U.S. Markets close in 4 hrs 41 mins

Edited Transcript of IDN earnings conference call or presentation 21-Mar-19 8:30pm GMT

Q4 2018 Intellicheck Inc Earnings Call

PORT TOWNSEND Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Intellicheck Inc earnings conference call or presentation Thursday, March 21, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Billy Joe White

Intellicheck, Inc. - CFO, Treasurer & Secretary

* Bryan Lewis

Intellicheck, Inc. - CEO & President

================================================================================

Conference Call Participants

================================================================================

* Amy Norflus

* Ashok Kumar

ThinkEquity LLC, Research Division - Head of Research

* Donald Roger Brooke Liddell

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

* Michael Pochucha

Northland Capital Markets, Research Division - Analyst

* Yi Fu Lee

Oppenheimer & Co. Inc., Research Division - Associate

* Gar Jackson

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, greetings, and welcome to the Intellicheck Fourth Quarter and Year-End 2018 Earnings Call. (Operator Instructions) As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Gar Jackson, of Investor Relations. Thank you, you may begin.

--------------------------------------------------------------------------------

Gar Jackson, [2]

--------------------------------------------------------------------------------

Thank you, operator. Good afternoon, and thank you for joining us today for the Intellicheck Fourth Quarter and Year-End 2018 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, 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 21, 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'll begin today's call with Bryan Lewis, Intellicheck's Chief Executive Officer; followed by Bill White, Intellicheck's Chief Financial Officer, who will discuss the Q4 and full year results. Following their prepared remarks, we will take questions from our analysts and institutional investors. Today's call will be limited to 1 hour. And I will now turn the call over to Bryan.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Gar. And good afternoon everyone, and thank you for joining us for the Q4 2018 Intellicheck's Earnings Call. My first earnings call as CEO of Intellicheck was 1 day shy of a year ago, and I'm very pleased with the changes and progress we have made over the past year. As I said on the last call, the increases in identity theft and the underage getting access to age-restricted products and the need to increase officer effectiveness and safety is fueling the realization that authenticating a government-issued ID is the most effective way to solve each of these issues.

I would like to start with some general comments about our group. I believe the changes we have put in place over the past year are beginning to bear fruit. Quarter-over-quarter, SaaS revenue grew by 45% and it was the first quarter since Q1 2017 where losses were below $1 million. We have reengaged with existing clients and signed a new large bank and I'm excited to say that other major banks are now reaching out to us. Credit card issuers, who haven't returned calls, are now coming to us saying, XYZ Bank told us about the great things you're doing for them, so we have to speak. And this is just one sector in which identity authentication is becoming a must-have. I've been saying it, that it appears that market is coming our way, and I would also say that the evidence is bearing that out, both in terms of clients and prospects and also the continued level of breaches and identity thefts.

I would like to remind everyone of the magnitude of the problem in top line of the addressable market. I will start with the consumer space, specifically retail, which we still believe has the most immediate revenue opportunity given the speed of return on investment for retailers and banks. The market need continues to be driven by the reality that identity theft is not going away. In each of these calls, I have spoken about the volume of data breaches. The amount of data stolen is astounding. The Identity Theft Resource Center reports that the amount of personally identifiable information or PII exposed in 2018 was up 126% over 2017. They detailed 1,244 breaches in 2018, resulting in 446,515,334 records being exposed. This is on top of the Equifax breach in 2017 that exposed the name, Social Security Number and date of birth of over 145 million of us. That gives the criminals more than enough information to steal your identity. And it happens. It happened to 14.4 million adult Americans in 2018. Interestingly, the CEO of Equifax testified before a congressional committee that it has happened to him three times. Closer to home, my personal data has been involved in 10 breaches since 2012, and I was alerted on February 25 that my data was in 2 of 5 datasets called for multiple breaches that were sold on the dark web in January.

So it is very likely that it is only a matter of time before I am one of the victims as well. And this data is cheap. Experian recently put out a report detailing the cost of different data elements. Credit card information, including the secret CVV code on the back of the card, costs just over $100. Driver's license data, about $20. And the one element used to uniquely identify us, our Social Security Number, can be bought for only $1.

The cost of doing business for criminals keeps going down. The only thing a criminal needs now is a driver's license featuring their photo with the stolen information to back up the stolen data. A sophisticated fake with all the holograms, it will pass the backlight test and it will pass a simple bar code scanner test costs between $100 and $200 and can be quickly and easily ordered over the Internet. The numbers demonstrate how easy it is to compile and steal an identity portfolio for less than a few hundred dollars. It is scary to think that I can buy everything I need to walk into a store being you very quickly, easily and relatively anonymously. Almost every store trains their staff to ask if you would like to save money by opening a store account. What do they ask for? Income, Social Security Number and an ID. And just like that, a large purchase has been made in your name, using your store identity portfolio with a matching fake driver's license that ties everything together.

