Intellicheck, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Greetings, and welcome to Intellicheck First Quarter Fiscal Year Earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson. Thank you. You may begin.

[Gar Jackson:]

Thank you, operator. Good afternoon and thank you for joining us today for the Intellicheck First Quarter Fiscal Year 2021 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.

[Bryan Lewis:]

Thank you, Gar and thank you to everyone who has joined us for our first quarter 2021 earnings call. I'm excited by what was accomplished this quarter, but even more so by the greater signs of openings we see, the additional use cases our existing clients have and are putting into place, as well as the deals in play and the increasing pipeline that we believe is on the horizon. When I factor in our three new sales hires, I believe that we are setting ourselves up for very well for the coming year. Before I get into all of that though, I'm going to highlight some of our financials. Q1 SaaS revenue grew 24% over Q1, 2020, with total revenues down 8% due to fewer ancillary hardware sales versus the comparable prior year period. In Q1 2021, 97% of our revenue was SaaS revenue and as a result, our gross margin for the quarter was 92%. SaaS revenues in Q1 versus Q4, was also up by 8%, but I would point out that in a normal world, we have consistently seen that there is an approximate 12% drop in transaction volume from Q4 to Q1. I think the smaller-than-expected dip points to some signs of reopening and higher store traffic, which we'll touch on in a moment.

[Bill White:]

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 March 31, 2021. I'll begin with our first quarter results. Quarter-over-quarter SaaS revenue grew 24% to $2,776,000 versus $2,238,000 in the prior year. Total revenue for the first quarter ended March 31, 2021 decreased 8% to $2,863,000 compared to $3,115,000 in the prior year comparable period. Gross profit as a percentage of revenue was 92.3% for the quarter ended March 31, 2021 compared to 77.8% for the quarter ended March 31, 2020. The increase in gross margin was primarily due to sales mix in the prior period as we sold scanning equipment to a bank preparing to roll our software out to their bank branches, which are normally sold at lower margins. Operating expenses that consist of selling, general and administrative and research and development expenses increased by 55% or $1,319,000 to $3,717,000 for the quarter ended March 31, 2021 versus $2,398,000 for the same quarter in 2010. That increase was primarily due to higher stock-based compensation cost and increased headcount and expanded research and development efforts. The company posted a net loss of $1,060,000 for the three months ended March 31, 2021 compared to a net income of $27,000 for the quarter ended March 31, 2020. The net loss per diluted share was $0.06 versus -- per diluted share versus zero in the prior period. Adjusted EBITDA for the quarter ended March 31, 2021 was a negative $52,000 compared to a positive EBITDA of $144,000 in the March 31, 2020 quarter. Interest and other income were negligible for the quarters ending March 31, 2021 and 2020.

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. Our first question comes from Scott Buck with H.C. Wainwright. Please proceed with your question.

[Scott Buck:]

Hi, good afternoon, guys. I know you added some heads during the – I know you added some heads during the quarter. I'm curious if there's anything else or any other kind of investment in the business you feel like you need to make Bryan to have the right infrastructure in place to maintain the current top line growth?

[Bryan Lewis:]

Yes. We've put in some marketing tools they're not – I wouldn't say, they're overly expensive but just ways for the marketing team to interact with the sales team run campaigns those types of things. And as I've said, we will be spending some money on sort of proper targeted marketing. I don't want to do the blast everywhere to me, it doesn't make any sense. We know who our target audiences are and being smart about it. But one of the things that I really want to make sure that we do is increase the brand awareness of Intellicheck, right? We've got lots of good word-of-mouth from our clients talking to other clients. But I want to make sure that our position is very, very strong because I look at it as – I'm going to go back to that word certainty. We do something nobody else can and we need to make sure people know that. So I think there'll be a little bit more marketing spend.

[Scott Buck:]

All right. Great. That's helpful. Second one I'm curious, you've been at this for three years now. And then given the amount of success that you guys have had, are you starting to see any change in the way your competitors approach either your current customers or potential customers? I mean, are you seeing changes in pricing or anything along those lines?

