Financial Data and Key Metrics Changes - Revenue for Q2 2019 grew 57% to $1.558 million compared to $1.001 million for the same period last year [48] - SaaS revenue was approximately $1.121 million for Q2 2019, representing a 79% increase from $625,000 in Q2 2018 and a 30% sequential increase from approximately $861,000 in Q1 2019 [48] - Gross profit as a percentage of revenue was 85.9% for Q2 2019, down from 91.8% in Q2 2018 [49] - The company reported a net loss of $874,000 for Q2 2019, an improvement from a net loss of $1.1 million in Q2 2018 [50] Business Line Data and Key Metrics Changes - SaaS revenue increased significantly, indicating a shift in focus towards financial services as the primary target market [9][10] - The company onboarded 86 new clients in the age-restricted product market, representing a 10% increase in sales over Q1 2019 [42] Market Data and Key Metrics Changes - Total scan volumes for financial services were up 13% sequentially comparing Q2 2019 to Q1 2019, and there was an 8% year-over-year increase comparing Q2 2019 to Q2 2018 [41] - The company has signed four of the top 10 banks as clients, indicating strong market penetration [25] Company Strategy and Development Direction - The company has shifted its focus to financial services to combat identity theft, which is seen as a significant pain point for financial institutions [10][11] - A new pricing model based on a per-scan approach has been implemented to better align with the transactional nature of banking [21][22] - The company aims to expand its technology into bank branches and mobile apps, indicating a broader application of its services [44][45] Management's Comments on Operating Environment and Future Outlook - Management believes the market is increasingly recognizing the need for authentication solutions due to rising identity theft incidents [11][12] - The company anticipates that changes in legislation regarding age-restricted products could lead to significant growth opportunities [42][43] - Management expressed confidence in the company's ability to capitalize on the growing demand for fraud prevention solutions [45] Other Important Information - The company has a revolving credit facility with Citibank allowing for maximum borrowings of $2 million, which is currently untapped [53] - As of June 30, 2019, the company had cash of $3.1 million and total assets of $13.4 million [51] Q&A Session Summary Question: Clarification on the implementation pipeline - Management confirmed that the listed clients are committed to the system and are at various stages of implementation [56] Question: One-time payment amount for implementation - The one-time payment for implementation was confirmed to be approximately $185,000 [57] Question: Customer retention rate - Management stated that customer retention remains at nearly 100%, with losses only occurring if a client goes out of business [60] Question: Potential revenue ranking of banks - Management indicated that it is difficult to rank banks by potential revenue without analyzing their specific programs [61] Question: Impact of data breaches on business - Management noted that data breaches create a heightened demand for their services, as they make identity theft easier [67][69] Question: Future use of driver's license verification - Management acknowledged that there is potential for increased use of driver's license verification in securing data [71] Question: Timeline for FDA-related opportunities - Management believes that legislation requiring authentication could happen soon, as discussions are ongoing [82]

[PART I – FINANCIAL INFORMATION](index=4&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) This section presents Intellicheck, Inc.'s unaudited financial statements and management's discussion for the quarter ended March 31, 2019 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Intellicheck, Inc.'s unaudited financial statements for Q1 2019, reporting an increased net loss and shifts in assets, liabilities, and equity [Balance Sheets](index=4&type=section&id=Balance%20Sheets%20%E2%80%93%20March%2031%2C%202019%20(Unaudited)%20and%20December%2031%2C%202018) This section details the company's financial position, showing assets, liabilities, and equity at March 31, 2019, and December 31, 2018 | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :-------------------------------- | :------------- | :---------------- | | Cash | $3,840,600 | $4,376,017 | | Accounts receivable, net | $796,834 | $1,019,434 | | Total current assets | $5,044,630 | $5,749,203 | | Total assets | $13,922,974 | $14,460,781 | | Total current liabilities | $1,688,003 | $1,504,788 | | Total liabilities | $1,846,521 | $1,541,076 | | Total stockholders' equity | $12,076,453 | $12,919,705 | - Total assets decreased by approximately **$537,807** from December 31, 2018, to March 31, 2019, primarily due to a decrease in cash and accounts receivable[9](index=9&type=chunk) - Total liabilities increased by approximately **$305,445**, driven by increases in current operating lease liability and deferred