, and data science teams. We are continuing the implementation of our channel program to be completed by the end of the year, which I will provide more details on later in my remarks. We expect this program to have a noticeable impact in our 2024 pipeline growth and bookings. We believe that the combination of the efforts discussed above will…

Thank you. [Operator Instructions]. The first question we have is from Mike Grondahl of Northland Securities. Please go ahead.

Hey, guys. First question, I think you said that you saw an 18% increase in average price per scan year-over-year. Could you just explain that a little bit? Is that driven by some price increases? Is it driven by some newer clients, like maybe this real-estate area where the amount you get per scan is a lot more than the average book? I'm just trying to, in my head, wrap it around an 18% increase in the average scan price.

Yeah Mike, Jeff here. So this is an initiative and a process we've been going through well over the last year. As Bryan and Chris have been working with existing clients, but we've brought those contracts up to renewals, both at the lower end of the spectrum, including the whales that we have in the queue and addressing those legacy prices, prices that shouldn't have been written in the first place. And so as we start to anniversary and see the traction on this contract updates, that is the effective impact to our average price per scan.

Yeah. And Mike, we're certainly increasing pricing on new clients. So it's not just that we're doing price increases on existing. We are continually pushing the pricing. We think that because we are, I think, so easy to use and the way we're looking at it, we're more than just fraud prevention. We're actually a way to gain more clients. And I think a good example of that is just today, my team was talking to one of those two regional pilots that we had talked about. And their goal when they started, when they used us there for their online applications, they hoped to increase customer conversions by 2%. The words they used were ecstatic, because they're actually seeing customer conversions increase by 20%. So when you think about the fact that we're not just cutting fraud, but we're also adding clients with a very high LTV, that's why we're certainly pushing pricing. We're more than just fraud prevention. We're customer acquisition.

Good. That's great. And if SaaS revenue grew 18% and pricing was up 18%, am I correct in seeing kind of volume flattish? Is that because maybe some – you lost a couple of customers, because you tried to raise price that – you know what I mean, they didn't want to pay more? I'm just trying to understand volume and price a little bit.

I'd say that if I look at overall, certain things were up and it really depends on the region or the industry that you're looking at. If I look year-over-year for the full year, I should say, you know, so first nine months of the year versus the first nine months of last year, retail is up about 9% and that's a really mixed bag. Electronics are flat. Some of the specialty women's apparel retail are down as much as 30%. And we also now have an increase over the same period of like 16% increase in retailers who are using us. So I think a lot of it really depends on, is it a legacy customer where some of that pricing like Jeff said, almost never should have been written, because it was done so, so long ago and we're still trying to bring them up. Banking is an area that is definitely growing for us. If I look at two of our largest banks, their volumes are up as they use us in new places within the bank, one up 28%. They almost is over double. So again, mixed bag, because some transaction volumes are up, but it might be somebody who's using us purely for parsing the data. So even though the volumes aren't up, it doesn't have a huge impact on revenue, because you can't charge as much for pure parsing as you do for both parsing and filling out the application and fraud prevention. So a little bit of both, if that makes sense.

Got it. And then, hey, just lastly, how do you feel about the pipeline, new customers?

I am – it's funny, we had a board meeting today and we were talking about that a lot. I think that we have said pretty much all year that this was going to be somewhat of a growth year for the new sales team and that we expected them to start bringing things in, in the back half of the year. I think that they are definitely, definitely doing that. If I look at, just last quarter we closed 27 age-restricted places, nine title companies. In addition to that software company that should hopefully get us to a bunch more, we did an online survey company, an online therapy company, a new auto finance company, a handful of automotive dealerships, in addition to the ones brought into us by our resellers. So between what I'm already seeing and the pipeline, I think that the team is making good on what we said and what we anticipated and planned for.

Got it. Hey, thank you.

Thanks Mike.

The next question we have is from Rudy Kessinger of D.A. Davidson. Please go ahead.

Hey, great. Thanks for taking my question. I just want to clarify, Jeff, on the R&D. So you're saying there's $395,000 of severance, but only $131,000 you back out for adjusted EBITDA?

That's correct. Yeah, there was only one position that ultimately we didn't replace. The rest was a recalibration and an uptick in the skill sets of that team.

Okay, got it. That's helpful. Bryan, it sounds like, you just mentioned quite a few deals that were closed in the quarter, but it seems like these are smaller deals. I guess, what was the average contract, ACV of those deals signed in the quarter? And did you sign any larger deals in the quarter that could turn into six-figure customers or no?

We – what I'd say is part of our issue is – I'll answer it in two parts. Some of these could be rather large, because auto finance company can be pretty big. I think the software company that provides basically the backbone for most of the small and mid-sized title companies could be very big. We talked about the number two title company in the country, so we've got a lot of things that I think are potentially be very big. The only thing is, a lot of our very, very large clients, which it's almost where – that's where we really sort of have to show people, don't want to be discussed at all. So, I can say that I am very happy with the things that we've announced. I'm very happy with what the team is doing. And I think that as we said, we were building a lot into the second half of the year, continued growth going into – I look at the pipeline, what we're doing, what the sales team is bringing in, very, very, very robust. Then I also combine that with what, Jonathan and team have done. Now we can go out and in two seconds white label our product to match what, somebody who wants to make their product look like in a digital world. It can be installed with absolutely almost no work, just a redirect on the URL. Those are the types of things that speed up deals, because it's basically almost – it's turning what was a major integration into an almost near no integration onboarding. So yes, I would say that we have.

