Intellicheck Inc (IDN) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Intellicheck Fourth Quarter and 2017 Year-End Earnings Conference Call. (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 the Intellicheck fourth quarter and year-end 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 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, 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 1 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 10-K 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% to $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, which more than doubled from $277,000 in Q4 2016 and with a 9% sequential increase versus approximately $520,000 in Q3 of 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 onetime 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 3 months ended December 31, 2017, versus $1.7 million for the 3 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 3 months ended December 31, 2017, compared to a net loss of $1.1 million for the quarter ending December 31, 2016. The 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 the 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 noncontractual 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 the $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 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 stockholders' equity of $16 million.

During the year ending December 31, 2017, the company generated net cash of $4.9 million compared to net cash used of $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 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 1-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 9, the company closed a public offering of 4,168,750 shares of its common stock 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 had 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 would like to thank you all for joining us today for my first earnings call as CEO of Intellicheck. Let's start by saying how excited I am to lead the company and monetize this great technology and to utilize 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 a good fit for this position.

The main attraction of Intellicheck to me was the technology and the people that I met through the interview process. They've created a phenomenal core technology with broad applications in a very large addressable market. The obvious problem that the board was concerned with was the pace at which the company was able to monetize this great technology and drive growth. The Board decided that the next CEO should bring a sales and marketing focus to the team and that we have the ability to drive growth for these great products.

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 selling into the banking world, and I understand the public markets. I am data-driven and focused on analytics to make forecasts and business decisions.

Obviously, our ability to actively forecast and close sales hasn't been good. We will be evaluating the reasons why, adapting our business model and driving improvement.

Most recently, I was the COO of a global primary research firm where I oversaw 53% compound annual growth. During my tenure, I drove a reduction in cost of sales by more than 10%. While my previous 3 companies have been private-equity backed, I either ran sales or operations for each and, in each case, increased productivity and sales leading to a successful return for the investors. I will bring that same focus on productivity, sales and marketing to Intellicheck.

I would like to repeat that word, focus. We're going to 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 Retail ID is going to be our primary growth driver. We will retrain our sales force to focus on enterprise software sales, recognizing that it is a longer sales cycle and it requires a much larger pool of active prospects. This is similar to enterprise risk and trading software sales where I have had a great deal of experience. The only way to make the numbers is to be sure that you are actively engaged with as many prospects as 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 hands has captured criminals who would have otherwise [skated]. 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 have already identified, and 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 that driving market penetration with the initial 14 states with a dedicated sales force a more efficient and focused course of action. We believe that this new process will lead to great referenced clients that will speed up the pace at which we sign up new customers.

As for the live switches, I am disappointed to report that, as we stand today, we have only gone live in the state of Delaware. There have been various technical hurdles that we are working on getting over and I have been told that by the end of the second quarter, we should go live in 4 of the remaining 13 states. But we are not waiting to start selling. We are actively marketing Law ID in Delaware, and we'll 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 and much better search engine optimization, or SEO. Drive clients to Age ID. Clients can already purchase the product online, just not at the pace we would like. I want to increase the awareness of our product that authenticates not just scans, with the hundreds of thousands of small businesses out there.

To 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. This will free up our sales force to concentrate on the larger, regional and national chains that are selling age control products.

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 succeeds, and training is a key to that success. Our sales force is the front line in the battle we call business, and I will make sure that they are the best-trained sales force in selling enterprise SaaS solutions.

Turning now to our products, 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 1 primary objective, to eliminate fraud. It is being used to authenticate the IDs of customers applying for credit, customers making credit card not present purchases, customers returning items that were never purchased and in prepopulating forms using the data contained in a customer's driver's license. The retail sales effort is traditionally hampered in Q4 due to the technology blackouts 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. We recently onboarded a hardware store chain with more than 100 locations in the mid and Southwest. It has deployed Retail ID Mobile 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 $45,000, and illustrates that we are, in fact, making progress as we enter fiscal 2018, and we intend to build on this momentum.

Regarding Law ID, we have turned on our first Nlets state switch that is located in Delaware. As I mentioned earlier, we are redeploying the sales force and will have a team focused exclusively on the Law ID product. We have begun hiring salespeople specifically for Law ID, and I believe that this focused approach will be more efficient than the shotgun sales approach that we used in the past that had all of our products sold by all of our people.