Just this month CBS News reported on an identity theft ring operating out of Long Island that stole at least 500 identities and used them to take out loans at credit unions. The identities were purchased on the dark web from a website in Cameroon, Africa for $4 per entity. All this points to the fact that the best way to stop identity theft is to authenticate a government-issued ID at the start of the transaction. Other forms of authentication do not work. In regards to one of the most common ways of authenticating a person, knowledge-based authentication or KBA, 32 state Attorney Generals wrote this to the DOJ in regards to the proposed changes to the FTC identity theft rules. They said, "We are concerned that knowledge-based authentication by itself is an acceptable form of communication. There is growing concern that in today's world, identity thieves can now overcome knowledge-based authentication questions either because the questions are weak or the answers are readily available online or previously compromised from a data breach. In a well-known example, a student in Tennessee successfully reset the password for Vice Presidential candidate Sarah Palin's e-mail account and gained access to its content by using a simple Google search to obtain Palin's birth date, ZIP Code and where Palin met her spouse. With information gleaned from data breaches more publicly available on social media sites, identity thieves can be better than consumers that are answering knowledge-based authentication questions because they have the data in front of them whereas consumers need to try to recollect the events that happened years ago."

They have said previously, you can buy all the data you need about a person, but you can't buy an authentic government ID. I've spoken many times about the cost of identity theft to banks and retailers. Javelin put it at $14.7 billion in 2018, but one thing we haven't talked about is the cost to the consumer whose identity has been stolen. Studies say that on average if your identity has been stolen, it will take you 300 hours over 6 months and cost you over $1,000 to clear your name. And there is an additional economic impact of identity theft for banks and retailers. A survey of American Institute of CPAs found that 62% of consumers blamed the company that failed to protect their data not the fraudster, and 62% of consumers will boycott a company that fails to protect them and their data.

Based on the date of the Equifax breach and the Accenture study that found that from the time of data breach to when the data was fraudulently used was typically 12 to 18 months, we have been predicting a spike in fraud in Q4. Unfortunately, for many, we were correct. We found overall a 20% increase in attempted fraud across our Retail ID crime base. In online channels, we saw an 82% increase in fraud attempts, and for what I would classify as our high-end retailers, the attempts nearly doubled. We estimated we stopped over 51,000 fraud attempts in Q4. If you remember from previous calls, each time fraudulent credit is issued due to identity theft at a department store, the average loss is $2,100. At tools and equipment stores, it was $2,569. Furniture stores, it is $2,908 and at top side of jewelry stores, at $3,574 per transaction. Given these numbers, we estimate we kept $110 million out of the hands of criminals.

Let me turn to scan statistics. I want to point out that these numbers are just for the clients where we host the software. In Q4 2018, total scans were up 49% over Q3 2018 and were up almost 10% year-over-year. Retail ID scans for 2018 were almost double 2017 at over 22 million scans. As we bring the large retailers in our pipeline from the 2 banks I spoke about last quarter online, this number will undoubtedly quickly grow. To give you an idea of the number of scans that a retailer can do, one lady at an apparel company that you will see in your local malls does almost 10 million account opening and account look-up scans a year. When you see how many retailers the bank is issuing credit for, plus the bank's own cards, you can begin to understand the size of the potential market we can sell into in just this space. One issuer we are working with provides credit cards for over 177 retailers and online merchants. While not all are nationwide chains, over half are. And if their scan volumes are the same as the lady at the apparel company I spoke about earlier with 10 million scans a year, it is simple math. Now multiply this by the number of banks that issue credit. This is a very large market we are just beginning to scratch the surface of. We are working with 4 national bank and credit card issuers right now, with at least 16 retailers of all sizes in various stages of deployment, from NDA to initial roll out. These merchants represent 10,000 new retail locations, which Retail ID will be fully used when rolled out. In an important step forward in expanding our market and penetration, we are piloting Retail ID with several of these banks for the issuance of their own brand-name credit cards. The relationship with the newly signed bank we spoke about last quarter as well as the reengaged client are only growing stronger, and we are on schedule to meet the target date at the end of Q2 for the retailers to start on-boarding and the bank branches at the end of Q3 for the new bank.

Additionally, our reengaged clients continue to bring more retailers to us to integrate with Retail ID because our authentication platform works. We are also making headway with some of the second and third look financing companies as well.

Our strategy to sell through the banks and credit card issuers who bear a large portion of the cost and the pain of identity theft is paying off and we will be continuing with that strategy. While we are ever mindful of cost, we will be adding some expense in headcount, specifically in IT and implementation so we can make sure we execute on the demand in front of us. We believe that these are prudent investments, given the gross margins that our SaaS products generate.

