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Edited Transcript of IDN earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q2 2019 Intellicheck Inc Earnings Call

PORT TOWNSEND Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Intellicheck Inc earnings conference call or presentation Thursday, August 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Billy Joe White

Intellicheck, Inc. - CFO, Treasurer & Secretary

* Bryan Lewis

Intellicheck, Inc. - CEO & President

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Conference Call Participants

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* Donald Roger Brooke Liddell

Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Scott Christian Buck

B. Riley FBR, Inc., Research Division - Research Analyst

* Gar Jackson

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Presentation

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Operator [1]

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Greetings, and welcome to Intellicheck's second quarter 2019 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Mr. Gar Jackson. Thank you. You may begin.

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Gar Jackson, [2]

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Thank you, operator. Good afternoon, and thank you for joining us today for the Intellicheck Second Quarter 2019 Earnings call. Before we get started, I will take a few minutes to read the forward-looking statements. 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 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, August 1, 2019. 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 Bill White, Intellicheck's Chief Financial Officer, who will discuss the Q2 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.

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Bryan Lewis, Intellicheck, Inc. - CEO & President [3]

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Thank you, Gar. Good afternoon, everyone, and thank you for joining us for the Intellicheck Q2 2019 Earnings Call. As you can see from the numbers, the changes we put in place over the past year are making a difference and we continue to march towards the goals we set for ourselves for 2019. Identity theft is not going away, and we believe that we are well positioned to capitalize on stopping fraud and reducing the sales of age-restricted products to the underage.

Our SaaS revenue was up 79% over Q2 2018 and was a 30% sequential increase from our Q1 2019 numbers. Onetime revenue was up this quarter because as I have previously said, we no longer view custom development for free. In Q2, we received the second payment for the completion of the development work for the bank we signed in Q3 of last year, which for clarity I will call bank re going forward, since I've been asked to give names to the banks we assigned to help people keep better track of the progress we are making with each of them.

I believe growth numbers like these demonstrate that we are a very different company today than in February of 2018, when I joined. On today's call, I'm going to focus on four major changes that I've made since joining the company just over a year ago that I believe have led to the growth we are seeing. I have reset where we are focusing our resources, how and to who we sell, how we price the products, and finally, how we implement.

First, we identified financial services, specifically for the purpose of stopping identity theft as our primary target market that we believe would be the fastest route to revenue and profitability. This is now our main focus. This does not mean we are not devoting effort to age-restricted products in law enforcement, just the percentage of time and the resources devoted to each has been rebalanced. Identity theft is a massive pain point for financial institutions, according to Javelin Strategy & Research, 14.4 million Americans had their identity stolen in 2018, at a cost of $14.7 billion. Add to this, the estimated $6 billion banks lose to sympathetic identity theft, and you can see why banks would be looking for a simple frictionless way to combat this theft.

The ability for thieves is stealing identity is not going away. The data is already out there on the dark web to do so and the data breaches just keep coming. 2018 saw a 120% increase in the amount of personally identifiable information breached over 2017. This year breaches continue at a record pace with the first quarter of 2019, seeing a 56% increase in the number of reported breaches and a 29% increase in the number of exposed records compared to the first quarter of 2018. And just this week, we saw the data of 100 million people exposed at Capital One.

I myself have been part of 5 sets of packaged data sales this year. It isn't a question of if, but rather when for most of us. The data is so plentiful, it has become ridiculously cheap. A social security number cost a $1 on the dark web, a driver's license information is $20. All that thief needs now is an authentic-looking driver's license with their face and your information and they are ready to go shopping posing as you, stealing your identity to open new credit card accounts where you don't have an account and posing as you, pretend you have forgotten your credit card, where you do have credit and what is known as card-not-present transactions.

Think how simple this crime is to pull off. It seems as if every time I make a purchase, the sales clerk asked me if I want to open an account. If you say, yes, they ask for 3 things, social security number, income and a driver's license. If you say you forgot your credit card, they usually ask for even less, the last 4 of your social security number and your driver's license. All this can be bought online for less than $200. The irony, is it the most expensive part of this package is a fake ID and the fakes are good, so good that over 55 law enforcement agencies use our products because even their most trained and seasoned officers can't spot them. So what chance does [historic] have, none without authentication software.