We recently brought onboard our third Law ID customer, a 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 it 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 now at Age ID. We have had solid traction for Age ID, but mainly with smaller accounts. As I mentioned, this isn't the best use of our sales resources. We 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 through large venues and restaurant chains. By redirecting our sales force to focus on the bigger customers and building out the platform with smaller accounts that 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 ones most impacted by fraud. The top-5 bank we began working with last year, with a large furniture store that saw a $16,000 reduction in fraud per store per month during our pilot program, rolled out Retail ID to 3 additional bank clients in the fourth quarter and Retail ID online with an additional 4 bank lines. We believe that this is just the beginning. We will be dedicating more resources to working with this banking partner to provide merchant accounts to approximately 18,000 retailers.

Let's talk about investing in the business. Since the third quarter capital raise, we have invested in additional sales and engineering resources, and 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. In fact earlier this week, I did an interview with Associated Press Television News and the Atlanta Journal Constitution. Additionally, we plan on investing in much better search engine optimization and improving our online marketing presence that we 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 debt settlement. That is all we can say on that front. What 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 to 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 through 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 was named to the board. Dave is a seasoned retail executive who spent nearly 20 years as Executive Vice President and Chief Financial Officer with the billion-dollar retailer, manufacturer and e-commerce company, Joseph 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 sixfold increase in sales. The iconic retailer was acquired by Men's Wearhouse in 2014 for $1.8 billion.

In closing, we have plenty of examples of product acceptance and have 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 live 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 Law ID will lead to better market penetration and sales growth.

Lastly, we are realigning the way our sales force is selling Age ID, that we 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 growing the business on our first quarter conference call that is expected to be on Monday, May 14. Following our first quarter earnings announcement, we will be presenting at the Oppenheimer Emerging Growth Stock Conference in New York on Tuesday, May 15.

We'll now turn the call over to the operator to start taking questions from our analysts and institutional shareholders.

(Operator Instructions) Our first question comes from Tanner Hoban, Oppenheimer & Co.

Bryan, 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 question. This is Bryan. And by the way, thank you. You're talking about something that 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 2 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 their pipeline deals or if there is potentially any further pushback onto these deals?

I think, one of the things about -- we're whale hunting in a way and when you're doing enterprise, large enterprise sales, sometimes they speed up, sometimes they move back. 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 had people who, for technological reasons, might get pushed back as well.

And I can say we had one of our prospects who is in [Thailand] who has decided that they want to reevaluate their entire point of sale system. That is integral to what we do. That means we get pushed back along with their IT. So 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. I'm wondering if there's anything changed on that as you begin the transition with your new sales team initiatives.

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

(Operator Instructions) Our next question comes from Mike Grondahl, Northland Securities.

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?

Yes, a 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 5 or 6 maybe salespeople and maybe 7 or 8 engineers. Is that still something which we should be watching for? And kind of what progress had been made in kind of both of those targets?

Yes. I would say that I'm working closely with Paul to make sure that we rightsize the sales force. We hire 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 onboard to help us focus on the Law ID product. And I also can say that we slowed down the hiring before I started so we could 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 at your firm or any firm I have ever worked at, hiring technology people tends to be one of the harder things to do. We 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 sits today, Bryan, how would you describe what's under pilot currently and what's sort of in the pipeline to turn on?

Let me see if I follow the question. So meaning what we have about to go into pilot, what is in pilot by product. I mean -- so what are the -- I'm just trying to zero in on your question.

Yes. On prior calls, there was always sort of this bucket of here's what we have in pilots. 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 2 quarters basically?

So the one thing that I'm happy to say is the pilot pipeline is very full 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 when -- a very successful pilot at a company said, [wait a minute], you're going to change our point of sale system. So that got pushed out a lot farther than we would like, but that's part of what we need to do is integrate into that system.

I honestly do not have in front of me the 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, and 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 your 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 pipe. 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? I mean, 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 we know the milestones that we need to do to get a pilot closed. So I would expect that I'll have a lot more -- better answer for that next meeting that we have.

As I said in the beginning, I'm a very analytically driven person and I do think that in sales there's 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 we've done in the past, because you can figure out where we made mistakes, where we could have sped 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're 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, we won't. Well, just a brief -- basically parroting what we've said in the press release, Mike, that we did settle it, but that's it. No 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.

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

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