Earnings Transcript for IWSY - Q3 Fiscal Year 2020

Terri MacInnis: Good afternoon, everyone, and thank you for joining ImageWare Systems' Third Quarter Financial Results and Corporate Update to discuss the Company's business and operations. I'm Terri MacInnis, VP of Investor Relations. Joining us today are ImageWare's Chair Person and CEO, Kristin Taylor; and the Company's CFO, Jonathan Morris. Following those remarks, management will address your questions. Any statements made in today's discussion that 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 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. You 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 a replay of the webcast will be available for 90 days on the Company's website at www.iwsinc.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of ImageWare is strictly prohibited. Now, I'll turn the call over to Jonathan Morris, Chief Financial Officer. Jonathan?

Jonathan Morris: Thank you, Terri, and welcome to those of you joining our call today. Our financial results are available on our website and the recently published news release and form 10-Q. For context on today's discussion, I'll provide a brief summary of those results. Revenue for the three months ended September 30, 2020, grew 215% to $2.471 million, up from $785,000 for 2019. The revenue for both years primarily reflected our legacy business. This increase was primarily driven by services revenue for smart badge technology, including software integration services, system installation services and customer training for one large customer, the U.S. Department of Veterans Affairs for a combined value of $1.2 million. These larger than average fluctuations are typically due to project-oriented solutions for our federal customer segment. Based on our current visibility with market conditions, we believe that we will see an increase in federal government procurement and implementations with respect to Identity management initiatives. Gross profits for the three months ended September 30, 2020 grew 152% to $1.633 million, as compared with $647,000 in a comparable period of 2019. Gross margin decreased to 66% in 2020 compared with 82% in 2019 due to the one-time impact of additional services costs incurred for this one particular customer. Although changes in our costs are typically caused by revenue fluctuations, cost of services can also vary depending on the level and complexity of services required. We are encouraged that new bookings for the quarter increased 28% to $2,014,933 as compared with $1,573,140 in the same period last year. The 70 bookings include 46 new up sells plus 24 renewals. Our sales team is delivering growth through strong renewals and critical momentum with new business. A comment regarding bookings, historically our software licenses typically provided customers with the right to use our software in perpetuity, as it exists when made available to the customer. We're now moving customers to a subscription model with contracts that are typically 12 months in length and for which revenue will be recognized ratably over the course of the year. New bookings therefore represent new contracts signed in the period that will be recognized as revenue over the life of the contract. We believe this will significantly increase the lifetime value of our customers as well as enhance our profitability as we consistently maintain an approximate 95% renewal rate. We have also started a process with our existing customers where possible of transitioning them from the current annualized maintenance agreements in place to multi-year subscription agreements. Loss from operations for the three months ended September 30, 2020 was $1,070,000 compared with the loss of $3,044,000 for the same quarter in 2019. This improvement of approximately $1.9 million from the third quarter of 2019 is due primarily to increased revenue of approximately $1.7 million and the decrease in operating expenses of approximately $988,000 related to our continued efforts to reduce expenses. We ended the third quarter with 2,906,000i n cash. Before I begin our discussion of nine month results I'd like to talk about how our pipeline generation continues to be a major focus for both the sales and marketing teams. Monthly webinars are a valuable tool being used successfully to showcase products and new developments to both new and existing customers. In Q3, marketing launched a new security focus newsletter as yet another way to communicate our value proposition to our audiences. Marketing has driven a 50% increase in organic website traffic. Our updated website will support each of these efforts when it is launched early next year. In the third quarter, our growing sales pipeline added 79 net new near term opportunities. We have 56 new opportunities in our state and local law enforcement customer segment. And for our enterprise customers, we have 23 new opportunities including 15 for our GoVerifyID product, six for our enroll-proof solution platform, and two new significant opportunities for professional services. This compares with Q2 2020 in which we added more than 67 net new opportunities. It is important to note however that although we continue to see strong demand, the time it takes to close deals, particularly for new customers of lengthening as a result of COVID-19. At the time of our quarterly call, we are experiencing a slower return to normal condition than we had anticipated although we viewed this as a relatively short-term disruption that does not impact our long-term strategy and initiatives. Turning now to nine months results, revenue for nine months ended September 30, 2020, totaled $3,999,000, up from $2,527,000 for 2019. The revenue for both years primarily reflected our legacy business. Gross profits for the nine months ended September 30, 2020, totaled $2,890,000 as compared with $2,046,000 in the comparable period of 2019. Gross margin decreased to 72% in 2020 compared with 81% in 2019 and is primarily attributable to the one-time costs associated with the customer previously mentioned. Loss from operations for the nine months ended September 30, 2020 was 6,781,000 compared with $9,235,000 for the same period in 2019. Turning now to our capital raising efforts undertaken to support our plans for substantial growth. During Q3, the Company sold 3.2 million shares of common stock to Lincoln Park Capital under the terms of a purchase agreement resulting in cash proceeds of $669,000. In addition, we closed a $2.2 million equity advance in the quarter as the first tranche of the Series D preferred capital raise. On November 12, we closed a total of $11.56 million in the Series D round, the proceeds from which will be used for general corporate and working capital purposes. Along with the closing, we announced several restructuring initiatives including a simplification of the Company's capital structure, which will remove the preferred Series A and Series C as well as a full restructuring of the Board of the Directors leaving Kristin Taylor, President and CEO on the board and appointing [Jim Demetrius] and [Vince Mill]. Kris was also appointed Chair of the Board. Another part of the organizational restructuring designed to increase shareholder value is the Company's plans to file in December a listing application for its common stock to trade on the NASDAQ exchange. The new board views the uplifting of ImageWare stock as a part of building value. These material improvements in both our balance sheet and our financial outlook provide the Company with the runway needed to execute on its business plan. I'm pleased to say that we've made important progress in Q3, while we continue to focus on cost controls, as well as other efficiencies, we will take steps as required to ensure the business is operating on a reasonable cost basis and maximum efficiency on a way to becoming cash flow positive, building revenue remains our first priority. This concludes my financial summary. I'll now turn the call over to Kris for the progress update on our business strategy. Kris?