Let's move to Age ID, a product that we sell per device at a given venue. The main thing that I can say about it is that it works. Just a reminder that the New York State DMV, before deploying our Law ID, which uses the same core authentication engine as Retail ID and Age ID, tested this core engine against 1,000 fake IDs. We caught all 1,000. Regionally, a fleet department Age ID client of ours in a college town compared us to a competitor being used by some of the bars in town. They reported that in the test, we caught 99% of the fakes while our competitor caught only 16% of the fakes. They strongly suggested the establishments using our competitor switch to Age ID. The potential market for Age ID is enormous. Think about all the places that alcohol, tobacco, vaping products or cannabis. Each one of those is a potential client, if the owner of the business decides that getting socially responsible is more important than the profit to be made by selling to someone you shouldn't. For this reason, Age ID is another example where it's best to sell to an association that could push the product to its members, insurance companies that give a discount or into a space that is under regulatory pressure, such as the vaping industry.

We continue to foster these relationships as demonstrated recent Smoke Free Alternatives Trade Association and the New York State Vaping Association press releases, because FDA is coming down hard on vaping retailers and these associations know it. On March 4, the FDA sent a letter to Walgreens asking for a meeting to discuss the high rate of violations by Walgreen stores and what steps the company will take to address these corporate-wide failures, while also putting 14 other national gas station and retailers on notice that they will be asked the same questions.

Each of these companies notified have a point-of-sale system that can easily incorporate Age ID. I hope that they listen to FDA Commissioner when he says, ignoring the law and then paying associated fines and penalties should not simply be viewed as a cost of doing business.

While we do not sell this product per scan, it is interesting to note that in 2017, we did a total of just over 260,000 scans. In 2018, this grew to over 2 million scans. Another interesting statistic is the percentage of fakes found by retailers versus law enforcement. In 2018, when retailers scanned, the average fraud rate was 2.67%. The 2018 fraud rate with law enforcement use was 6.94%. I think this reflects the fact that law enforcement scans everyone whereas retailers generally do not. I think the law enforcement numbers are a much better indicator of the true number of fakes and why we are seeing more regulatory pressure.

New Age ID clients in the second half of 2018 grew 116% over the first half of 2018. And Q14 (sic) [Q4] 2018 Age ID revenues grew 129% to $110,000 from $48,000 in Q4 2017. Our restructured sales gain, search engine optimization, association partnerships in mass marketing are paying off and we will continue with this strategy.

Moving to our Law vertical, where we can sell both Law ID and Age ID, we see that Age ID could be a much easier sale as restrictions from the FBI's criminal justice information system on the police department as well as the fact that there are no state-level integrations required means we can sell in all 50 states. While Age ID does not replicate what the computer and a police cruiser can do or what Law ID can do, every jurisdiction in United States has issues with the sale of age-restricted products. In Q4, four more law enforcement agencies contracted for Age ID. Law enforcement tends to be one of our best lead generators for Age ID sales. Those establishments cited for selling to the underage tend to call us up for subscription.

The feedback we get on Law ID remains very positive, which is why I believe the product has a future. In New York State alone, there are 514 law enforcement agencies with over 66,000 sworn officers. The size of the market is also one of the reasons widespread adoption might take longer. Each of those 514 is an individual sale with individual budgets and needs to be with an agency issuing phones to their officers. Sales in pilots continue, but are small in nature. I believe that as law enforcement evolves and the number of mobile phones being issued to officers increases, so will our sales.

In Q4, we signed 1 new Law ID client and at a pilot was successful, it is now in the purchase order phase and began 2 pilots that just ended in Q1. We are now awaiting next steps on those pilots.

We are working with each of our client agencies to see where we can expand within the department and if they are planning for the budgeting cycle, which closes in June. In the meantime, we are aggressively pursuing Age ID with law enforcement, focusing on campus police and the police departments in the towns around or with college campuses.

In closing, I'm proud of what the team here has accomplished in the 9 months of 2018 that I was part of the firm, and I look forward to reporting to you what I know we can accomplish in 2019. It was a challenging and exciting year for the company and for me as well. I can't say it enough, the market for identity authentication is growing. Our clients and prospects are realizing that they should stop chasing the shiny new toy because the latest technology somebody writes about is nowhere near as accurate, easy to implement and frictionless to the consumer as authenticating something we have with us any time we shop, a government-issued ID. The problem of identity theft is not going away. We are focusing our efforts in the financial services sector, given the massive untapped addressable market in which we are making significant traction, and we believe it is the fastest path to revenue growth and profitability. We came a long way in 2018, and we have a ways to go in 2019. As long as we continue to execute on the opportunities our clients are bringing to us, it should be a banner year.

I will now turn the call over to Bill White, our Chief Financial Officer, to discuss our financial results.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Bryan, and a good day to our shareholders, guests and listeners. I'd like to discuss some of the financial information that was contained in our Form 10-Q and press release for the fourth quarter and fiscal year ended December 31, 2018 that we released and filed with the SEC a short while ago.

I'll begin with our fourth quarter results. Revenue for the fourth quarter ended December 31, 2018 grew 37% to $1,330,000 versus $968,000 for the same period last year. Our SaaS revenue was approximately $826,000 for Q4 2018, a 45% increase from $569,000 in Q4 2017 and was a 27% sequential increase versus approximately $651,000 in Q3 2018. Gross profit as a percentage of revenue improved to 93.1% for the quarter ended December 31, 2018 compared to 89.4% for the quarter ended December 31, 2017. Operating expenses consist of selling, general and administrative and research and development expenses.

