Bryan Lewis - CEO Bill White - CFO

Gar Jackson - IR Tanner Hoban - Oppenheimer Mike Grondahl - Northland Securities

Greetings, and welcome to the Intellicheck Fourth Quarter and 2017 Yearend Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gar Jackson, Investor Relations.

Good afternoon and thank you for joining us today for Intellicheck fourth quarter and yearend 2017 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 of 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, March 22, 2018. 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'll begin the call with Bill White, Intellicheck’s Chief Financial Officer who will discuss the Q4 and full year financials. We’ll then hear from Bryan Lewis Intellicheck’s recently appointed Chief Executive Officer. 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 Bill White.

Thank you, Gar. 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 fourth quarter and fiscal year ending December 31, 2017 that we released a short while ago. We anticipate that our Form 10k will be filed with the SEC later today. I'll begin with our fourth quarter results. Revenue for the fourth quarter ended December 31, 2017, grew 32% and $968,000 versus $734,000 for the same period last year. Our Software as a Service or SaaS revenue was approximately $569,000 for Q4 2017. It's more than doubled from $277,000 in Q4 2016 and with a 9% sequential increase versus approximately $520,000 in Q3 in 2017. Gross profit as a percentage of revenues improved to 89.4% for the quarter ending December 31, 2017 compared to 80% for the quarter ending December 31, 2016. The increase in percentage was -- in 2017 is due to higher revenues on our SaaS product and less equipment sales that typically have a lower margin. Operating expenses consist of selling, G&A and research and development expenses and an impairment charge to our intangible assets. Excluding the one-time impairment charge of $1.4 million and the severance agreement for the Former CEO of $0.5 million, OpEx was $1.9 million for the three months ended December 31, 2017 versus $1.7 million for the three months ended December 31, 2016. The increase in OpEx was primarily driven by legal fees and engineering consultants. The company posted a net loss of $2.9 million for the three months ended December 31, 2017, compared to a net loss of $1.1 million for the quarter ending December 31, 2016 and net loss per diluted share was $0.19 versus $0.10 in the prior year. Adjusted EBITDA for the quarter ending December 31, 2017 was negative $1.3 million compared to a negative $852,000 in the quarter ending December 31, 2016. Turning now to our full year 2017 results, revenue for the full year ending December 31, 2017 was $3.6 million compared to $3.8 million for the prior year. Our SaaS revenue for calendar 2017 was $1.7 million, an increase of 88% compared to $906,000 for the prior year. Driven by growth in our SaaS business, gross profit as a percentage of revenue was 85.5% for the year ending December 31, 2017, compared to 80% for the same period last year. Operating expenses were $9.2 million for the year ending December 31, 2017, up from $8.8 million for the year ending December 31, 2016. Excluding the onetime impairment charge previously mentioned, in the severance agreement for our former CEO, selling, general and administrative expenses decreased 17% to $5.3 million for the year ending December 31, 2017 from $6.4 million for the year ending December 31, 2016. This is primarily as a result of reduced stock-based compensation costs and legal and professional fees. Research and development expenses decreased 20% to $1.9 million for the year ending December 31, 2017 from $2.4 million for year ending December 31, 2016, due to decreased use of engineering consulting firms. As previously mentioned, we recognized an impairment charge on intangible assets of $1.4 million for the year ending December 31, 2017. This was related to trade names, patents and developed technology and non-contractual customer relationships associated with and related to our Defense ID business, which we don't see as a primary revenue driver in the future. Company had a net loss of $6 million for the year ending December 31, 2017. Excluding the $1.4 million impairment charge and $0.5 million cost for the severance contract, net loss was an improvement of $1.6 million compared to a net loss of $5.7 million for the year ending December 31, 2016. The net loss per diluted share was $0.48 versus $0.58 per share in the prior year. Weighted average share counts were 12.4 million at year end versus 9.9 million for December 31, 2016. Adjusted EBITDA was a negative $3.9 million for 2017, an improvement of $0.5 million as compared to adjusted EBITDA of a negative $4.4 million for 2016. Interest and other income was $60,000 for the year ending December 31, 2017, as compared to $15,000 during the year ending December 31, 2016. Now I'd like to focus on the company's liquidity and capital resources. As of December 31, 2017, the company had cash of $8 million, working capital defined as current assets minus current liabilities of $7.3 million, total assets of $17.9 million and stockholder's equity of $16 million. During the year ending December 31, 2017, the company generated net cash of $4.9 million compared to a net cash used up $2.9 million during the year ending December 31, 2016. Net cash used in operating activities was $3.7 million for the year ending December 31, 2017, compared to $4.2 million for the same period last year. Net cash provided by investing activities was $5,000 for the year compared to a net cash used of $29,000 for the prior year and we generated cash of $8.7 million from financing activities in 2017 compared to generating cash of $1.4 million from financing activities in 2016. On May 22, 2017, the company entered into a one-year revolving credit facility with Northwest Bank. This agreement allows for maximum borrowings of $2 million secured by collateral accounts and bears interest at Northwest's money market plus 3%. As of today, there are no amounts outstanding under this facility. We currently anticipate that our available cash, as well as expected cash from operations and available under the revolving credit facility will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. On August 09, the company closed a public offering of 4,168,750 shares of its common at a price of $2.25 per share. Net proceeds from this offering were approximately $8.7 million after deducting underwriting discounts and commissions paid by the company. As of December 31, 2017, we have net operating loss carryforwards of approximately $11 million. Before I turn the call over to Bryan Lewis, I'd like to say that I'm very excited to have him lead the Intellicheck team. He has a proven background in building successful companies and a track record of driving revenue and sales growth. Bryan has some great ideas to drive growth in our business and I look forward to working with him to make this happen. Bryan?