Another change that is now in place is how we sell and who we sell to, whereas previously, we've been mostly trying to sell to retailers, we now focus on banks. Why? Because the banks who issue the white label or private label credit cards, typically take the hit for fraudulent accounts and this amount isn't trivial. We ask several of our clients, how much the average loss per fraudulent account opening is and it is staggering. For department stores, it was $2,100; for tool and equipment stores, it was just over $2,500; for furniture stores, just over $2,900; and finally, for jewelry stores, just over $3,500 each time. When you consider we stop a fraudulent transaction on average every 90 seconds, you can see how quickly the losses add up and why they like our frictionless and easy to integrate solution.

We also began to sell with data. We know how often we stop fraud for each of our retailers and now how often it happens by retailer type. When we combine this with the average loss reported to us, we have a pretty accurate idea of what we say for a prospect. This gave us the confidence to stand much firmer on pricing. As we analyze the data on fraud stopped and with our new focus on banks, we changed how we priced our Retail ID product.

In the past, we've priced it on a per store model with a flat fee for each store where the product was installed. We did not feel this was adequately compensating Intellicheck for the value we brought to the table. So for the most part, we have moved to a per-scan model. This model made much more sense as the banks are used to a transactional model and it allowed us to be more fairly compensated for the return on investment we were bringing.

We structured the pricing model to count all scans from every client a bank brings on board. This pricing is tiered in tranches and the price per tranche goes down as total monthly scan volume goes up. This incentivizes the banks to bring more clients on board, since their marginal cost of stopping fraud goes down as the number of retailers using the system increases, driven by the data presented in our focus sales process, I'm pleased to say the changes have led us to closing deals and bringing on additional banks and retailers.

The final and critical change to enable us to capitalize on these opportunities was to improve the processes and professionalization of our implementation team. I felt we were too reactionary and the reporting lines of the people tasked with implementation were split between sales and development. This meant there was a lack of accountability and no single person I could point to, to get things done.

As a result, we formed a distinct team reporting to Bill White and whereas before we were reactionary, now we are proactive and lead the process. Each implementation gets a little faster and easier and this new structure led by Bill is working much more efficiently.

So what have we achieved with these changes? Let's start with an overview of the banks we have signed. So far we have 4 of the top 10 banks as customers. I've received feedback from some shareholders that it's sometimes difficult to determine what bank I'm talking about. Since confidentiality agreements prohibit us from naming them, as I mentioned earlier, I will now refer to them by number. Bank number 1 is the smallest of our bank clients in terms of credit cards issued. They are however, a fantastic reference client who will speak with any prospect we have regarding the accuracy of Retail ID and the reduction in fraud. We are currently working with their innovations team on new projects within the bank and I am happy to say, they recently reported to us, that the team tested 277 stakes against our system, and we caught all 277.

Bank number 2 is our longest standing client and had a tremendous legacy deal with us in terms of pricing for them. Even with a fantastic deal though, I saw that they had not brought live any new retail clients in at least 2 years before I started. In addition, they hosted our technology, which was cumbersome for us as it meant sending updates to the software we used to catch fix. Their contract was up for renewal last year and I was steadfast that we would not renew at their low per store pricing. We successfully negotiated a new agreement that migrated them to our SaaS web service model hosted by Intellicheck and also move them to the per-scan model. Since that renewal and the reestablishment of the relationship, they have brought us 11 new retailers. Four have gone live so far and the rest of various deployment dates running through Q1 2020.

Bank number 3, we signed in Q3 2018. This is a testament to the effectiveness of changing how we sell. This was a prospect that the company had been trying to sell to through a third-party, and it will gone nowhere for over a year. We decided it was best for us to engage the bank directly to sell our products. Within 6 months, we signed them as a client, also under the new per-scan pricing model. This also represented another first. It was the first major engagement where we charged for custom development. This bank wanted at the spoke process and they paid for it. Half last year and as I said earlier, half in Q2. They are now live and it started paying us monthly SaaS revenues and are working with our implementation teams to bring their four largest retailers by volume live, in addition to their retail branches.