Including the impairment charge in CEO severance expense, OpEx was flat at slightly over $1.9 million for both the 3 months ended December 31, 2018, and December 31, 2017. The company posted a net loss of $664,000 for the 3 months ended December 31, 2018 compared to a net loss of $2.9 million for the quarter ending December 31, 2017. The net loss per diluted share was $0.04 versus $0.19 in the prior year. Adjusted EBITDA for the quarter ending December 31, 2018, which excludes the one-time impairment charge, was a negative $633,000 compared to a negative $1.3 million in the quarter ended December 31, 2017.

Now turning to our full year 2018 results. Revenue for the full year ended December 31, 2018 was up 23% to $4.43 million compared to $3.6 million for the prior year. Our SaaS revenue for calendar 2018 was $2.66 million, an increase of 63% as compared to $1.7 million in 2017. Driven by growth in our SaaS business, gross profit as a percentage of revenue was 91.3% for the year ended December 31, 2018 compared to 85.5% during the same period last year. Operating expenses for the year ended December 31, 2018 were $8.1 million compared to $9.2 million for the year ended December 31, 2017. Excluding the prior year's one- time impairment charge previously mentioned, along with the severance agreement for our CEO that totaled $1.9 million, Selling, G&A decreased slightly to $5.2 million for the year ended December 31, 2018 from $5.3 million for the year ended December 31, 2017, primarily as a result of reductions in stock-based compensation costs and legal fees, offset by expanded marketing efforts.

Research and development expenses increased 52% to $2.9 million for the year ended December 31, 2018 from $1.9 million for the year ended December 31, 2017, driven by increased headcount in development personnel and accelerated R&D efforts. As previously mentioned, we recognized an impairment charge on intangible assets of $1.4 million for the prior year ended December 31, 2017, which 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 believe will be a primary revenue driver in the future. The company had a net loss of $4 million for the year ended December 31, 2018 compared to $6 million for the calendar year 2017.

Excluding the $1.4 million impairment charge and the $0.5 million severance contract, the net loss was an improvement of approximately $155,000. The net loss per diluted share was $0.26 versus $0.48 in the prior year. The weighted average share counts were $15.5 million at year-end versus $12.4 million at the end of 2017. Adjusted EBITDA was a negative $3.7 million for 2018, an improvement of approximately $200,000 as compared to adjusted EBITDA of negative $3.9 million for 2017. Interest and other income were $130,000 for the year ended December 31, 2018 compared to $60,000 for the year ended December 31, 2017.

Now, I'd like to focus on the company's liquidity and capital resources. As of December 31, 2018, the company had cash of $4.4 million; working capital, defined as current assets minus current liabilities, of $4.2 million; total assets of $14.5 million and stockholder's equity of $12.9 million. During the year ending December 31, 2018, the company used net cash of $3.6 million compared to net cash generated of $4.9 million during the year ending December 31, 2017. Net cash used in operating activities was $4.2 million for the year ending December 31, 2018, compared to $3.7 million for the same period in 2017.

Net cash used in investing activities was $100,000 for the year compared to net cash provided by investing activities of $5,000 for the year ending December 31, 2017. And we generated cash of $688,000 from financing activities in 2018, compared to generating net cash of $8.7 million from financing activities in 2017.

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 various interest at Citibank's rate minus 2%. 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 our revolving credit facility, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. As of December 31, 2018, the company had net operating loss carryforwards of approximately $15 million.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Mike Pochucha with Northland Capital Markets.

--------------------------------------------------------------------------------

Michael Pochucha, Northland Capital Markets, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Maybe first off just on that top 5 banks, is that still 4 retailers that we're looking at? Or does that number go up since the last quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's still the initial. And thanks, Mike, for the compliment. That's still the initial retailers that they're looking to bring up, the ones that I think they look at doing the most scans, probably also creates the most losses. But they are -- we're talking to them about their entire portfolio.

--------------------------------------------------------------------------------

Michael Pochucha, Northland Capital Markets, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Got you. And then on NLETS, I might have missed it, but is that still live at 6 states? Or how is that progressing?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, the NLETS is still live in 6 states. So we're going in and we're hitting those states very hard to make sure that we've got everything we need to be the product that the police want to put out to their officers. And the reason we're doing that is there's additional fees and costs for each NLETS state that we bring up. So we want to make sure that we've got a lot of demand in a state, potential demand from prospects before we go live with an NLETS connection.