Thank you very much, Bill. I'd like to thank you all for joining us today for my first earnings call as CEO of Intellicheck. I will start by saying how excited I am to lead the company and monetize this great technology that can be utilized across a number of key vertical markets. But before I begin with my findings after my first month here, I want to share with you why I chose to join Intellicheck, my background and what makes me fit for this position. The main attraction of Intellicheck to me was the technology and the people that I met through the interview process. We’ve created a phenomenal core technology with broad applications and a very large addressable market. The obvious problem with the Board was concerned with was the pace at which the company was able to monetize its great technology and drive growth. Board decided that the next CEO should bring in sales and marketing focus to the team and they have the ability to drive growth for this great product. I started my career in sales and have been running global and national sales teams for over 25 years. Most of my experience is in selling enterprise SaaS solutions in the trading and risk management space. So, I understand the complexity of the selling into the banking world and I understand the public markets being data driven and focused on analytics to make forecasts and business decisions. Obviously, our ability to accurately forecast and close sales hasn’t been good and we'll be evaluating the reasons why? Adapting our business model and driving improvement. Most recently I was the CEO of a global primary research firm, where I oversaw 53% compound annual growth. During my tenure and drove a reduction in cost of sales by more than 10%. While my previous three companies have been private equity backed are either ran sales or operations for each and in each case increased productivity and sales leading to a successful return for the investors. I would bring that same focus on productivity, sales and marketing to Intellicheck. I would like to repeat that word, focus. Focus on several things to increase the pace at which we monetize this great technology. First, after my short time here it is obvious that Intel ID is going to be our primary growth driver. We will re-train our sales force to focus on enterprise software sales recognizing that it is a longer sales cycle and requires a much larger pool of active prospects which is similar to enterprise risk and training software sales where I had a great deal of experience and only way to make the numbers is to be sure that you are actively engaged with many prospects possible. The second big area of focus will be Law ID which is already proving to be a great tool in the hands of Law Enforcement Officers. We have officers telling us how having Law ID capabilities in the palm of their hand has captured criminals who would otherwise abetted. We are realigning our sales force around Law ID and have made a strategic decision to limit our launch to the initial 14 states that we’ve already identified begun the engineering process of going live. In the past we thought that getting all states turned on and available was the right decision, but we now believe the driving market penetration with these initial 14 states with a dedicated sales force, more efficient and focused course of action we believe that this new process will integrate reference clients that will speed up the pace at which we find new customers. As the live switches, I am disappointed to report that as we stand today we've only gone life in a state of Delaware. There have been various technical hurdles that we are working on getting over that being pulled out by the end of the second quarter which you go live in four of the remaining 13 states. But we are not waiting to start selling we are actively marketing Law ID in Delaware and will expand our sales efforts into the other states as they come online later this year. We need to operate more efficiently. We will enhance our online presence much better search engine optimization, innovation or FEL drive clients to Age ID. Clients can already purchase a product online, just not at the pace we would like to increase the awareness of a product that authenticates not just scans the hundreds of thousands of small businesses out there. Protect their business and our children all they need to do is download our App. There's no large upfront expense for them and they can be live in minutes. We’ll free up our sales force to concentrate on the larger regional and national chain that are selling Age control. The final step of our sales and marketing focus will be on SaaS software sales training. Throughout my career in sales, I have observed that the company that is always looking to do things better, is the one that succeed and training is the key to that success. Our sales force is the frontline in the battle we call business and I will make sure that they are the best trained salesperson in selling enterprise SaaS solutions. Turning now to our product, I will start by addressing each product category beginning with Retail ID that I believe has the potential to generate the most significant revenue growth. Retail ID has a robust and diverse feature set that is focused on one primary objective, to eliminate fraud. It’s been used to authenticate IDs of customers applying for credit, customer making credit card not present purchases, customer returning items that were never purchased and in populating form using the data contained in a customer's driver's license. The retail sales effort is traditionally hampered in Q4 with technology blackout's retailers impose during this busy shopping season. That being said, we are now past the holidays and it's time to get rolling