revenue[9](index=9&type=chunk) [Statements of Operations](index=5&type=section&id=Statements%20of%20Operations%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section outlines the company's financial performance, including revenues, expenses, and net loss for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | Change (YoY) (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenues | $1,278,994 | $1,062,062 | +20.4% | | Cost of Revenues | $(192,297) | $(100,469) | +91.4% | | Gross profit | $1,086,697 | $961,593 | +13.0% | | Total operating expenses | $2,305,707 | $2,043,420 | +12.8% | | Loss from operations | $(1,219,010) | $(1,081,827) | +12.7% | | Net loss | $(1,212,991) | $(1,067,957) | +13.6% | | Loss per common share - Basic/Diluted | $(0.08) | $(0.07) | -14.3% | - Revenues increased by **20.4%** year-over-year, primarily driven by higher commercial revenues, particularly Software as a Service (SaaS) revenue, which grew by **45%**[11](index=11&type=chunk)[91](index=91&type=chunk) - Gross profit percentage decreased from **90.5%** in Q1 2018 to **85.0%** in Q1 2019, mainly due to increased hosting costs on SaaS revenue[11](index=11&type=chunk)[92](index=92&type=chunk) [Statement of Stockholders' Equity](index=6&type=section&id=Statement%20of%20Stockholders'%20Equity%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section details changes in stockholders' equity, reflecting the impact of net loss and stock-based compensation for the period | Metric | December 31, 2018 ($) | March 31, 2019 ($) | | :-------------------------- | :---------------- | :------------- | | Total Stockholders' Equity | $12,919,705 | $12,076,453 | | Stock-based compensation | $369,739 | - | | Net loss | $(1,212,991) | - | - Total stockholders' equity decreased from **$12,919,705** at December 31, 2018, to **$12,076,453** at March 31, 2019, primarily due to the net loss incurred during the period, partially offset by stock-based compensation expense[13](index=13&type=chunk) [Statements of Cash Flows](index=7&type=section&id=Statements%20of%20Cash%20Flows%20for%20the%20three%20months%20ended%20March%2031%2C%202019%20and%202018%20(Unaudited)) This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 and 2018 | Cash Flow Activity | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(542,249) | $(864,559) | | Net cash provided by (used in) investing activities | $6,832 | $(67,431) | | Net cash provided by financing activities | $- | $687,521 | | Net decrease in cash | $(535,417) | $(244,469) | | Cash, end of period | $3,840,600 | $7,765,692 | - Net cash used in operating activities decreased by **$322,310**, primarily due to the timing of collections on accounts receivable[15](index=15&type=chunk)[97](index=97&type=chunk) - Investing activities shifted from cash used (**$67,431**) in Q1 2018 to cash provided (**$6,832**) in Q1 2019, mainly due to reduced purchases of property and equipment[15](index=15&type=chunk)[97](index=97&type=chunk) - No cash was provided by financing activities in Q1 2019, compared to **$687,521** in Q1 2018 from the exercise of stock options[15](index=15&type=chunk)[97](index=97&type=chunk) [Notes to Financial Statements](index=8&type=section&id=Notes%20to%20Financial%20Statements%20(Unaudited)) This section provides detailed explanations and disclosures supporting the unaudited financial statements, covering accounting policies, assets, liabilities, and equity [1. Nature of Business](index=8&type=section&id=1.%20NATURE%20OF%20BUSINESS) This section describes Intellicheck, Inc.'s core business activities, products, and its financial outlook regarding working capital - Intellicheck, Inc. develops, integrates, and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and access control in government, military, and commercial markets[16](index=16&type=chunk) - Key products include Retail ID®, Age ID®, Law ID®, and Defense ID®[16](index=16&type=chunk) - The company expects existing resources and revenues to satisfy working capital requirements for at least the next 12 months, but may need additional financing if performance falls short or expenses exceed expectations[18](index=18&type=chunk)[19](index=19&type=chunk) [2. Significant Accounting Policies](index=8&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines the key accounting principles and methods used in preparing the financial statements, including revenue recognition and lease accounting - The company adopted ASU 2016-02, Leases, effective January 1, 2019, recognizing a right-to-use asset of approximately **$266,000** and an operating lease liability of approximately **$274,000**, with no significant impact on the statement of operations[27](index=27&type=chunk) - Revenue from Software as a Service (SaaS) and other subscription/support services is recognized over time based on usage[40](index=40&type=chunk)[41](index=41&type=chunk) - Revenue from equipment sales is recognized at a point in time when the customer obtains control[42](index=42&type=chunk) Revenue Disaggregation by Product and Service (Three Months Ended March 31) | Products and services | 2019 ($) | 2018 ($) | | :-------------------------- | :--------- | :--------- | | Software as a Service (SaaS) | $861,249 | $594,690 | | Other subscription and support services | $268,170 | $294,199 | | Equipment | $116,412 | $119,722 | | Non-recurring services | $7,143 | $17,248 | | Extended warranties on equipment | $20,678 | $33,851 | | Other | $5,342 | $2,352 | | **Total Revenues** | **$1,278,994** | **$1,062,062** | - Two customers accounted for approximately **26%** of total revenues in Q1 2019 and **33%** in Q1 2018, both associated with commercial identity sales[50](index=50&type=chunk) [3. Intangible Assets](index=14&type=section&id=3.