[Bryan Lewis:]

Not from our end. If anything I'd say, we're seeing the ability to increase our pricing. And I'll go back to sort of some of the competitive moat things that we have, particularly when we're talking in the physical world. The fact that we work with all the existing hardware that's in place, the only reason that we ended up doing this hardware purchase for number 3 is they wanted us to also authenticate for them passports and that requires something different than the normal check capture machine that they have. So that was the reason for that particular purchase. Otherwise, we work with everything. Nobody else doing OCR can do that. So it is a significant outlay for anybody looking to do it across scale where you need to put in a lot of equipment.

[Scott Buck:]

Great. That’s helpful. Appreciate the time.

[Operator:]

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

[Mike Grondahl:]

Hey guys. Just a first question. I don't know if you commented this quarter, but the number of implementations in 1Q? And what does that backlog look like?

[Bryan Lewis:]

I don't know Bill if you -- I know you if you want to quick look it up. The backlog continues to expand is the way I'd look at it. Bill and I were looking over the list the other day of what's in queue and what's going on. And it is strong, it is robust. I look at between what is new, new coming in the door versus the existing growth at our clients or growth at existing clients I should say. One of the things that we're heavily focusing on is again with new hires and focus of the sales team is to make sure that we're grabbing new logos. And at the same time we've got people who are talented in the land and expand really good account management. So everything that I've seen is showing that the pipeline of implementations is only growing.

[Mike Grondahl:]

Got it. And maybe while Bill is looking up that for 1Q. Just the 25 NDAs signed in 1Q are -- I imagine those vary from small to large. But can you comment on the mix at all? Like are you excited about some larger ones, or -- how do you think about them?

[Bryan Lewis:]

I'm exceptionally excited about the names that we have on that NDA list because two things. One I like the NDAs especially for the very large clients because it proves real intent in my opinion because they're not just going to willy nilly sign them. Most of the larger organizations have a little bit more checks and balances on just going out and doing an NDA. The other thing I like about it is that frees us up to start talking about who our existing clients are which gives us massive instinct credibility. And usually the reason that we're going into an NDA is, we're beginning to talk about a proof of concept some sort of trial and pricing. So it's -- to me it's a significant step. We know that both parties now have skin in the game. And you're right to say it runs from sort of some of the large guys those banks that we've been targeting the 10 that we've mentioned is the main providers of credit cards, down to some resellers who could be I think really good for us in getting in different spaces. Some of the fintech companies out there doing a lot of the buy now pay later types of things. So it's a mix of large and medium in both physical and digital use cases.

[Mike Grondahl:]

Got it. And Bill, could you help us, SG&A, R&D and the stock-based comp had pretty healthy step-ups in 1Q. Can you kind of help us think about the quarterly run rate for those three items the rest of the year?

[Bill White:]

Yeah. We probably in this – right in the $650,000 range, $650,000 to $700,000 a quarter noncash expenses and that would be our non-cash equity grants and whatnot that are amortized over the year.

[Mike Grondahl:]

Got it. What about SG&A and R&D? What do those two categories look like?

[Bill White:]

Yeah. I would guide in the – with the ramp-up here in the 25% to 35% range of – excluding the non-cash expenses. So 25% to 30%, 35% in the non-cash expense OpEx.

[Mike Grondahl:]

That type of growth rate is that what you're describing?

[Bill White:]

No, year-over-year look for about a 25% to 30% OpEx increase.

[Mike Grondahl:]

Got it. Okay. Great. And did you ever find anything on implementations in 1Q?

[Bill White:]

I'll have to – I'll get back to you on that. I was thinking, it was another number, but let me get back to you on that, Mike.

[Mike Grondahl:]

Sure. No, problem, Bill. Okay. Thanks, guys.

[Operator:]

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

[Roger Liddell:]

Yes. Hey, gentlemen. I'm interested in the $2.7 million hardware sale and just the – for the moment the accounting for it will it be a deferred revenues item and amortized or key to the rollout of software just walk us through anything that would help us on that?

[Bill White:]

Yeah. Bryan do you want me to take that one?

[Bryan Lewis:]

Yes, please, Bill. Yes, please.

[Bill White:]

You bet. Yes Roger, it will be recognized when it's being shipped FOB shipping point. So the title will transfer when it leaves the dock and the manufacturer. So we'll be recognizing that as it's shipped.

