Earnings Transcript for IWSY - Q1 Fiscal Year 2020

Operator: Good afternoon, everyone, and thank you for participating in ImageWare Systems First Quarter Financial Results and Corporate Update Call to discuss the company’s business and operations. Joining us today are ImageWare Systems’ President and CEO, Ms. Kristin Taylor; and the company’s CFO, Mr. Jonathan Morris; as well as Mr. Mark Blackman, Vice President of Product Management. Following those remarks, management will answer your questions. Any statements made on this call are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, if, should and will and similar expressions as they relate to ImageWare Systems Incorporated are intended to identify such forward-looking statements. ImageWare may, from time to time, update these publicly announced projections, but it is not obligated to do so. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will, in fact, occur. These projections are subject to change and could differ materially from final reported results. For a discussion of such risks and uncertainties, please see risk factors in ImageWare’s annual report on Form 10-K for the fiscal year ended December 31, 2019, and other reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as amended. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. I remind everyone that this call will be available for replay through July 2, 2020, starting at 7

Jonathan Morris: Thank you, operator, and welcome to those of you joining our call today. Our financial results are available in the recently published news release and Form 10-Q. For context on today’s call, I’ll provide a brief summary of those results. Revenue for the 3 months ended March 31, 2020, totaled $0.8 million, down from $0.9 million for 2019. The revenue for both years primarily reflected our legacy business. Gross profit for the 3 months ended March 31, 2020 and the comparable period of 2019, each totaled approximately $0.7 million. Gross margin increased to 85% in 2020 compared with 78% in 2019, due to our continued efforts to reduce costs. Loss from operations for the 3 months ended March 31, 2020, was negative $3.1 million compared with negative $3.6 million for the same quarter in 2019. We ended the first quarter with $53,000 in cash. While the effects of the coronavirus are difficult to estimate and the situation remains dynamic, we have experienced preliminary negative impact primarily through increased sales cycles. We, however, view this as a relatively short-term disruption that does not impact our long-term strategy and initiatives. As previously reported, on May 4, 2020, we entered into a PPP Loan agreement for approximately $1.571 million of government stimulus funds issued under the CARES Act administered by the SBA. We intend to use proceeds from the PPP Loan, primarily for payroll costs, rent, and utilities. The PPP loan has a 1% interest rate per annum, which matures on May 4, 2022. We continue to evaluate the use of qualifying expenses under which the loan may be forgivable in part or in full. As noted last quarter, our balance sheet was enhanced and our financial outlook was materially strengthened by several recent capital infusions. We continue to have the right, not the obligation to call in a $10.3 million commitment from Lincoln Park Capital. That commitment does not restrict our ability to receive capital from alternative sources. We continue ongoing discussions with a number of potential sources for significant long-term capital now that our balance sheet and financial outlook have materially improved, and we’ll share more information as developments evolve. This concludes my financial summary. I will now turn the call over to Chris for the progress update of our business strategy. Kris?

Kristin Taylor: Thank you, Jonathan, and thank you to everyone for joining us today. I hope you are all continuing to stay safe and take precautions as less restrictive pandemic measures unfold. As of today, ImageWare is continuing to efficiently operate through an extremely productive and committed distributed workforce. We’ve extended our remote workforce timeline to early fall to ensure the health and safety of our team, and we will continue to do so until the health crisis is over. June marks my fourth month as your President and CEO, and I’m pleased to share that I’ve been recently elected to serve you on the ImageWare Board of Directors. We are in the midst of reshaping the existing Board, which has been in place for more than a decade. My election was the first of more changes forthcoming in this area over the next several months. I am happy to have accomplished a number of items as part of my 100-day strategy, despite the continued global crisis and economic setbacks. I’ve been leary to walk into this new assignment, ready to dismantle things. Before I truly understand what needs to change or before I can create the vision for what new capabilities could be built, that would give the company strength to further its impact. I am convinced now that what has been built over the 3 decades at ImageWare is the basis of what will be a thriving company. ImageWare created a sizable market serving law enforcement in state and local government markets. We leveraged the biometric engine, BE, which we created from the ground up in large federal government end-to-end projects. And we decided to play in the access control market by embedding our biometric authentication software into physical and logical access cards. As I spoke about approximately a month ago, we are busy updating and upgrading these platforms to be able to compete more aggressively. Mark Blackman will talk more about this shortly. Some of the areas we have started to knock down in the first 100 days are