with the implementation. Recently on boarded a hardware store chain with more than 100 locations in the middle of Southwest. It is the late Retail ID Mobil in 43 of their high-risk stores. They will be using Retail ID Mobile for returns without receipts and authenticating IDs for large transactions. The annual revenue for this new account is approximately $45000 new straight that we are in fact making progress as we enter fiscal 2018 and we intend to build on this momentum. Regarding Law ID, we've turned on our first inlet state switch that is located in Delaware. As I mentioned earlier, we are redeploying the sales force and we'll have a team focused exclusively on a Law ID. We've begun hiring salespeople specifically for Law ID. And I believe that this focused approach will be more efficient than shockgun sales approach that were used in the past that all of our products sold by all of our people. We recently brought onboard third Law ID customer, Police Department located in Delaware and we intend to build on this momentum with our new dedicated sales focus. This initial purchase in Delaware reiterates that we have a great product now it’s our job to get in the hands of more users and build on the momentum that we believe we can create in the states where we are now live. Looking out our Age ID, we have a solid traction for Age ID, but mainly with smaller accounts. As I mentioned this isn't the best use of our sales resources. They have a solid foundation with customers in 28 states including 31 local ABC and law enforcement agencies. Additionally, with the new regulations regarding the cannabis market we see expanding opportunities for Age ID, where we can achieve substantial revenue gains with this product is large venues and restaurant chains by redirecting our sales force to focus on the bigger customers and building out a platform with smaller accounts to make purchases online. We believe we should begin to see accelerated growth towards the back half of the year. We continue to believe that banks are one of our best partners to drive growth, not only are they integrated with the end customers but they are ultimately the one most impacted by fraud. The top five bank we began working with last year with the large franchise store, that saw $16,000 reduction in fraud first store per month during our pilot program rolled out Retail ID to three additional bank clients in the fourth quarter and Retail ID online an additional 4 bank clients. We believe that this is just the beginning. We will be dedicating more resources to working with this banking partner, revive, working accounts to approximately 18,000 retailers. Let's talk about investing in the business, since the third quarter capital raise we've invested in additional sales and engineering resources new plan to launch an advertising campaign aimed at raising the awareness of Intellicheck and our products. We are also becoming much more engaged with the media. Back earlier this week I did an interview with Associated Press Television News, The Atlanta Journal Constitution. Additionally, we plan on investing in much better search engine optimization and improving our online marketing presence that you believe will drive Age ID and Retail ID interest to our platform. I would like to now comment -- take a moment to comment on litigation in general. We recently announced that we settled all pending litigation with Honeywell and had a confidential settlement. That is all we can say on that front. But I want everyone to realize though is that litigation is a costly process, not only in hard dollars, but also the time and energy required by management deal with litigation in general. Going forward we would be focused on the growth of our key product offerings. We have great products and world-class customers. We are focusing our efforts on growing these product lines and the business. This is the best use of management time and company resources. As we look forward, now is a good time to also talk about the latest addition to our Board of Directors. In January, we announced that David E. Ullman is named to the Board. David is a seasoned retail executive who spent nearly 20 years as Executive Vice President and Chief Financial Officer to a billion-dollar retailer, manufacturer an eCommerce company, Jos. A. Bank Clothiers. Dave had an instrumental role in strategic planning and growth initiatives as well as mergers and acquisitions which led to more than a decade of sustained profitable growth and a six-fold increase in sales. Iconic Retailer was acquired by Men's Warehouse in 2014 for $1.8 billion. In closing, we've plenty of examples of product acceptance and it kicked off the key Retail ID selling season with the implementation of Retail ID Mobile at 43 high risk hardware stores. Additionally, we are making a more concentrated effort in the state where we are alive with Law ID and recently onboarded our third revenue generating agency in Delaware. We believe that setting up a dedicated sales force to focus exclusively on My ID will lead to better market penetration and sales growth. Lastly, we are realigning our sales force is selling Age ID. And we will believe will be significantly more efficient and deliver larger sales that will move the revenue needle. I look forward to providing you additional insights into my findings and plans for the growing of business on our first quarter conference call that is expected to be on May -- Monday, May 14. Following our first quarter earnings announcement we'll be presenting at the Oppenheimer Emerging Growth Stock Conference in New York on Tuesday, May 15. We will now turn the call over to the operator to start taking questions from our analysts and institutional shareholders.