%20INTANGIBLE%20ASSETS) This section details the carrying amount and amortization expense related to the company's intangible assets Intangible Assets Carrying Amount and Amortization | Metric | Amount ($) | | :-------------------------- | :--------- | | Net balance at December 31, 2018 | $306,575 | | Amortization expense (Q1 2019) | $(39,252) | | Net balance at March 31, 2019 | $267,323 | - Amortization expense for intangible assets was **$39,252** for the three months ended March 31, 2019, consistent with **$39,251** in the prior year period[55](index=55&type=chunk) [4. Note Receivable](index=14&type=section&id=4.%20NOTE%20RECEIVABLE) This section reports the outstanding balance of the note receivable from the sale of wireless enterprise assets - The total note receivable from the sale of wireless enterprise assets was **$60,765** at March 31, 2019, down from **$71,137** at December 31, 2018[56](index=56&type=chunk) [5. Debt](index=14&type=section&id=5.%20DEBT) This section describes the company's revolving credit facility and its available borrowing capacity - The company entered into a revolving credit facility with Citibank on February 6, 2019, allowing borrowings up to **$2,000,000**. As of March 31, 2019, there were no outstanding amounts, and **$2,000,000** was available[57](index=57&type=chunk) [6. Accrued Expenses](index=15&type=section&id=6.%20ACCRUED%20EXPENSES) This section provides a breakdown of accrued expenses, including professional fees, payroll, and severance payments Accrued Expenses Breakdown | Category | March 31, 2019 ($) | December 31, 2018 ($) | | :------------------ | :------------- | :---------------- | | Professional fees | $103,976 | $69,406 | | Payroll and related | $484,316 | $406,925 | | Severance payments | $79,203 | $158,406 | | Other | $69,239 | $92,181 | | **Total** | **$736,734** | **$726,918** | - Accrued expenses increased slightly to **$736,734** at March 31, 2019, from **$726,918** at December 31, 2018, driven by higher professional fees and payroll-related accruals, partially offset by a decrease in severance payments[58](index=58&type=chunk) [7. Income Taxes](index=15&type=section&id=7.%20INCOME%20TAXES) This section discusses the company's net operating loss carryforwards and the valuation allowance against deferred tax assets - The company had approximately **$15 million** in net operating loss (NOL) carryforwards at December 31, 2018, with varying expiration dates[59](index=59&type=chunk) - A full valuation allowance has been recorded against net deferred tax assets due to uncertainty regarding their realizability[59](index=59&type=chunk) [8. Share Based Compensation](index=15&type=section&id=8.%20SHARE%20BASED%20COMPENSATION) This section details the stock-based compensation expense, outstanding options, and unrecognized compensation costs Stock-Based Compensation Expense (Three Months Ended March 31) | Category | 2019 ($) | 2018 ($) | | :-------------------------- | :--------- | :--------- | | Selling, general & administrative | $366,523 | $54,434 | | Research & development | $3,216 | $6,274 | | **Total Compensation Cost** | **$369,739** | **$60,708** | - Total stock-based compensation expense significantly increased to **$369,739** in Q1 2019 from **$60,708** in Q1 2018[60](index=60&type=chunk) - Outstanding stock options increased to **1,516,495 shares** at March 31, 2019, with a weighted average exercise price of **$1.80** and an aggregate intrinsic value of **$2,632,195**[63](index=63&type=chunk) - As of March 31, 2019, there was **$638,237** of unrecognized compensation cost related to unvested stock options and RSUs, expected to be recognized over approximately **3.56 years**[66](index=66&type=chunk) [9. Common Stock](index=17&type=section&id=9.%20COMMON%20STOCK) This section provides information on the company's common stock, including details of a past public offering - On August 4, 2017, the company completed a public offering of **4,168,750 shares** at **$2.25 per share**, generating approximately **$8,670,000** in net proceeds[69](index=69&type=chunk) [10. Legal Proceedings](index=17&type=section&id=10.%20LEGAL%20PROCEEDINGS) This section confirms the company is not currently involved in any material legal or regulatory proceedings - The company is not currently involved in any legal or regulatory proceedings expected to have a material effect on its business[70](index=70&type=chunk) [11. Commitments and Contingencies](index=17&type=section&id=11.