[Roger Liddell:]

Okay. And give me some sense of the amount of this could be just a suggestive not right down to dollars obviously. You have had some contracts that are meaningfully off-market now based on the value-added by utilizing the products. And is there a – a backlog of those old contracts or have some of the significant mispriced ones already rolled? And by extension, how do you rate the – how do you describe the situation right now in terms of you trying to get something more per scan to reflect the value added for the customer?

[Bryan Lewis:]

So Roger, we haven't had anything significant role or come up for renewal. However, this year we do have two contracts that will be coming up for renewal that we consider significant. And that's number three and four. So -- and those we'll, obviously, be looking to get more value out of it for the services that we're providing.

[Roger Liddell:]

Okay. I see explosion in fraud, occasionally we hear from you or just in the press about the figures. I would have thought there would have been more translations for you, and some of your competitors from that unwelcomed expansion in the fraud side. Is there a lagging effect here that I am simply not focused on to explain the disconnect between the explosion figures and you have remedies for that? I would have thought it would be a steeper ramp.

[Bryan Lewis:]

I think that there's a couple of things, because you look at the numbers and they increase every single year in the amount that's lost to fraud. I mean, it goes up double digits every year, right? So now I think total fraud losses in the U.S., I think are sailing between frauds and scams like 50-some $56 billion, something tremendous. Part of it is again getting out education that it can be done, which is one of the reasons I want to start spending some money on brand awareness and thought leadership. Because I think there's still a ton of people who don't think that there is something that can be done without making it super, super complicated. You talk about in a way you look at all of our competitors and one of the things that's really relying on is a much more complicated process with more friction that requires facial biometrics. And so the reason they do that and some of them have even written papers that if you use facial biometrics, your fraud attempts go down. Well, so do your cost because you got to pay for the biometrics. Because they're saying it goes down, because people don't want to have their face on camera. So you're making a much more complicated process. Whereas, with us we can tell you that the license -- they're using something it isn't real. So do you really want to add the friction in for the boundary case where somebody maybe stole relative's license and is trying to do something. So in my opinion and in our -- most of our clients' opinions, the answer to that is no. So it's a little bit of inertia, a little bit of people don't know that there's something out there, a little bit of technology some people their systems, they're trying to get them up to speed to be able to handle and take in data like we can provide to them. So I think in a way a couple of years ago after the Experian -- I'm sorry the Equifax breach there was a big uproar about it. And I think what we've seen happen in the past year is the criminals changed how they're going about doing it and perpetuating identity theft and really move to the digital channels. So that's why we're seeing a lot of our clients begin to throw in, all right how do we get you in our digital channels, because stores are closed but the crooks were still looking to make a living, they decided they were going to do it online. And that's what really expanded. And I think that we'll continue to see uptick in growth. I think that some of the big players, the big banks we look to sign, they move a little bit more slowly on almost everything. And it's a big decision because once they go with something they don't want to have to rip it out right away. So I think the more we can get our presence known, our brand awareness raised, it will make it easier for us to get into more and more of these clients. And again one of our big pushes is, get our clients together and our prospects. And have our clients tell them why they should use us, because it's always a heck of a lot better when your competitor says, "No, go use Intellicheck' over one of my salespeople doing it brings a lot more credibility.

[Roger Liddell:]

Okay. Final question, in terms of the recovery, I can't really sort out the impact of this variant and that variant at one state opening up and other closing down. And then, you get the contribution to revenues of the in-store versus the digital channels. If recovery continues, let's call it the optimistic picture that the, vaccine is the real driver and the variants will fade away not disappear. But, where do you see the recovery coming? Is it going to be in-store cannibalizing digital, or -- well you take it from there?

[Bryan Lewis:]

Yeah. I think that I don't see it really cannibalizing it. I think people have been talking about the death of brick-and-mortar forever. And it just doesn't seem to happen. A ton of studies show millennials like going to stores. Retail mall traffic had been down but is around that 20% range, occurring to have Wall Street article that came out, but is already coming back up. You've got New York, New Jersey and Connecticut said that, they're going to lift indoor restrictions, I think on the 19th. The Governor of Pennsylvania just came out and said, they're lifting everything on the 31st. And as soon as 70% of the population is vaccinated the mask mandates go away. So I think we're beginning to see it. And those are the states that make the real impact, right? Those are the population heavy our clients heavy a lot of our retailers are in those space. But I think that the more we begin to see people getting comfortable, because they got the vaccine or they're comfortable, because they don't want it. And they're probably still going out anyway. Those are the things that give me signs of encouragement is these very large states now putting dates and targets on, what it takes to fully open. And I think once we get there then, we see volumes return to normal. And if these places are opening up in the middle of next month or the end of next month, I think that shows well for the rest of the year.