--------------------------------------------------------------------------------

Michael Pochucha, Northland Capital Markets, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Got it. And then just on maybe headcount and expense, is that something we can see building a little bit over the year or is that specific to certain quarters when that starts ramping a little bit?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, we've added some people already and we're going to watch it based on the demand as -- in terms of onboarding our clients. One of the things I talked about a little bit in the past is building out an implementation team to make sure that we have the people in-house, so that when our retailers bring us -- I'm sorry, when our banks bring us to retailers, we've got the bandwidth to speak to them, walk them through the implementation and get them up as quickly as possible. What I have my people targeting is, how can we move up every implementation by a month? That has significant impact.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from the line of Shaul Eyal from Oppenheimer & Company.

--------------------------------------------------------------------------------

Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [9]

--------------------------------------------------------------------------------

This is actually Yi Fu Lee for Shaul. First question is for Bryan. In terms of the law enforcement client opportunity, can you give us a little more color on the total adjustable market size and how much do you think that Intellicheck could capture?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [10]

--------------------------------------------------------------------------------

Well, I think that the market, if you look at who could use the product, the main targets that make sense to me are officers, who are not in a police cruiser. The theme is, no laptop, no car, no problem. Because what we can provide is something that gives the officer, who is on a bike, a motorcycle, a horse or on foot the same capability that an officer in a cruiser has, to enter an information and get back wants and warrants on a person without having to go through dispatch, which frees dispatch up to handle more urgent safety calls. So the market is large. Like I said, and I just gave an example of New York, but you look at any state, there are a number -- in any state there are multiple agencies and almost everybody has somebody, who is not in a police cruiser, whether it's a detective or a special agent-type thing. So they are all the people that we can sell to. When we look at selling to law enforcement for Age ID, that drastically opens up who we can initially sell to and then help us gauge demand for our full-blown Law ID product because there aren't requirements of having a phone issued by the agency that has a mobile device manager on it with special training for the officers that makes them CJIS qualified. So that market is immediately much larger. So we're looking at, right now, is we've got a nationwide market with 2 different products and we're attacking it, I think, in a logical manner to get more police departments online and then have them help us to make sure that we have the Law ID product built to the point that it makes a lot of sense for them to issue it department-wide. So the market is very, very big. Is it going to be more Age ID than Law ID in the short term? I would say yes. But it's much easier for us to deploy Age ID than Law ID.

--------------------------------------------------------------------------------

Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [11]

--------------------------------------------------------------------------------

Okay. And Bryan, in terms of like the sales cycle, can you give us a little more color? I know you are in process of closing one deal. Can you give us a little color on like, I guess, the magnitude of it as well as the sales cycle? Will it take like 6 months, 9 months to close? How long is the sales cycle?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [12]

--------------------------------------------------------------------------------

For Age -- for Law ID?

--------------------------------------------------------------------------------

Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [13]

--------------------------------------------------------------------------------

For Age and Law, maybe.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Age ID tends to be much quicker because there is -- there are not a lot of hurdles that the department has to go through to get the product in the hands of the officers. Again, that's because the information is different. There's no wants or warrants returned on Age ID, which means the police officer does not have to have a CJIS certification. And because there's really no information that can get stored on or that could be accessed from that device, it doesn't require a mobile device manager to allow them to remotely wipe the device should it be lost or stolen. So that can be really a matter of -- it can be just a couple of weeks. Age ID they -- I'm sorry, Law ID, they generally want to get in the hands of multiple officers and have, at a minimum, a 30-day pilot, generally longer. And then it needs to go into a purchase order process, which tends to be a lot longer than Age ID because the contract is different. And again, the legal ramifications of having that product in the hands of the officer are different for the agency than they are for Age ID.

--------------------------------------------------------------------------------

Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [15]

--------------------------------------------------------------------------------

Okay. And I'm sorry, one last follow-up for Bill on the financial side is, you talked about expanding the sales force in IT. In terms of like maybe give us a little color on the operating margin headwind in terms of this expansion. And also, Bill, can you give us a little more color on, like, the nice improvements on the gross margin we see in this quarter to 91% as well?

--------------------------------------------------------------------------------

Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [16]

--------------------------------------------------------------------------------

Yes, sure, thank you. I've said historically that our margin should normalize in the 85% range. We've been running a little above that. I think you'll see margins normalize in the 85% to 90% range. We just happen to be a little higher now because of product mix.

--------------------------------------------------------------------------------

Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [17]

--------------------------------------------------------------------------------

And in terms of, sorry, the sales force as with the IT additions that you intend to put on this year, can you give us a little more color on the operating margin pressure, if any?