%20COMMITMENTS%20AND%20CONTINGENCIES) This section outlines the company's lease obligations and remaining severance liabilities - The company leases offices in Melville, New York, with monthly payments of **$10,334**, expiring March 31, 2021. Rent and utilities expense for Q1 2019 was **$31,404**[71](index=71&type=chunk) - A severance liability of **$79,203** remained at March 31, 2019, related to payments to a former CEO[72](index=72&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Intellicheck's Q1 2019 financial performance, highlighting revenue growth, increased expenses, and liquidity, alongside critical accounting policies and Adjusted EBITDA [Overview](index=18&type=section&id=Overview) This section provides a general introduction to Intellicheck's business and recent corporate restructuring - Intellicheck is a technology company focused on threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and access control in government, military, and commercial markets[76](index=76&type=chunk) - The company's wholly-owned subsidiaries, Mobilisa, Inc. and Positive Access Corporation, merged into Intellicheck on December 31, 2018[75](index=75&type=chunk) [Critical Accounting Policies and the Use of Estimates](index=18&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) This section outlines the key accounting policies requiring significant management judgment and estimates, including goodwill impairment testing - Critical accounting policies include revenue recognition, stock-based compensation, deferred taxes, and commitments and contingencies, which involve significant management judgments and estimates[78](index=78&type=chunk) - Goodwill, totaling **$8,101,661** as of March 31, 2019, is tested annually for impairment, with no impairment identified in Q1 2019[79](index=79&type=chunk)[82](index=82&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations%20(All%20figures%20have%20been%20rounded%20to%20the%20nearest%20%241%2C000)) This section analyzes the company's financial performance for the quarter, focusing on revenue growth, gross profit, operating expenses, and net loss Key Financial Results (Three Months Ended March 31) | Metric | 2019 ($) | 2018 ($) | Change (YoY) (%) | | :-------------------------- | :--------- | :--------- | :----------- | | Revenues | $1,279,000 | $1,062,000 | +20% | | SaaS revenue | $861,000 | $595,000 | +45% | | Gross profit | $1,087,000 | $962,000 | +13% | | Gross profit margin | 85.0% | 90.5% | -5.5 pp | | Operating expenses | $2,306,000 | $2,043,000 | +13% | | Net loss | $(1,213,000) | $(1,068,000) | +14% | - The **20%** increase in revenues was primarily driven by higher commercial revenues, with SaaS revenue increasing by **45%**[91](index=91&type=chunk) - Operating expenses increased by **13%** due to higher stock-based compensation costs and an increase in development personnel headcount[93](index=93&type=chunk) [Liquidity and Capital Resources](index=20&type=section&id=Liquidity%20and%20Capital%20Resources%20(All%20figures%20have%20been%20rounded%20to%20the%20nearest%20%241%2C000)) This section assesses the company's ability to meet its short-term and long-term obligations, including cash position, working capital, and future financing plans Liquidity and Capital Resources (as of March 31, 2019) | Metric | Amount ($) | | :-------------------------- | :--------- | | Cash and cash equivalents | $3,841,000 | | Working capital | $3,357,000 | | Total assets | $13,923,000 | | Stockholders' equity | $12,076,000 | - Net cash used in operating activities decreased to **$542,000** in Q1 2019 from **$865,000** in Q1 2018, mainly due to improved accounts receivable collections[97](index=97&type=chunk) - The company anticipates its available cash, expected cash from operations, and a **$2,000,000** revolving credit facility to be sufficient for working capital and capital expenditures for at least the next 12 months[99](index=99&type=chunk)[100](index=100&type=chunk) - A universal shelf registration statement on Form S-3 allows the company to offer up to **$25,000,000** in securities for future capital needs[102](index=102&type=chunk) [Adjusted EBITDA](index=21&type=section&id=Adjusted%20EBITDA) This section defines and reconciles Adjusted EBITDA, a non-GAAP measure, to GAAP net loss, providing insight into operational performance - Adjusted EBITDA is a non-GAAP measure used by management and investors to evaluate operational strength, excluding non-cash charges and non-operating items[106](index=106&type=chunk)[107](index=107&type=chunk) Reconciliation of GAAP Net Loss to Non-GAAP Adjusted EBITDA (Three Months Ended March 31) | Metric | 2019 ($) | 2018 ($) | | :-------------------------- | :------------- | :------------- | | Net loss | $(1,212,991) | $(1,067,957) | | Interest and other income | $(6,019) | $(13,870) | | Depreciation and amortization | $62,110 | $59,150 | | Stock-based compensation expense | $369,739 | $60,708 | | **Adjusted EBITDA** | **$(787,161)** | **$(961,969)** | - Adjusted EBITDA improved to **$(787,161)** in Q1 2019 