Mark Blackman: Thank you, Kristin. It would be my pleasure. As Kristin mentioned, the team has been actively auditing products and processes to better understand what is working well and what is in need of improvement. The top-down analysis has identified many areas to refine both in-product strategy and execution. On the product side, while we have a number of compelling offerings, many of our products are targeted for updates. We are working to strategically update products with the latest in mobile and cloud technology, prioritized by market opportunity. This work will not only improve customer experience and capabilities but will also streamline development and lower the costs associated with product operations and support. Additionally, we have uncovered new opportunities to expand the reach within our existing customer base through the integration of product offerings, specifically within our Identity platform. With regards to our internal operations, we have restructured many processes and teams to enable greater agility and focus for the organization. Examples such as customer-focused feature prioritization, resource optimization and measuring and tracking key performance indicators or KPIs, will ensure we are efficiently building and deploying products that address the specific needs of the markets we serve, and we are seeing immediate results from these activities. For example, through an audit of system expenses, we have reduced cloud computing costs by 20% and have targeted additional savings in the near future. While we work to improve operations, in parallel, we are driving products forward. I am pleased to report that in April, we received iBeta PAD Level 1 compliance for our Biointellic Intelligent Anti-spoofing product. This is our liveness detection technology, leveraged across ImageWare software products to prevent presentation attacks by ensuring the captured biometric image is that of a live individual and not a picture or 3D mask. Our Biointellic is also available as a standalone product, enabling other companies to quickly integrate liveness detection into their offerings. For example, Contactable, an identity as a service company, has completed Biointellic integration into their proofing product for a large consumer, financial and banking opportunities in the Africa region. GoVerifyID is our enterprise-ready application, enabling enterprises to add cloud-based biometric MFA authentication to existing IAM infrastructure. A key differentiator from many of our other MFA offerings is the cloud-based matching of biometrics. When biometrics are securely stored to the cloud, employees can biometrically authenticate across a pool of shared computers or workstations. This is extremely useful, for example, in authenticating bank tellers as they move across terminals or call centers with many operators sharing a pool of workstations. Over the next quarter, sales and marketing will leverage this capability and their messaging to target opportunities in finance, health care and manufacturing. Also on GoVerifyID, we are scheduled to re-launch the product in July. The re-launch includes a new container and microservices-based architecture and refreshed mobile and desktop software clients. Both enhancements will greatly reduce the cost of development and system operations. The new architecture will enable a higher level of automation, providing interested parties the ability to test and purchase GoVerifyID in a self-service manner. Additionally, user experience greatly improves with regards to look and performance of the mobile applications, bringing it in line with competitor offerings. Along with GoVerifyID product changes, we are launching an external product website in Q3. Simplified messaging and pricing will also be part of this product refresh. Our Identity platform is a suite of products that address the biometric requirements of large-scale government and corporate clients. Examples where the Identity platform can be deployed include

Kristin Taylor: Thank you, Mark. You’ve heard today from two of our recent leadership additions

A - Kristin Taylor: And we appreciate the questions you submitted via e-mail this week. A reminder that many of your questions cover the same subject or similar subjects, we will answer your questions as we can with the best information available at this time. Some topics are best addressed in future quarterly updates. We will begin by answering questions on the subject of the biometric market in general and the biometric payment cards recently in the news. We have been asked to quantify the biometric market in its near-term outlook. We believe the total addressable MFA market opportunity will be approximately $4.5 billion by 2025. Biometric smart cards have been in the industry for many years, and ImageWare has been a leading developer of authentication and identification solutions using and encoding those cards for well over a decade. In fact, ImageWare has provided solutions for the federal and international governments using biometric smart cards that are used to authenticate individual identities and authorized and provision physical and logical access control. These solutions were built on our patented biometric engine and have been in production, as mentioned prior, for over a decade. Customers include government agencies and government transportation entities. At ImageWare, we always believe that biometric authentication would come to the consumer market in a big way. We were proven right when Apple introduced fingerprint into the iPhone. What followed was a wave of biometric use to secure phones that continues to grow today. We now see the market turning to biometrics to secure financial transactions using payment cards. The reason for this is clear to reduce fraud, which is a growing and persistent problem. At ImageWare, we see the inclusion of biometrics and payment cards as further proof that the biometric authentication market as a whole will continue to grow and that we are poised to provide the scalable solutions to support it. As sensor technology advances, the need for a scalable platform solution to support and enable the mass use of biometrics will be a critical component to adoption. ImageWare leads this endeavor with proven patented products that power some of the most demanding 24/7 mission-critical applications to date. The adoption of biometrics as part of financial transactions will continue to grow. We expect to grow with it and continue to be an integral part of it by providing the world’s most powerful biometric platform for identity authentication. As the use cases for identity authentication continue to evolve, we’re ready to support them with scalable turnkey solutions that have a strong track record of success due to our work in the government and consumer markets. Many of us read recently that IBM announced they were pulling their facial biometrics. IBM’s removal from the facial biometric market, combined with Amazon’s and Google’s actions to prevent using their facial recognition technology by law enforcement has been all over the news. Some have taken these actions further by supporting a facial recognition ban. It’s important to understand what this means for the industry and why facial recognition is receiving such a backlash. There are several issues that are of concern. The first is mass surveillance. In many countries, citizens and politicians see what happened when mass surveillance using facial recognition had been implemented in countries like China, Russia, and even the United Kingdom. Mass buying on innocent civilians has had unwanted and unexpected outcomes, such as social currency, misidentification, and more. And that’s the second issue, namely the gender and race bias that many facial recognition algorithms suffer from when used against large databases for identification. The risk of misidentifying someone based on their race or gender is too big of a problem to ignore. To be clear, ImageWare is not in the mass surveillance business. We do not develop solutions that support that type of application. For example, we provide identification solutions to law enforcement and to the government. These are based on controlled facial image captures, such as mugshots that are matched against known identities such as alleged, charged, and convicted criminals, not the general population. We provide authentication solutions that are used to verify a single person’s identity when they attempt to log into their network, their email, their health care record, and their financial institutions. These are specific solutions that are designed to enhance and protect privacy, not to take it away, as is the case with mass surveillance or the use of products such as ClearView.AI, which use any image of any person that can be taken with a cell phone or scrapped from social media and used to identify a complete stranger. Also in the news recently was a report that biometric payment cards are now being manufactured in China. While we’re not surprised to see fingerprint as the first modality tied to a biometric financial card, fingerprints are only one biometric modality or type and not the most inclusive one at that. An estimated 30% of the global population does not have an easily read or even readable fingerprint. Factors such as age, genetics, and even what you do for a living can have an impact on whether common fingerprint capture technology will be effective for a given person. At ImageWare, we pioneered the field of multimodal biometrics, the use of multiple biometric types to identify or authenticate an individual. From experience, we know that ultimately these types of biometric cards will have to include other types of biometric authentication other than fingerprint to be inclusive and gain mass adoption. Our patented technologies, products, and platforms enable multimodal biometric use cases like financial smart cards. They’re patented, scalable, and proven to provide the results needed for applications such as this. Next, Jonathan will address the number of questions we received regarding our S1 registration statement, the $10.3 million commitment by Lincoln Park Capital to purchase shares and the status of financing and other related matters. Jonathan?