--------------------------------------------------------------------------------

Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [18]

--------------------------------------------------------------------------------

Yes, I think -- I don't think there'll be significant pressure on the operating margins. We'll add -- we're very cost-conscious and we'll add employees as we need to, as we're bringing on these customers and need implementation teams and more developers or increasing the velocity of development when needed, but that will be as needed.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from the line of Roger Liddell from Clear Harbor Asset Management.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Several questions on the Age ID side. Bryan, you cited, I think I recall was, a college town that had a 99% accuracy rate, we expect that. But then you said versus 16% for the other incumbent systems. 16% effectively means there is no control whatsoever. And I'm startled by that number. Isn't that number itself a major in this more focus of attention on underage issues with vaping being a driver? Isn't the 16% rate just an admission of failure?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Look, in my opinion I would say yes. And it's one of the things -- this particular town mandated that people have a device. And I think it's another example where I'm working with a lot of government agencies to make sure they understand the difference between scanning and authentication. And you can get a scan or you can download a scanner for free online but that doesn't mean that it's going to authenticate it. The bad guys know how to create these IDs. They advertise it on their websites that it will pass scanning test. And it just shows that this is an example where the law has not kept up with technology, saying that you need to visually inspect the license does not work. Saying that you need to scan a license does not work. What you need to do is make sure that you can say that this license, with 100% certainty, the barcode on it matches the jurisdiction's actual barcode. And that's why I would say, yes, I think 16%, you might as well not do anything. And that's why I think the police department who saw the bars switched what they were doing, because you were -- you probably try to do the right thing and maybe save a few bucks doing it, but you are not doing what it is we intend you to do.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, fair enough. Following that thread, the FDA meeting that you referred to and Walgreens, well, commissioner -- FDA Commissioner Gottlieb is leaving, and if he was the driver behind this vaping issue then I have no idea whether this thing goes right into a ditch. Can you comment usefully on that, and what is the FDA actually doing or threatening to do -- I mean what will they actually do?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So we've met with them several times, and have done a lot to educate them on the difference between, again, visual inspection and scanning. The FDA pays for the whole We Card program where they train people on how to, I suppose, like, visually tell if it's real or not. And after we went down there with a bunch of fakes and show them the fakes and asked them if they could visually tell and then show them the difference between scanning and authentication by using one of these free downloads versus our Age ID product, I think they realize that what they were doing is well off the market. They have some guidelines out that they are in the middle of a comment period. Comment period closes on April 15. We will be commenting on that to tell them our take is that this is an opportunity where they could have the guidelines, which hopefully will then impact the law, start moving toward something where the law understands what technology is capable of doing and demand an authentication process, not just the visual inspection or scanning process. From everything they have told us, his stepping down is not changing their zeal in curbing this epidemic. And I would also say that, again, dealing with SFATA and the New York Vaping Association, they are all also very adamant on the fact that they want to keep the youth out of doing this. They look at their product as something that can get them off of burning tobacco, which they feel is what really causes cancer and they think their products have a real health use, although I don't know if they would ever say -- or they'd advertise any health aspect, but they think it's something that can get people off of cancer-causing tobacco use.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. I'd continue on with the vaping theme. I noticed in the announcement of an upcoming IPO for a company that, quoting here, sells vaping products and accessories to over 6,600 independent smoke shops, regional stores and a number of licensed cannabis cultivators, processors and dispensaries. It also runs 2 online stores in North America which sell directly to consumers. The takeaway point to me is 6,600 independent smoke shops, et cetera. That's a bigger number than I would have thought. What -- can you give me a sense of a scope of the Smoke Free Trade Association? (sic) [Smoke Free Alternatives Trade Association] and is the 6,600 location number, does it correlate at all with what you know about the SFATA membership?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The number from between SFATA and the New York Vaping Association is much larger than that. One other thing is, many of these vaping shops make their own products and mix [them too]. So there are -- this is just 1 provider of raw materials to the vaping shops. So the addressable market, although I don't have it right in front of me, I don't happen to have the membership list for either of them, but I know it is much larger than that.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from the line of Ashok Kumar from ThinkEquity.

--------------------------------------------------------------------------------

Ashok Kumar, ThinkEquity LLC, Research Division - Head of Research [27]

--------------------------------------------------------------------------------

Just a big picture question in terms of the bond rate, do you expect that to remain at the current levels of 3.50% a month, which is the average level in 2018? And the timeline of profitability of maintained discipline on the operating structure, with about $8 million in annualized operating expenses and the 80% to 90% operating margin, would the $9 to $10 million be the revenue level where you reach operational breakeven, and do you have a timeline for that?

--------------------------------------------------------------------------------

Billy Joe White, Intellicheck, Inc. - CFO, Treasurer & Secretary [28]

--------------------------------------------------------------------------------

Yes, yes, Ashok. We've said that we're not planning on raising working capital for working capital purposes, which would mean that we expect to reach EBITDA positive before having to raise capital. And with respect to timing, we haven't been -- we haven't said when we expect to reach EBITDA positive at this point.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Amy Norflus from Neuberger Berman.