Thank you. We will now be conducting a question-and-answer session [Operator Instruction]. Our first question comes from Tanner Hoban, Oppenheimer & Company. Please proceed with your question.

Hi guys and good afternoon, Brian. Congrats on the new opportunity. On the last call, you expected pipeline closures to close primarily during or be pushed back to one to second quarter. I'm wondering if this still seems like the progress that Intellicheck is going towards or are these being pushed back slightly a bit more?

I'm not sure that I follow the questions. This is Bryan. Thank you. Talking about something it was mentioned in the third quarter call?

Yes, yes. So last quarter on the call it was mentioned that some of the deals were being pushed back about a quarter or two into the first or second quarter of next year. I'm wondering if this still seems like the progress that Intellicheck is making towards closing the pipeline deals or if there is potentially any further pushback on these deals?

I think one of the things about, we are hunting in a way and when you're doing enterprise -- large enterprise sales sometimes they speed up, sometimes they move fact. One of the reasons that I want to make sure that we have a much fatter pipeline than we currently have because we've had some people come in faster than anticipated. And then we also have people who for technological reasons might get pushed back as well. And I can't say we had one of our prospects who has entirely has decided that they want to reevaluate their entire point of sales system, which is -- that is integral to what we do. That means we get pushed back with their ID, I think it goes both ways.

Got it. And also, on last call it was -- there was some EBITDA sort of guidance ending the year at least in the last quarter, ending the year with positive EBITDA. Wondering if there's anything changed on that as you begin the transition with your new sales team initiatives?

Well, I guess being here about 30 days, I'm still analyzing all of that and I have a lot more to say about it and that next Q1 call.

Got it. Thank you.

Thank you.

[Operator Instruction] Our next question comes from Mike Grondahl, Northland Securities. Please proceed with your question.

Oh yes. Thank you. Hey Bill and welcome Bryan. Another follow-up question from last quarter that, there was a large potential electronic store customer that had slipped from October to the early April timeframe I think. How is that customer looking?

Yeah. Large electronic store customer last quarter...

Mike, that is still in process, nothing more to report on that.