from **$(961,969)** in Q1 2018, indicating a reduced operational loss when excluding certain non-cash and non-operating items[108](index=108&type=chunk) [Off-Balance Sheet Arrangements](index=22&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of any off-balance sheet financing arrangements or special purpose entities - The company has not entered into any off-balance sheet financing arrangements or established any special purpose entities[109](index=109&type=chunk) [Forward Looking Statements](index=22&type=section&id=Forward%20Looking%20Statements) This section advises that the report contains forward-looking statements subject to uncertainties, with no obligation for updates - The report contains forward-looking statements subject to inherent uncertainties and changes in circumstances, with no obligation to update them[110](index=110&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=22&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses the company's exposure to market risks, primarily focusing on concentrations of credit risk related to its cash holdings - The company's primary market risk relates to concentrations of credit risk, specifically cash held in a single financial institution[111](index=111&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2019, and reports no material changes in internal controls over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2019[113](index=113&type=chunk) - No material changes in internal controls over financial reporting occurred during the period covered by the report[115](index=115&type=chunk) [PART II - OTHER INFORMATION](index=23&type=section&id=Part%20II%20-%20Other%20Information) This section covers additional information not included in the financial statements, such as legal proceedings, risk factors, and exhibits [Item 1. Legal Proceedings](index=23&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is not involved in any legal proceedings - The company is not currently involved in any legal proceedings[117](index=117&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) This section highlights potential risks to the company's business and financial performance, including adverse economic conditions and reliance on government business - Current economic conditions, such as a decline in business and consumer spending, could adversely affect the company's business and financial performance[118](index=118&type=chunk)[119](index=119&type=chunk) - Operating results may be impacted by the overall health of the North American economy, despite a significant portion of business being with the U.S. government[119](index=119&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[121](index=121&type=chunk) [Item 3. Defaults Upon Senior Securities](index=23&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities - No defaults upon senior securities to report[121](index=121&type=chunk) [Item 4. Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[121](index=121&type=chunk) [Item 5. Other Information](index=24&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - No other information to report[122](index=122&type=chunk) [Item 6. Exhibits](index=24&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents List of Exhibits | Exhibit No. | Description | | :---------- | :------------------------------------------ | | 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | | 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | | 32 | 18 U.S.C. Section 1350 Certifications | | 101.INS | XBRL Instance Document | | 101.SCH | XBRL Taxonomy Extension Schema | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | | 101.LAB | XBRL Taxonomy Extension Label Linkbase | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | [Signatures](index=25&type=section&id=Signatures) This section confirms the official signing of the report by the company's President, CEO, and CFO - The report is signed by Bryan Lewis, President and Chief Executive Officer, and Bill White, Chief Financial Officer, on May 10, 2019[125](index=125&type=chunk)[126](index=126&type=chunk)

Intellicheck, Inc. (NYSEMKT:IDN) Q1 2019 Earnings Conference Call May 1, 2019 4:30 PM ET Company Participants Gar Jackson - Investor Relations Bryan Lewis - Chief Executive Officer Bill White - Chief Financial Officer Conference Call Participants Yi Fu Lee - Oppenheimer Roger Liddell - Clear Harbor Asset Management Michael Samuels - Berthel Fisher Amy Norflus - Neuberger Berman Operator Greetings, and welcome to the Intellicheck’s First Quarter 2019 Earnings Conference Call. At this time, all participants a ...

Intellicheck, Inc. (NASDAQ:IDN) Q4 2018 Earnings Conference Call March 21, 2019 4:30 PM ET Company Participants Gar Jackson - IR Bryan Lewis - CEO Bill White - CFO Conference Call Participants Mike Pochucha - Northland Capital Markets Yi Fu Lee - Oppenheimer Roger Liddell - Clear Harbor Asset Management Ashok Kumar - ThinkEquity Amy Norflus - Neuberger Berman Operator Greetings, and welcome to Intellicheck Fourth Quarter and Year-End 2018 Earnings Call. At this time, all participants are in listen-only mode ...