--------------------------------------------------------------------------------

Amy Norflus, [30]

--------------------------------------------------------------------------------

It was a really great quarter and there seems to be lots of amazing opportunities. I know like you just said you really don't give revenue guidance, but can you kind of help us understand what we should expect when some of these opportunities should turn into realities, revenue growth rates, quantify anything?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [31]

--------------------------------------------------------------------------------

What we said is when we look at our -- you look at a national retailer and we figure each one of those should be worth, when they're fully live, between $800,000 and $1.2 million a year to -- in revenue to us, so depending on their scan volumes and all those types of things. So it's one of the reasons when we talk about the number of retailers we expect to bring up, timing of that is very important. But one of the reasons why we're dealing with the banks to help us push through to the retailers, the banks have an incentive. The retailers also have an incentive, not as great as the banks but it is working. We are -- have more retailers that we are working with than we certainly have since I started and probably the years previous to that. The method is resonating.

--------------------------------------------------------------------------------

Amy Norflus, [32]

--------------------------------------------------------------------------------

How many resellers are there? I'm sorry.

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [33]

--------------------------------------------------------------------------------

Right now we've got 16 in the pipeline in various stages of implementation.

--------------------------------------------------------------------------------

Amy Norflus, [34]

--------------------------------------------------------------------------------

And do you consider bank a retailer? Or how so?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [35]

--------------------------------------------------------------------------------

No, no, no.

--------------------------------------------------------------------------------

Amy Norflus, [36]

--------------------------------------------------------------------------------

So when you give us those numbers -- I'm sorry I was just looking for -- to understand that.

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [37]

--------------------------------------------------------------------------------

Yes, I said we're dealing with 4 banks who have 16 retailers that they are bringing to us to onboard. In addition, 2 other banks are also piloting with their own brand name cards.

--------------------------------------------------------------------------------

Amy Norflus, [38]

--------------------------------------------------------------------------------

And would a brand name card be equivalent to -- those 2 brand name cards, that would be equivalent to 2 retailers?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It depends on how many cards that particular bank issues in their own name. But I'd say the minimum, yes.

--------------------------------------------------------------------------------

Amy Norflus, [40]

--------------------------------------------------------------------------------

And can you kind of give us the same thing with the Age ID and the Law ID, how we should look at the revenue trends from those?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think that Law ID is going to be as I said, it's going to take longer than we anticipated maybe in the beginning. I think that the product, again, the feedback from officers who are using it is very, very positive. Again though it needs to be in a -- at a police department that is issuing telephones to their officers as opposed to they can go out and get a phone from anywhere use to use Age ID. A phone used for Law ID has to be a department-issued phone with an MBM. There are a growing number of law enforcement agencies that are issuing phones to their officers but that limits what we can -- who we can sell to, which implies while that part of the market is growing, we're focusing heavily on Age ID to law enforcement everywhere.

--------------------------------------------------------------------------------

Amy Norflus, [42]

--------------------------------------------------------------------------------

And Age ID?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [43]

--------------------------------------------------------------------------------

I'm not sure I understand the question. What do you wanted about Age?

--------------------------------------------------------------------------------

Amy Norflus, [44]

--------------------------------------------------------------------------------

Just trying to quantify some of the -- I mean like I've been reading all the press releases of you're partnering with this people, you're partnering this, working with a lot of different people. Has any of that produced revenue? When should it produce revenue? Just trying to understand.

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [45]

--------------------------------------------------------------------------------

Yes, I think it's one of the reasons that in the second half of last year, we more than doubled the sales of Age ID that we did in the first half of the year. And I would expect that we will continue to see increased sales in Age ID. But again, it's predicated on -- the law right now states that all I have to do is visually inspect an ID and I'm clear. So as pressure grows on people to be more socially responsible, as states and towns are starting to now think about passing laws to either completely ban the sale of certain products or certainly restrict the age, increase it to 21, they've got real incentive to make sure that they are doing the socially responsible thing. So more and more people are coming to us. And the other thing, too, is the more often they get busted by a police department using Age ID, the more likely they are to abide. We can usually tell when somebody use -- a law enforcement agency using our product has gone out and done a sting and hit bar row in a particular town because we can map out who got busted because it's 1 Main Street, 12 Main Street, 37 Main Street, suddenly are calling us up asking about the product.

--------------------------------------------------------------------------------

Amy Norflus, [46]

--------------------------------------------------------------------------------

That's great. Perfect. And if I could just one more on the Retail ID. So the 16 retailers that we have in the pipeline at various stages, is there anybody that's 100% already in there? Or the 16 will just roll in over a 2-, 3-, 4-year period? Or how do I think about that?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [47]

--------------------------------------------------------------------------------

No, it's -- not a 2-, 3- or 4-month period. It's a matter of the implementation process depending on the IT resources available to the retailer to innovate into the point-of-sale system. And we've got retailers who have done it in a matter of weeks and some who it has taken them 3 or 4 months. So it's whatever stage of rollout or their resources are in. So we have -- in this quarter we brought up, just brought live the rollout for a national home merchandise retailer with 1,100 stores. We've got a smaller national specialty retailer that's working out. And we expect -- we've got our pipeline of -- where we stand in development queue, as we have our partnership meetings with the banks and their clients to help them with the rollout. We've got a timeframe and target dates for each of those 16. And we are tracking to those dates.