Got it. And then Bryan on the sales side and the engineering side, earlier we were kind of -- it was conveyed that IDN was looking for about five or six maybe sales people and maybe seven or eight engineers. Is that still something, we should be watching for and kind of what progress had been made in kind of both of those targets?

Yeah, I would say that I'm working closely with Paul to make sure that we right size the sales force. We hired what we really need. And I don't have the exact number now, but I know it's not what we have today. I can say that starting Monday we have somebody new coming on Board to help us focus on the Law ID product. And I also can say that we've slowed down the hiring before I started, so we can make sure that, it fit in with the plan that the new CEO being me, would have in terms of our strategy going forward. In the technology side, yes, we are still hiring. I think, if you talk to anybody you're firm or any firm I have ever worked at, hiring technology people tends to be one of the harder things to do. You currently have engaged a couple of search firms that are helping us with that process. But we know that we need the developers and we're going to hire them.

Got it. And then how would you -- as it fits today Bryan, how would you describe what's under pilot currently and what sort of in the pipeline to turn on?

Maybe see if I have follow the question. So, what we have about to go into pilot, what is in pilot and so what is that I am just kind of zero in on your question?

Yeah. Well hey, on prior calls there was always sort of this bucket of, here's what we have in pilot. We've never lost a customer. Everyone loves this product and as those pilots finish up, they represent X amount of annual revenue. So, I guess I'm just trying to get a feel for what's in pilot today and what can they represent, if the pilots go well? And are there any that have completed a pilot recently that are about to go live and how do we think about the next few quarters basically?

The one thing that I'm happy to say is that pilot pipeline is very useful and very robust. I can also say that we haven't definitively ever lost a pilot still to this day. However, they do move around. So, and -- very successful pilot, the company would say wait a minute, we are going to change one of the sales system. So that got pushed out a lot farther than we would like, but that's part of what we need to do is integrated to that system. I also do not have in front of me a dollar amount of the pilots. But again, what I would say is one of the things that I want to get our sales force to in our company is a much heavier pilot pipeline than we have, knowing that, when you're doing something enterprise wide, it can move both forwards and backwards. And the larger the pipeline is, the more likely you're going to have things that move up or stay the same. But there really seems to be some slowdown with installing an enterprise product. So that's why we need to get more in our pipeline. It is very healthy. I'd like to see it bigger.

Let me ask a follow up to that Bryan, the pipeline obviously you described it as very full, robust, healthy. If a year from now, if things go as you want them to go, would you expect the dollar value in the pilot stage to be 20% bigger, 50% bigger. What level would you like it to be down the road relative to today?

I am still analyzing right now in a way what has been the speed of our pipeline? So, know the milestones that we need to do to get a pilot close. So, I would expect it will have a lot more better answer for that next meeting that we have. As I said in the beginning, I am a very analytically-driven person. I do think that in sales there is a lot that you can do to predict better by looking at what we’ve done in the past. And then you can also speed it up by looking at what will be done in the past because you could figure out where we made mistakes, where we could set things up. Without having those numbers to know exactly what the pace of the pipeline has been in detail, I couldn’t say whether it needs to be 20% greater or 100% greater. All I know is that we're capable of doing more than we are doing today.

Got it. And then one question maybe for Bill. Bill, in regards to the Honeywell settlement, you've kind of said that's confidential. Will we see any disclosures in the 10-K about that settlement?

No. You won’t. Well, just a brief basically parroting what we've said in the press release Mike, that we did settlement, but that’s a little more color than that.

Okay. And can we derive that it was immaterial to you guys from that I mean I guess, I'm trying to think through if it was material, if you got X-dollar amount. would you have to disclose that?

Just in general Mike, material matters have to be reported in general.

Okay, great. Well hey guys I'll look forward to mid-May and get a little bit more data and kind of insight in the progress, so thank you.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Bryan Lewis for closing remarks.

So, I would just like to say thank you very much everyone for attending our Q4 and year-end conference call. I look forward to seeing many of you in person and speaking to you all again on our Q1 earnings call in May. Thank you very much.

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