PART I [Business](index=4&type=section&id=Item%201.%20Business) Intellicheck, Inc. develops threat identification and identity authentication solutions for commercial and government sectors, primarily through SaaS offerings [Overview](index=4&type=section&id=Overview) - Intellicheck develops and markets threat identification and identity authentication solutions for retail fraud prevention, law enforcement, and government/military access control[12](index=12&type=chunk) - Key products include Retail ID® (fraud prevention), Age ID® (age verification), Law ID® (law enforcement), and Defense ID® (government/military access control)[12](index=12&type=chunk) - The company plans to expand by increasing market share, entering new markets, and enhancing products with features like online applications and biometrics[13](index=13&type=chunk) [Our Products and Services](index=6&type=section&id=Our%20Products%20and%20Services) - Products are generally sold as Software as a Service (SaaS), where customers pay for a cloud-based service[21](index=21&type=chunk) - The core technology, ID Check®, is embedded in product lines like Retail ID®, Law ID®, and Age ID®, and is capable of reading and verifying encoded information on driver licenses and military IDs from the US and Canada[23](index=23&type=chunk)[25](index=25&type=chunk) - Commercial products focus on fraud reduction (Retail ID®), age verification (Age ID®), and workflow efficiency (Guest ID®, Instant Credit Application Kiosks)[28](index=28&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk)[39](index=39&type=chunk) - Government products include Defense ID® for facility protection, Law ID® for officer safety via real-time database queries, and PORT ID for securing ports[41](index=41&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk) [Strategy](index=9&type=section&id=Strategy) - The company's objective is to be a leading security company in the identity sector, focusing on both commercial and government systems[46](index=46&type=chunk) - Key commercial strategies include marketing technology for productivity enhancement, developing strategic alliances (e.g., with Lenel, AMAG, Zebra), strengthening sales with a focus on SaaS licenses, and protecting intellectual property[46](index=46&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk)[51](index=51&type=chunk) - Key government strategies involve enhancing products like Defense ID for new sectors (law enforcement, port security), providing TWIC® reader applications, and increasing access to multiple law enforcement and government databases[52](index=52&type=chunk)[53](index=53&type=chunk)[55](index=55&type=chunk) [Major Customers](index=13&type=section&id=Major%20Customers) Top 10 Customers' % of Total Revenue | Year | Top 10 Customers' % of Total Revenue | | :--- | :--- | | 2018 | 52% | | 2017 | 57% | - The company has a significant concentration of revenue from a limited number of major customers, although it anticipates the customer base will expand and reduce this dependency in the future[72](index=72&type=chunk) [Competition](index=13&type=section&id=Competition) - The company operates in an intensely competitive and rapidly changing industry[74](index=74&type=chunk) - Competitors in the government identity sector include Idemia USA, HID Global, and U.S. government systems like DBIDS and AIE[75](index=75&type=chunk) - Zebra and Honeywell offer embedded driver's license reading solutions, but these are noted to simply read the barcode rather than authenticating it[75](index=75&type=chunk) [Research and Development](index=14&type=section&id=Research%20and%20Development) R&D Spending | Year | R&D Spending | | :--- | :--- | | 2018 | $2,904,166 | | 2017 | $1,916,107 | - R&D efforts are primarily focused on the identity sector, including modifying existing software for customers and developing new software solutions[79](index=79&type=chunk) [Intellectual Property](index=14&type=section&id=Intellectual%20Property) - As of the report date, the company holds **sixteen (16) U.S. patents**, **one (1) Canadian patent**, and **one (1) United Kingdom patent**, with **six additional applications pending**[80](index=80&type=chunk) - Patents cover key aspects of identification document authentication and verification, as well as Defense ID System technology[80](index=80&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including historical financial losses, customer concentration, long sales cycles, and technology-related vulnerabilities - The company has a history of financial losses, with a net loss of **$3.96 million** in 2018 and an accumulated deficit of **$114.4 million** as of December 31, 2018[97](index=97&type=chunk) - A significant business risk is the high customer concentration, with the **ten largest customers accounting for 52% of total net revenues in 2018**[132](index=132&type=chunk) - The business strategy targeting large retailers and government agencies exposes the company to long sales and implementation cycles, which can adversely impact the timing of revenue recognition[99](index=99&type=chunk)[100](index=100&type=chunk) - The company's proprietary software relies on data from government agencies; if access to this data is lost, the software's utility would be diminished[98](index=98&type=chunk) - Potential security breaches of the company's information systems could compromise sensitive data, leading to liability, reputational damage, and loss of customer confidence[123](index=123&type=chunk)[124](index=124&type=chunk) [Properties](index=22&type=section&id=Item%202.