Okay. And then on the two southeast regional banks, it seems like those deals have continued to push quarter-after-quarter. Are those pilots generating revenue? And if not, when do you think those two deals will start generating revenue? And then just lastly, sneaking two in one here, just what is your expectation for the seasonal strength in Q4 in scanning volumes relative to past years?

So two parts. They certainly should start generating revenue in Q1 at the absolute latest. I mean, like I like we said on the call, they are both blown away by what they are seeing. They both told us that they were just getting destroyed by fraud. And now for both of them, we're not only stopping that fraud destruction, but we're also getting them new customers very quickly. So that's why they are now looking, how do we get it all over the place? And I think Chris has been very busy with that, in trying to figure out how we get to everywhere they want to as quickly as possible. I will say that so far I'm not seeing any reduction through basically cut in yesterday in terms of volumes from – in terms of the seasonality, so, so far so good.

Okay, great. Thanks for taking my questions, guys.

Thank you.

The next question we have is from Scott Buck of H.C. Wainwright. Please go ahead.

Hi. Good afternoon, guys. Thanks for taking my questions. Brian, I'm curious, you guys price the product differently when you are doing your work with auto or real estate versus the legacy store branded cards. I guess I'm just asking, given that I imagine the number of transactions is significantly fewer, but the dollar volumes we're talking about in the risk is significantly higher.

Yeah, definitely. We sort of have a – maybe three tiers is the way to look at it. Volume being an indicator for part of the pricing and then age restricted is always very different than fraud prevention. And then with fraud prevention it's sort of the size of the fraud potential in there. So you've got age starting at a lower point for any kind of real volume than we would in fraud prevention. And then the lower the volume, the higher the cost, and then the greater the potential loss, the higher the cost.

Okay, great. That's helpful. And I'm curious what – obviously the business has changed quite a bit since kind of pre-COVID in terms of diversification. How much of transaction volume is still coming from kind of the legacy store branded card business?

Definitely the majority of it is still there. Probably 93% to 95%. We're getting our reporting there, so it makes it easier for us to break that out. But my goal is to reduce that as we get into some of these other markets and certainly other areas that are sort of recession proof, where you still need to authenticate yourself, which is one of the reasons we like some of the other markets that we have been moving into.

Great. That's helpful. And kind of as a follow-up there, I mean, there's been a fair amount of news regarding credit tightening over the past several months and it's becoming more difficult for people to open new credit cards. Have you seen that on your end in terms of transaction volumes?

No, like so far, not. I think more where I'm seeing changes in transaction volumes, it's because the retailer themselves is having problems, because there are some retailers who are up. And then again, like I said, there are some of the retailers that are very much down, 5% to 30%. But I'm also seeing other retailers that are flat and others that are up about 10%. So, so far we're not, but that is certainly something that I'm keeping my eye on.

Sure. I appreciate the time, guys. This is great. Thank you.

Thanks, Scott.

The next question we have is from Daniel Hibshman of Craig-Hallum. Please go ahead.

Hey, this is Daniel on for Jeff Van Rhee. Just quick, on the new data product, any thoughts on pricing and or how that would be priced and any thoughts on the expected top line impact from that?

At this point in time, not yet. But we do look at it as doing a number of things. One is, certainly strengthening the existing product. But we have talked to many of our existing clients about it and they have all said that they would find it highly valuable. So we continue to work with them. Our first step is to get the data light going. We've got a data scientist who's coming onboard who can help us make a lot of sense of it. We've already figured out a few things that we know we can already do. But I think you get somebody who really knows how to sift through the information, it's going to be even better. But certainly that's the thing that we're focusing on in early 2024, is to make sure that we get that plan in place. And again, it's going to be done in collaboration with our clients.

Thanks for those thoughts. And then just on the cost reductions with moving cloud providers, any thoughts on the potential cost reductions there, what that amounts to?

You mean moving off of – well, you mean the cloud providers? Like, yeah. I’d say that my CTO and Head of DevOps are promising me the sun and the moon. But I would expect something on the order of at least 20%.

Thanks for that, and that's all I had. Thanks.

Thank you.

We have no further questions at this time. I would like to turn the floor back over to Bryan Lewis for closing comments.

So, thank you all for joining us today. Hopefully, as you can see, we're focused on making changes, positioning resources, and growing our market presence and penetration. I think all of our efforts reflect a common theme. We're continuing to work with new and existing clients to expand the ways we can stop identity theft with our proven technology solutions, right. And in addition to that, showing them how we can help them acquire more customers faster, right. And we think between the two of those things, the best is yet to come as we solidify our reputation as an industry leader in both physical and digital identity. So with that, thank you and good night.

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.