Bank number 4 was even faster from a sales cycle perspective. The first use case for this bank within their call centers. If you see their commercials on TV in the side, you want their credit card and call them to apply, the final step in the process is a tech sent to the applicants phone. This text is a derivative of our Retail ID technology that uses a camera on the customer's phone to scan and authenticate the driver's license.

From discussions to contract for what was to be a 60-day pilot, took about 30 days and into the pilot, they were so impressed, it went to full rollout across the call centers. They now have over 4,500 call center personnel using Intellicheck's authentication technology. In addition to the call center, they recently signed a statement of work with us to deploy our technology at their retail branches and with their merchant channel. Integration for the branches is underway and they brought to us 2 of their largest retailers to start using Retail ID. One of these large retailers is already in a very successful pilot and the other is doing integration work for an upcoming pilot. I'm very excited about an upcoming meeting with this bank, to discuss additional ways we can partner together with them.

Our newest financial services partner is an online bank we will call bank number 5. This account was sold in conjunction with applied recognition, one of our facial recognition partners as the bank wanted a two-part authentication. As a part of the online account opening process with this bank, the first step is Intellicheck technology authenticating driver's license and if it passes, our [partners] facial recognition technology matches the face to the picture on the license. We're not sure how large this opportunity will become, but it proves the combined technology works and we believe it will lead to future revenues and new opportunities.

The speed at which we can install clients is proof that the new implementation team is working, having a single person to point my finger at namely Bill sitting here next to me has brought the accountability and leadership we needed. To speak to the difference of the before and after, in 2018, we did integrations with 3 retailers. So far in 2019, we did integrations with banks 2, 3, 4 and 5, as well as 7 integrations with retailers and a visitor management system.

Currently in queue for implementations through Q1 2020, we have 12 retailers, 3 retail bank branch systems and an automotive dealership management system. That brings us to look at some of the retailers we brought live this quarter. For the purposes of this part of our discussion, today I'm focusing on 4 major retailers with an extensive retail footprint. One of the stores we brought online is a leading sporting goods chain, this Midwest-based discount store chain has more than 200 locations, largely in the South and Midwest. Many of you likely are familiar with its store product selections that include clothing, shoes and equipment from as any sport or outdoor activity.

We also went live with an East Coast-based chain of home-focused merchandised retail stores, that include more than 1,500 locations, including its subsidiaries. No doubt, many of you have visited one of their stores focused on kitchen, bath and other home products. A leading beauty, retail chain store company went live this quarter as well, focused on beauty, cosmetics and personal care products. Their reach includes over 400 stores in the Americas. Another leading U.S. national retailer that went live with us is an outdoor gear and apparel retailer with over 200 locations across the U.S.

As you can see, these are powerful results that speak to the reality that we are not the same company, as we were in February 2018. To further highlight how different we are, we recently had inbound calls from a major online bank and a traditional brick-and-mortar bank. Both told us that they were at an industry roundtable run by the Auriemma Group, a payments and leading advisory group. At this roundtable, these 2 banks spoke of their fraud problems. They both told us numerous attendees said call Intellicheck. Like I've been saying over the past year, the market is coming our way.

Another key element to measure growth are scan volumes. So we're going to look at percentage changes. Since we had no visibility into the scan volumes of bank 2, when they were hosting the software, absolute numbers would not make much sense to report on at this time. As I said earlier, bank 2 has transitioned to our SaaS hosted solution and a pay per scan model and going forward, we intend to disclose those scan numbers.

But I can tell you right now is the total scan volumes for financial services were up 13% sequentially comparing Q2 2019 to Q1 2019. This compared to a 9% sequential increase Q2 2018 versus Q1 2018, and there was an 8% year-over-year increase comparing Q2 2019 versus Q2 2018.