--------------------------------------------------------------------------------

Amy Norflus, [48]

--------------------------------------------------------------------------------

So if I understood you, the 16 is not years, it's months?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [49]

--------------------------------------------------------------------------------

It's 16 retailers, specific different individual retailers.

--------------------------------------------------------------------------------

Amy Norflus, [50]

--------------------------------------------------------------------------------

Correct. But there -- the resources that they have internally to integrate into their POS systems, it -- originally I thought it took a few years until you got everything to work into a POS system. But if I heard you, you said it's not going to take years, it would be shorter than that.

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [51]

--------------------------------------------------------------------------------

No. Generally, the way that a retailer rolls it out, they need to do the work to make sure that they can send us the barcode properly and then can understand the message we send back about that particular barcode. And then whatever the work they need to do to make sure they've got the credit process going properly back and forth with their bank based on the validation, authentication of the ID that we sent to them in the bank. They get that done. They generally will roll it out to a few of their locations in different parts of the country to make sure that they've got all the kinks ruled out. They generally do that for about a month or so to make sure it's all working right. And then they light up all their stores nationwide.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question is a follow up from the line of Roger Liddell from Clear Harbor Asset Management.

--------------------------------------------------------------------------------

Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [53]

--------------------------------------------------------------------------------

Continuing on the theme of enrollment periods that you need for large complex retailers and onboarding team and the longer time frames, do you have any plans to have for mom-and-pop or smaller retailers a self-enrollment kind of software so you don't need those assets and onboarding team tied up to implement?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [54]

--------------------------------------------------------------------------------

Yes, absolutely, Roger. One of the things we're doing is we have moved -- I guess, 2 things to explain. Most of our products had been in the Apple B2B store, which is a lot more complicated for a merchant to download. They need to have something called a Volume Purchasing Plan number and some other things that many of them don't have. We moved -- we're moving or have moved our products into the regular Apple store because we're able to put a lot more controls on who can download and access to the system and other things. So we felt comfortable putting it in the public store. That means if a mom-and-pop store wants to be able to check and authenticate an ID before they fill out the application, they will be able to download the product on to their smartphone or tablet and use the product. And I think it's important for them because generally those small stores, the credit card that's going to be issued is in the bank's name. I mean, it's not like I open up local jewelry store, Bryan's Jewelry, I'm not going to get a white label card. I'm going to get one from a bank that's going to back me. But I eat 100% of the fraud. So it is a very easy tradeoff for them to say the cost of the product certainly outweighs any of the losses that I would get. And yes, we will, in short order, have it very easy for them to self-enroll.

--------------------------------------------------------------------------------

Donald Roger Brooke Liddell, Clear Harbor Asset Management, LLC - Managing Member, Investment Manager and Vice-Chairman [55]

--------------------------------------------------------------------------------

Okay, that's it. For a final question, you gave a figure of, if I wrote it down right, 6.94% fraud prevention rate using law enforcement or Law ID versus 2.67% for retailers generally. Is that discrepancy enough to -- is it relevant to driving faster implementation? Or is that nice to have -- it's a tailwind but not relevant?

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [56]

--------------------------------------------------------------------------------

Okay, just so to make sure that I clarify a few things there. The 6.94% is the fraudulent rate that we see when law enforcement goes out and does a scan authentication of a driver's license using Age ID. By law we, at Intellicheck, cannot see anything that is done when an officer scans an ID using Law ID. We are not CJIS-certified. We are not sworn law enforcement officers. All of that happens in the NLETS cloud. We see none of it. So that number was purely Age ID used by law enforcement. And on comparing there what happens with when a retailer scans, and they don't scan everybody, when they do a raid on an establishment, particularly for alcohol, the cops go in and they shut all the entrances and they shut down the bar and they check every single person's ID. So I think a lot of times, when somebody thinks, oh they're close enough. They're 25. They look like they're 21, but they're really only 20. They don't card them. Whereas the law enforcement cards everybody. So that's why I think it's -- you see a much higher rate. I think that 6.94% is much more indicative of the amount of false IDs used by people, underage people to get age-restricted products. And I do think it's a very good selling point when talking to the retailers about why they need to put in a product because their people are not that good at checking who is real or not, for 2 reasons. One, I can't tell the difference between somebody who's 19 and 21. And two, I could not tell you what my neighboring states' driver's license looks like. So how am I going to tell if it's real or not? And which I think all points to the reason why, as I said before, the law has got to catch up with technology and the law needs to require authentication.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Ladies and gentlemen, we have no further questions in queue. I'd like to turn the floor back over to management for closing.

--------------------------------------------------------------------------------

Bryan Lewis, Intellicheck, Inc. - CEO & President [58]

--------------------------------------------------------------------------------

Just want to say thank you, everyone, for attending the call. Thank you very much for your questions. Specifically, we want to thank you for the compliments we got. I think we're on the right track. I'm looking forward to these calls throughout the year. And I hope to enjoy our next call as much as I did this one. So thank you very much.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.