Jonathan Morris: We continue to receive questions regarding the agreement with Lincoln Park Capital. I want to reinforce that the company has the right, not the obligation, to call in a $10.3 million commitment. This commitment, along with other capital infusions, have materially strengthened and enhanced our balance sheet as well as our financial outlook. The most recent LPC transaction on June 11 was part of the original agreement dated April 28, 2020. That commitment does not restrict our ability to receive capital from alternative sources. We have also been asked to discuss our capital raising efforts. As I mentioned earlier, we are evaluating a number of financing opportunities with several potential sources for significant long-term capital. Given our ongoing discussions with capital providers, it isn’t appropriate to talk about the structure or negotiations at this time.

Kristin Taylor: Thank you, Jonathan. This leads us to questions regarding our revenue model. Historically, federal state and local sales have made up the lion’s share of ImageWare’s revenues. We charge per project-based upon the clients’ needs and professional services required for their unique implementations. Government awards contracts in different yearly bundles based on needs and budget culminating into a project RFP. In the future, we will increase sales revenue through GoVerifyID, our enterprise offering, with monthly recurring revenue through a SaaS model. As expected, we have a number of questions about the status of historic projects and their revenue. The foreign government project we 8-K ed earlier this year is slow due to both of our countries being paralyzed with the COVID-19. We are waiting for this project to begin. Our projects with Contactable are present but represent small revenue at this point. The African telecom market opportunity is slow, given that the implementation is on feature phones. We will see more of a takeoff when users move to more sophisticated mobile phones with built-in biometric hardware capabilities. Next, we will turn to questions regarding revenue and estimated timing for new projects. Recognizing there have been delays in revenues with past projects, the sales team is making excellent progress with strong presentations that are resonating. I am directly involved with most of these meetings, pushing for deal wins. I want to assure you that we have productive conversations with real customers ranging in size from Fortune 1000s to SMBs to government. Most potential clients like our solutions but tell us that they have what they need for the moment in terms of authentication. Some have asked us to complete RFIs. Some have asked us to integrate into their existing MFA provider, and we are busy working on implementation path. We are waiting to hear on awards of business from a number of entities. As I have said before, it’s simply too soon for us to provide revenue estimates. I have studied the sales cycle at ImageWare. We are heavy in Q3 and Q4. Commercial deals typically take 3 to 6 months on average to close and government projects can take upwards of 3 years. We are finishing products, weaving platforms, driving new marketing and messaging campaigns, building a new website and simplifying the customer journey. We have great fundamentals. We just need more time to bring success back to the business. I believe that we have covered the subject of our IP and plans for monetization in our prepared remarks. So I will end the call with a brief closing comment. I thank everyone for joining our call. I look forward to our Q2 business update as we continue to build, innovate and expand products, fine tune the key features of our products and make substantive inroads towards our sales goals. We have made important recent progress, and we still have challenges ahead. With the support of our team and our investors, we will face them with great optimism and the conviction that we will be successful. I would like to encourage anyone with ongoing questions or feedback to reach out to our Investor Relations team or myself. Stay safe and be well. Thank you, again.

Operator: This concludes today’s conference. Thank you for your participation.