While I spent much of the time speaking about the financial services vertical, I do not want to downplay the age-restricted product market. We continue to make great headway here. In Q2, we onboarded 86 new clients, 4 of which were law enforcement agencies. This represents a 10% increase in sales over Q1. If legislation changes or the pressure to curb team waiting motivates one of the large chains being targeted by the Food and Drug Administration and makes them decide to do the socially responsible thing, this vertical could explode.

Much discussion has been going on in D.C. regarding raising the age of tobacco products, I met with most of the legislators proposing these changes and have asked that they include ID authentication in their bills. I've been very clear about what will happen if they don't, because the change will have no [cheese]. I remind them that we raise the age for alcohol from 18 to 21 back in 1980, yet the CDC reports 11% of all alcohol consumed is by underage kids. In the meantime, it is a great business for us to be in, because of the law enforcement validation, which provides tremendous credibility to our financial services prospects.

So what can you take away from what you've heard here today. Our changes are working, we are making headway in financial services for the top 10 banks for just the private label credit cards alone, we estimate the total addressable market could be $180 million to $250 million annual SaaS revenue opportunity over time. And our clients are now looking beyond private label credit cards and to put our technology in the bank branches, and on their mobile apps, and even more importantly, they want to partner with us to see where else is very effective authentication solution can be used. I believe we are just scratching the surface. We are not the same company, and I think all of us at Intellicheck couldn't be more excited about that and what is yet to come.

I will now turn it over to Bill White to discuss the financials.

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Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [4]

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Thank you, Bryan, and a good day to our shareholders, guests and listeners. I like to discuss some of the financial information that was contained in our press release for the second quarter ending June 30, 2019, which we released this afternoon.

I'll begin with the second quarter results. Revenue for the second quarter ended June 30, 2019 grew 56% to $1,558,000 versus $1,001,000 for the same period last year. Our SaaS revenue was approximately $1,021,000 for Q2 2019, a 79% increase from the $625,000 we posted in Q2 of 2018 and was a 30% sequential increase from approximately $861,000 in Q1 2019. Our gross profit as a percentage of revenue was 85.9% for the quarter ended June 30, 2019, compared to 91.8% for the quarter ended June 30, 2018.

Operating expenses that consist of selling, general and administrative and research and development expenses increased 10% or $196,000 to $2,259,000 versus $2,063,000. This increase was primarily driven by an increase in development personnel and annual bonus plan which is contingent upon achieving certain goals established by the Board of Directors and Compensation Committee.

The company posted a net loss of $874,000 for the 3 months ended June 30, 2019, compared to a net loss of $1,100,000 for the quarter ended June 30, 2018. The net loss per diluted share was $0.06 versus $0.07 in the prior year. Adjusted EBITDA for the quarter ended June 30, 2019 was negative $785,000 compared to a negative $1,018,000 in the quarter ended June 30, 2018. Interest and other income were negligible for the quarters ending June 30, 2019 and June 30, 2018.

Now I'd like to focus on the company's liquidity and capital resources. As of June 30, 2019, the company had cash of $3.1 million, working capital defined as current assets minus current liabilities of $2.9 million, total assets of $13.4 million and stockholders' equity of $11.5 million. During the 6 months ended June 30, 2019, the company used net cash of $1.3 million compared to a net cash used of $1.5 million during the 6 months ended June 30, 2018.

Net cash used in operating activities was $1.6 million for the 6 months ended June 30, 2019, compared to $2.1 million for that same period in 2018. Net cash provided by investing activities was $14,000 for the second quarter of 2019, compared to net cash used in investing activities of $107,000 for the 6-month period ended June 30, 2018, and we generated cash of $268,000 from financing activities for the 6 months ended June 30, 2019, compared to $68,000 for the same period last year.

On February 6, 2019, the company entered into a revolving credit facility with Citibank. This agreement allows for maximum borrowings of $2 million secured by collateral accounts and bears interest at Citibank's base rate, minus 2%. As of today, there are no amounts outstanding under this facility. We currently anticipate their available cash as well 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. At December 31, 2018, we had a net operating loss carry-forward of approximately [$15 million].