%20Properties) The company's Melville, New York headquarters occupies 5,400 square feet under a lease expiring March 31, 2021, deemed adequate for current needs - The corporate headquarters is located in Melville, New York[135](index=135&type=chunk) - The company leases approximately **5,400 square feet** of office space, with the lease set to expire on **March 31, 2021**[135](index=135&type=chunk) [Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) As of the report date, Intellicheck, Inc. is not involved in any legal or regulatory proceedings that are expected to have a material adverse effect on its business - The company is not currently involved in any legal proceedings expected to have a material adverse effect on the business[136](index=136&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Intellicheck's common stock trades on NYSE MKT under 'IDN', with no cash dividends paid or anticipated, and details on outstanding equity securities - The company's common stock is traded on the NYSE MKT Stock Exchange under the symbol **"IDN"**[139](index=139&type=chunk) Common Stock Price Range | Period | High Price | Low Price | | :--- | :--- | :--- | | **2018** | | | | Q1 | $2.87 | $1.60 | | Q2 | $2.36 | $1.74 | | Q3 | $2.75 | $1.91 | | Q4 | $2.63 | $1.96 | | **2017** | | | | Q1 | $3.10 | $1.98 | | Q2 | $4.20 | $2.78 | | Q3 | $3.84 | $2.42 | | Q4 | $3.05 | $2.11 | - No cash dividends were paid in fiscal year 2018, and none are anticipated in the foreseeable future[141](index=141&type=chunk) [Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents five years of selected financial data, highlighting 2018 revenues of **$4.43 million** and a net loss of **$3.96 million** Selected Financial Data (In thousands, except per share data) | (In thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Statement of Operations Data:** | | | | | | | Revenues | $4,433 | $3,598 | $3,839 | $7,015 | $6,613 | | Loss from operations | $(4,093) | $(6,080) | $(5,750) | $(5,480) | $(7,645) | | Net loss | $(3,964) | $(6,021) | $(5,735) | $(5,334) | $(7,644) | | Net loss per common share (Basic/Diluted) | $(0.26) | $(0.48) | $(0.58) | $(0.55) | $(1.59) | | **Balance Sheet Data (As of Dec 31):** | | | | | | | Cash | $4,376 | $8,010 | $3,092 | $5,953 | $2,966 | | Total assets | $14,461 | $17,882 | $14,534 | $18,473 | $15,814 | | Stockholders' equity | $12,920 | $16,009 | $12,935 | $16,326 | $13,148 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses 2018 financial performance, highlighting a **23% revenue increase** to **$4.4 million**, improved gross margin, and a narrowed net loss [Results of Operations (2018 vs 2017)](index=28&type=section&id=Results%20of%20Operations%20%282018%20vs%202017%29) Financial Performance (2018 vs 2017) | Metric | 2018 | 2017 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $4,433,000 | $3,598,000 | +$835,000 | +23% | | SaaS Revenue | $2,696,000 | $1,659,000 | +$1,037,000 | +63% | | Gross Profit | $4,047,000 | $3,076,000 | +$970,000 | +31.5% | | Gross Margin | 91% | 85% | +6 pts | - | | Operating Expenses | $8,140,000 | $9,157,000 | -$1,017,000 | -11% | | Net Loss | $(3,964,000) | $(6,021,000) | +$2,057,000 | -34.2% | - The increase in 2018 revenue was primarily driven by higher commercial revenues, specifically a **63% increase in Software as a Service (SaaS) revenue**[172](index=172&type=chunk) - Operating expenses decreased by **11%** in 2018, mainly because 2017 included a **$1.38 million impairment charge** on intangible assets and higher severance costs[174](index=174&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Key Financial Metrics (as of Dec 31, 2018) | Metric (as of Dec 31, 2018) | Amount | | :--- | :--- | | Cash | $4,376,000 | | Working Capital | $4,244,000 | | Total Assets | $14,461,000 | | Stockholders' Equity | $12,920,000 | - Cash decreased by **$3.6 million** during 2018, with **$4.2 million** used in operating activities[178](index=178&type=chunk) - In August 2017, the company raised approximately **$8.67 million** in net proceeds from a public offering of common stock[179](index=179&type=chunk) - The company maintains a **$2 million revolving credit facility**, which was unused as of December 31, 2018. Management anticipates that available cash and credit will be sufficient for at least the next 12 months[180](index=180&type=chunk)[182](index=182&type=chunk) [Adjusted EBITDA](index=29&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA (in thousands) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | **Net loss** | **$(3,963,576)** | **$(6,020,505)** | | Interest and other | $(129,923) | $(59,841) | | Depreciation and amortization | $245,548 | $412,351 | | Stock-based compensation expense | $186,707 | $435,679 | | Impairment of intangible assets | - | $1,375,422 | | **Adjusted EBITDA** | **$(3,661,244)** | **$(3,856,894)** | - Adjusted EBITDA is a non-GAAP measure used by management to evaluate operational strength. The Adjusted EBITDA loss improved slightly to **$(3.66 million)** in 2018 from **$(3.86 million)** in 2017[187](index=187&type=chunk)[189](index=189&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2018, management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[206](index=206&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)[209](index=209&type=chunk) - No changes occurred in the company's internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[208](index=208&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=33&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2019 Proxy Statement - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2019 Proxy Statement[212](index=212&type=chunk) [Executive Compensation](index=33&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding Executive Compensation is incorporated by reference from