[Roger Liddell:]

Thank you, Bryan

[Bryan Lewis:]

Thank you.

[Operator:]

Our next question comes from Omar Anar , a private investor. Please proceed with your question.

[Unidentified Analyst:]

Hi. Thanks for taking the call. I've noticed in a lot of your communication to shareholders. You have really focused on banks and security and anti-fraud within banks. I'm curious how you think about the opportunity in e-commerce, in cryptocurrency, in cannabis sales, in anything you can do with the sharing economy where people have money online whether it's an Airbnb account or an Uber account or a Patreon and they can get attacked by ATOs as well. Curious how you think about that opportunity? How do you think about that sales motion et cetera?

[Bryan Lewis:]

Yes. We're going after all of that. We've already got a pretty good presence in cannabis. And a lot of that comes from our law enforcement. Many of the states where they sell cannabis, the state level age enforcement bodies like the Washington State alcohol, tobacco and cannabis, there are our clients. So then of course the people that are selling it want to use the same product that they're going to be measured by sharing economy all those types of things that we're targeting. And it's one of the reasons that as I said, I want to hire salespeople. I look at my top sales guys and I'm like you working yourself to death and thankfully they're highly motivated. We went after what we did because volumes are so much higher in terms of the validations and the transactions that need to take place in some of this retail stuff. It was a really good spot for us now to say well if this huge bank trusts me you probably should too right? It provides a lot of credibility when we can talk about few our clients are using us for identity validation. So started there as I said because it was a good first step. Obviously now, I look at -- I see tons of places where you're going to have to prove that you are who you say you are. I want to make sure we're staffed up to get to all those because I do think that they'd be important revenue sources.

[Unidentified Analyst:]

Thank you. And slight change in direction. From channel checks with Jumio and Mitek for some of their lower-volume clients they're getting as much -- they're charging as much as $1 a scan. And for some of their bigger clients they're charging $0.25 a scan. So do you see your pricing getting in line with pricing that's as high as Jumio or Mitek? And how quickly do you think you can get there?

[Bryan Lewis:]

Well, we haven't given out any of our pricing, but I also say that there are certain things that you have -- when you're doing the channel check you should make sure is that for ID validation only, or is that also including facial recognition? Because again, they usually have to go hand-in-hand, because from what our clients tell us a 60% to 65% access range on checking -- on proving that the license is real or not when you're using OCR. So I don't know if that's a fully baked in price. But certainly, we've got clients who are telling us the amounts of money that we are saving them or the reputational risk that we're providing them on two fronts. One, because we're making sure that somebody's identity didn't get stolen. And second, because we're so accurate. We're also not telling a good client that your license is bad, I mean, because it's -- that happens almost as much as they don't do the right license. When you're judging a license or an ID on its validity based on how it looks, law enforcement tells us they can't do it and they're trained. So I don't know how somebody in a call center offshore is going to be able to do that. So you get a lot of false negatives in addition to the false positives. So our clients simple, easy, quick and we're certainly showing at every renewal that we have that we have pricing power and can and have in the past and we'll continue to do so significantly raise pricing.

[Unidentified Analyst:]

Got it. Yes. And just to clarify my comment about their pricing was just on the authentication of the ID not with the selfie match or the live video match.

[Bryan Lewis:]

Got you. Yes that's different than that I heard. But yes. Okay. Thank you.

[Operator:]

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

[Bryan Lewis:]

Well, thank you everybody for joining the call. I'm seeing signs of recovery in the economy and people's health and all those things, which I think is going to bode well for us. I'm very excited about the hiring that we're doing the caliber the people that we brought in at every level. Our messaging is improving. Our lead generation is improving. So I think we've got a lot of stuff in the factory that you will that we are really optimizing, which I believe is going to help us to continue to grow and hopefully continue to grow at even faster rates. So, thank you everyone and I look forward to speaking to you on next quarter.

[Operator:]

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