I'll now turn the call over to the operator to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Grondahl with Northland Capital Markets.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [2]

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The first question. It sounds like the pipeline or the backlog has got like 12 retailers in it, 3 bank branch systems and kind of an auto DMS system. I guess that's not really the pipeline, that's what's on track to be implemented. Is that how you think about that?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [3]

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Yes, that's exactly the way to look at it, Mike, those are people that have committed to coming on to the system, it's just a matter of where they are in the implementation queue, some are in active development, some are beginning to roll out and some are saying, this is something that we have resources allocated for on January 1, 2020. So it's just a matter of where they are in that queue. But yes, as opposed to saying, it is a pipeline of people or prospects we're talking to, these are people who have committed to installing the system.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [4]

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Got it, got it. And then with the onetime payment in the quarter for implementation, was that roughly $185,000 kind of the amount you had called out a quarter or 2 ago?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [5]

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Correct.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [6]

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Got it. And then as you work through -- I guess we really say the first 7 months of the year, did anything fall out of your funnel?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [7]

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If you're saying, is there anything that we thought we were going to sign that we didn't sign. I would say the answer is, no. We have had a couple of retailers who might have moved, right. But we've also had a couple of new retailers who move left in terms of implementation and the time frames. I think that, the more that we have committed, the less those movements really matter, because they offset each other, but it's not like somebody has come to us and said, I'm thinking about this and then said, no.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [8]

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Got it. And it's not like you haven't lost any customers still, right? Your retention is still 100% or close to that?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [9]

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Yes. The only time we ever lose a client is if a bar goes out of business in that one age ID subscription, which is by itself inconsequential since I've been here, we have never lost a retailer or a bank.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [10]

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Got it, got it. That's what I thought. And then is it possible for you to rank those banks in terms of potential revenue?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [11]

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It's really hard to say, because I haven't gone through and analyze to make up of each one of their programs. So again, if we go back to some of the things that we've discussed in some of the conferences. Bank number 2, has over a 160 private label credit card programs they run. But as I said, I don't think somebody is going to steal identity to get their kids braces and they do a lot of dental offices and things. So we will down in there. I think it was 57 different retailers that made sense, they are similar to other clients we have on board. I haven't done yet the same analysis, but it also depends on the size of the retailers, some of them have more of 15 to 5,000 store location retailers than others. They're all in that top 10 though is what I'll say and the top 10 does control around 99% of this particular market.

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Operator [12]

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Our next question comes from [Roland Romeiser], a private investor.

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Unidentified Participant, [13]

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Hey, Bryan. This is [Ronnie Romeiser]. I'm a private investor. I have a pretty tricky question based on what we discussed earlier in this call. Last week, we saw a breach of Capital One. I don't know if they're number 1, number 2, number 3, number 4 or number 5 or any them. But that type of a thing, it's huge. I was wondering how generally with our company be able to take advantage of something like this, if this were to occur to one of our clients. Would be -- would they have to reissue 140 million credit cards and would we be part of that? And the second part of my question is there is a big move afoot about securing data. So these breaches. We had Equifax and we have constant breaches that take place. And if they were to shore up the controls, would they possibly include driver's license verification authentication -- we have to say that for me. Would that cost would be part of some tightening of controls and hence that would be a big advantage to us. Could you discuss that.

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Bryan Lewis, Intellicheck, Inc. - CEO & President [14]

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Yes. So I see it is a 3-part question, part one, how do we capitalize on breaches in a way, and I think that the Equifax breach was probably, I hate to say is bad for people, good for us, because that was a lot of data and pretty much everything, you need to steal somebody's identity that was 145 million Americans. Studies have shown run by Accenture, that it takes about 18 months from the date of a breach to the time that the data begins to show up for sale, get seasons, gets packaged and then gets sold And I believe that put it at Q4 of 2018, will be that 18-month mark, and we did see a spike in fraud attempts.

The Capital One breach, we're not really involved in the reissuance of credit cards, I -- maybe the good thing about that is what I read is they don't believe that data was published yet by the [woman] who hack them. But it's still is a lot of information about 100 million people, and if it is out there, it's just adding to the ease at which criminals can buy the data, which I think makes it all the more important that banks buy a system like ours. As far as cybersecurity and breaching data, I think that's a completely different market. If you look at how that women broke in, and she found there was a deficiency in the way that something had been set up by Capital One on the Amazon Cloud. And I don't know whether from her experience at Amazon, she was able to exploit that or find it, but that's certainly not a market that we are -- I don't see how we would bring anything to that other than authenticating that the employees who they say they are.