the 2019 Proxy Statement - Information regarding Executive Compensation is incorporated by reference from the 2019 Proxy Statement[213](index=213&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=33&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding Security Ownership and Equity Compensation Plan Information is incorporated by reference from the 2019 Proxy Statement - Information regarding Security Ownership and Equity Compensation Plan Information is incorporated by reference from the 2019 Proxy Statement[213](index=213&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=33&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding Certain Relationships, Related Transactions, and Director Independence is incorporated by reference from the 2019 Proxy Statement - Information regarding Certain Relationships, Related Transactions, and Director Independence is incorporated by reference from the 2019 Proxy Statement[214](index=214&type=chunk) [Principal Accounting Fees and Services](index=33&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding Principal Accounting Fees and Services is incorporated by reference from the 2019 Proxy Statement - Information regarding Principal Accounting Fees and Services is incorporated by reference from the 2019 Proxy Statement[214](index=214&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=33&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the consolidated financial statements and various exhibits filed as part of the Form 10-K report - This item includes the consolidated financial statements for the years ended December 31, 2018 and 2017[216](index=216&type=chunk) - A list of exhibits is provided, including the Certificate of Incorporation, By-laws, material contracts such as employment agreements, and certifications required by the Sarbanes-Oxley Act[217](index=217&type=chunk) Financial Statements [Consolidated Balance Sheets](index=39&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2018, total assets decreased to **$14.5 million** from **$17.9 million** in 2017, with stockholders' equity at **$12.9 million** Consolidated Balance Sheets (As of December 31) | (As of December 31) | 2018 | 2017 | | :--- | :--- | :--- | | **Assets** | | | | Cash | $4,376,017 | $8,010,161 | | Total current assets | $5,749,203 | $8,966,944 | | Goodwill | $8,101,661 | $8,101,661 | | **Total assets** | **$14,460,781** | **$17,882,104** | | **Liabilities & Equity** | | | | Total current liabilities | $1,504,788 | $1,626,908 | | **Total liabilities** | **$1,541,076** | **$1,873,051** | | **Total stockholders' equity** | **$12,919,705** | **$16,009,053** | [Consolidated Statements of Operations](index=40&type=section&id=Consolidated%20Statements%20of%20Operations) For 2018, revenues were **$4.43 million** and gross profit **$4.05 million**, resulting in a net loss of **$3.96 million**, an improvement from 2017 Consolidated Statements of Operations (For the Year Ended December 31) | (For the Year Ended December 31) | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $4,433,454 | $3,598,296 | | Gross profit | $4,046,837 | $3,076,461 | | Total operating expenses | $8,140,336 | $9,156,807 | | Loss from operations | $(4,093,499) | $(6,080,346) | | **Net loss** | **$(3,963,576)** | **$(6,020,505)** | | Loss per common share (Basic/Diluted) | $(0.26) | $(0.48) | - The 2017 statement of operations includes an impairment charge of **$1.38 million** on intangible assets, which was not present in 2018 and contributed significantly to the higher net loss in 2017[237](index=237&type=chunk) [Consolidated Statements of Cash Flows](index=42&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In 2018, net cash used in operating activities was **$4.2 million**, leading to a **$3.6 million** net decrease in cash, ending the year with **$4.4 million** Consolidated Statements of Cash Flows (For the Year Ended December 31) | (For the Year Ended December 31) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,220,611) | $(3,745,285) | | Net cash (used in) provided by investing activities | $(101,054) | $4,846 | | Net cash provided by financing activities | $687,521 | $8,658,428 | | **Net (decrease) increase in cash** | **$(3,634,144)** | **$4,917,989** | | Cash, beginning of year | $8,010,161 | $3,092,172 | | **Cash, end of year** | **$4,376,017** | **$8,010,161** | [Notes to Consolidated Financial Statements](index=43&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including ASC 606 adoption, a **$1.38 million** intangible asset impairment in 2017, and deferred tax asset valuation allowance - The company adopted revenue recognition standard ASC 606 on January 1, 2018, using the modified retrospective method, which did not result in a material change to how revenue is recorded but enhanced disclosures[259](index=259&type=chunk)[260](index=260&type=chunk) - In 2017, the company recorded an impairment charge of **$1.38 million** on intangible assets (tradenames, patents, and customer relationships) acquired in the Mobilisa acquisition due to a projected loss of revenue and a shift in marketing strategy. No impairment was recognized in 2018[256](index=256&type=chunk) - The company has a net operating loss (NOL) carryforward of approximately **$15 million** as of December 31, 2018, which is available to offset future taxable income. A full valuation allowance has been recorded against net deferred tax assets due to uncertainty of realization[315](index=315&type=chunk)[317](index=317&type=chunk) - Two customers accounted for **31% of revenue in 2018**, and two customers accounted for **26% of revenue in 2017**, indicating significant customer concentration[281](index=281&type=chunk)