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Unidentified Participant, [15]

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All right. What about changes that might take place in the future, would they use driver's license authentication of driver's license to help secure information?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [16]

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It's conceivable, right now, I'm focusing on the market that we have right in front of us that I want to be the dominant player in, which is the issuance of credit in the financial services space.

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Operator [17]

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

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Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [18]

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Bryan, the 12 to 18 months lag figure Accenture, I think you said, that's been a constant over the period that you've alluded to it. is there any thesis for an acceleration just things happening faster and incentive to rush before certain authentication gets in place. Can you just elaborate on that?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [19]

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I don't know that I've seen it, but it seems logical that just because there is so much data out there, that I would expect that before -- maybe some monitoring gets put in place or other things like that they might be rushing to use the data that could be why I saw it myself in 5 package deals. Whereas I hadn't been involved in anything in the previous year that I've been monitoring myself this year in the first quarter, that's when those 5 deals went down. So it sounds like people are selling the data -- packaging the data and getting it out faster.

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Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [20]

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Okay. So we may see the spike earlier, that would be a nice tailwind. Can you elaborate on the facial recognition that you talk to regarding bank number 5. I know Intellicheck had or perhaps still has some intellectual property in that area. But if there are pros and cons of facial recognition. So would you take a few minutes and just walk us through how you think it's going to play out?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [21]

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Yes, I believe in an increasingly mobile world, you're going to need to be able to authenticate people from afar, if I'm in a store and I'm looking to do something, we can authenticate the license and then the clerk or the bank teller can visually compare me to the picture on my license to make sure that I am, I am who I say I am. When you're doing it on a mobile device that obviously doesn't work. So I look at it sort of as a 3-step process, if you want to be very complete about it. The first step is the application will authenticate that the driver’s license is real using the barcode, you then take a picture of the front of the license and through OCR, you authenticate that what is written on the front is actually what is encoded in the back. So my name on my license. In doing so you now have my picture. And then the next step is, let's make sure I'm still holding that license. So take a selfie that proves liveliness so that it's not just that I'm taking a picture of a picture to compare. But it is actually might face and I am alive and see the match against the photo on the license. And now I know that it's a real license and I'm still holding it. And now I can continue with that application. So there's a lot of mathematics that goes on in that facial recognition software and this one particular partner type recognition we found very good at it. And it's certainly worked in the sale of the bank 5.

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Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [22]

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Do you foresee other major issuers going those route?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [23]

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Yes, we're in talks with a lot of people about it, any one of the banks that is moving to online enrollment is looking to have this technology. So I would say that it is something that banks 1 through 4 are also talking to us about.

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Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [24]

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Okay. Time frame, is this a 1-quarter or 1-year or 2-year?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [25]

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It really depends on the particular banks and what their innovation teams are doing, and I'll say some banks move it warp speed and others it's like going to the DMVs of old in terms of how quickly things move. So I anticipate, this is something that it will probably take several quarters to get completely done. I will also say that it's going to take a lot of time before more things -- most things are mobile as opposed to in person. So it's -- to me, the big revenue stream is still our bread and butter business of authenticating somebody at a physical location.

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Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [26]

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Finally, the FDA opportunity or if it is an FDA some other entity that promulgates a standard or let's call it performance standard. Is that a 1 quarter, or 1-year, or 2-year, if it's going to happen. I understand you are not asking anybody to put this into their model, but can you give a sense of the probability of it happening and what's the timeframe?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [27]

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If they're going to put anything in legislation that says authentication, I think it's going to happen soon. Those bills are all being written and until pass in short orders. There is already some states or cities that have raised the age to 21. I believe everybody I spoke to in D.C. understood the fact that without authentication, they will never be able to do it. I took a ton of fake licenses with me and especially licenses from the states of the people they are meeting with, I drop them on the table and they were shocked that they couldn't tell, and it's their own state. They're calling out their licenses and comparing it. They realized how good these fakes are, now it's just a matter of are they going to fight enough to get that through, and I don't know, I haven't seen anything come out of Washington in a while, so who knows what will actually happen. I'm thinking that there are some of the larger companies that are realizing that they really have to do something from a PR standpoint and from the standpoint of -- they also legislation could be that they are not allowed to sell these products. And I think they'd rather have the revenue stream from the people who should be buying it and block those that shouldn't be, because that's really been the whole problem with the age-restricted marketplace. The law only says that you need to visually inspect the license, we know these folks are good enough that, that doesn't work anymore and there are plenty enough people out there who would rather say, hey, I comply with the law, and know that they're selling beer or tobacco products to a kid and pocket that revenue versus not pocketing the revenue and doing the right thing. So we got 86 new people last quarter who wanted to do the right thing. I hope it's a trend that grows

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Operator [28]

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Our next question comes from Scott Buck with B. Riley.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [29]

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I'm curious, can you tell us how many of the banks in at the current level of implementation are profitable on a stand-alone basis?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [30]

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I'm not quite sure how to answer the question. I mean what we've done for the most part is they're going to pay us a minimum, that's going to cover most of our expenses for the hardware and other things like that. We're running at 85% gross margins, as is we don't expect that to change at all going forward. So I'm not quite sure how to answer that out. Bill, you got any idea?

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [31]

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I guess what I'm really asking is, is each incremental relationship profitable from day one?

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Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [32]

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Yes, yes, it is.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [33]

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Okay.

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Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [34]

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The per scan model takes into consideration and our COGS or so 15%. So yes, we're profitable from the first day.

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Scott Christian Buck, B. Riley FBR, Inc., Research Division - Research Analyst [35]

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In the first swipe. Okay, that's perfect. Second question, obviously, there's a lot of implementation work to do. What kind of capacity, do you guys have to go out end market to banks number 6, -- 7,8,9, I guess?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [36]

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There is -- from a implementation standpoint, it's -- we could be doing 20 banks at once. It's really from our end of it. We've done, yes, then, Bill, is giving me a shock face. Since I do point my finger at him, but from our end of it, it's just teaching them, generally the 2 things we need to do, to teach them how to make sure their is scanner sending us the data we need in the format that we need and then how to write to our SDK or API. So from our end of it, it's mostly education. It's not like we're doing custom programming to bring somebody up who is going to co-adjust to our normal specs, and where we do have to do custom coding, it's got to be -- I'm not going to do it for a teeny tiny thing, it's going to have to be a big bank and we charge them for it now.

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Operator [37]

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Our next question comes from Mike Grondahl with Northland Capital Markets.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [38]

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just a follow-up. I think you talked about retail scan being up 8% year-over-year and SaaS revenue was up 79% year-over-year. So just help me think about both of those numbers, are you basically getting it all on price because you've gone to the per click model and the 8% scan volume, I think that excluded that 1 bank. But just help us understand those 2 numbers?

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Bryan Lewis, Intellicheck, Inc. - CEO & President [39]

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You got to -- we've got to remember, the age-restricted products go into that growth number as well. Some of it is price for sure, because as I said, we changing the pricing model and bringing on clients that were paying us in the manner that we wanted. I think it's really what made the difference. So the banks 2, and 3, and 4 are beginning to pay us on -- well, yes, just 3 and 4 are beginning to pay us on SaaS revenue on a per scan model is a big part of the difference, as well as dedicated team that we have selling a lot of age ID that helps.

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Operator [40]

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There are no further questions. At this time, I'd like to turn the call back to Bryan Lewis for closing comment.

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Bryan Lewis, Intellicheck, Inc. - CEO & President [41]

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Thank you, everyone, for joining us on this call. I'm very happy that the changes that we have put in place are making a difference. I think you'll continue to see that throughout the year. And I look forward to our Q3 call. Thank you, everyone, and have a good night.

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Operator [42]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. The conference call has ended. Please disconnect your lines. Thank you.