Kristin Taylor: Thank you, Jonathan, and thank you to everyone for joining us today. We are feeling the impacts of COVID-19. The virus is surging. In California alone, we are seeing nearly 11,000 new cases daily and more than 12 million U.S citizens have confirmed infections. Tens of thousands of new cases are reported daily. As much as we thought we would have been through the worst of it, the reality is the pandemic is affecting our current clients and partners as well as our potential clients. Prior to the pandemic, ImageWare operated with a 20% remote workforce model with today's 100% distributed virtual team performing at such a high level. We are in negotiations to sublease our current 8,000 square foot office space in San Diego. As a next step, we will seek a more innovative new space that would allow us to create a demonstration environment for potential clients in our three verticals, law enforcement public safety, federal, as well as the enterprise. We will look for a bright and open office space that is inviting for collaboration. The new space would accommodate what we expect to be a majority of our workforce continuing to work remotely even after the world returns to a new normal. Our new office will be designed to encompass our vision to support our mostly work-from-home team with a place to hold some board and office meetings, demos and testing. As a biometrics first cybersecurity company, we are building on our legacy of providing the very highest level of security to systems, data, places, and facilities by identifying and authenticating people through biometrics. Our putting biometrics first is a competitive delineation. Since I joined ImageWare in March, we spent much of the last three quarterly calls reviewing our history and the many unique benefits of our technology. Today, I'll discuss progress made since the prior quarter where we are and where we are headed. At the end of the day, it's all about our relentless focus on driving results. Today's call is fundamentally different because having just closed an $11.56 million financing, we now have the much needed working capital to fuel the Company. I'll also review what we have been able to accomplish over the past 8 months in an austere environment, and what we are able to do now that we are funded. Of course, as Jonathan pointed out, we'll continue to look for cost savings, while we spend strategically to accelerate sales. We continue to execute on our strategy to optimize legacy products, as we refresh and integrate them with the latest cloud and mobile technologies, to define our niche in the security market place, to deliver increased value to the customer in numerous sectors and realize cash flow positive by growing consistent revenue. Our engineering sales and marketing teams are firing on all cylinders, communicating and working closely together. They're executing against our new engineering product and organizational roadmaps, while seeking to improve operations and efficiencies. They are working tirelessly each day to refine, enhance and develop our suite of products for those previously mentioned verticals. I'll discuss the Identity Platform in more detail. Components of the platform include the IWS Biometric Engine known as BE, law enforcement and at the smart badges as well as GoVerifyID known as GVID. As I've discussed several calls ago, we're creating an Identity Platform that provides customers with an end-to-end platform to enroll, identify, authenticate and manage users that will appeal to customers from all three of our vertical segments. For example, a law enforcement officer will enroll a perpetrator much in the same way as a national identity client or a university enrolling its students or a hospital enrolling patients. Our revitalization of the BE, which is the soul of our products, continues and should be completed by Q1 of 2021. In the meantime, the work we have completed on this patented open platform database already makes it sleeker and faster. We spoke last quarter about the need to finish GVID our MFA offering. I'm pleased to report that the six month multi-phase upgrade will be completed in a few short days by November 30. This allows the sales team to double down on targeted outreach, including to existing partners who need multi-factor authentication. Features now include new protocol support and web applications, new UI or user interface, new security and monitoring layers, comprehensive testing, updated look and ease of use for Android and iOS clients. Cloud-based architecture to automate development test cycles and reduce cloud costs, a new SaaS model, new documentation provisioning and ease of use for clients, new landing page, data sheets, marketing and sales materials, and portals to ease demonstration and use of the product. A self-service portal would be released in early 2021. We can now focus on key markets who desperately need authentication such as financial, healthcare, manufacturing education, call centers, and the growing number of remote workers. We will do this while building more depth and value into the product and increasing the ease of usability. We are focused on GVID workforce and GVID customer for biometric login access, as well as leveraging the GVID platform with a new unique implementation for the remote worker. We will be discussing this new implementation in more detail in the coming months. We announced a partnership with Laxton in December of 2019. As a bridge to the new Law Enforcement 2.0 platform, I'm happy to announce that in October, we completed a new QuickCapture mobile software product that resides on the Laxton Chameleon 5 and 8 devices. This is a powerful solution that allows officers, public safety and military personnel in the field to have dynamic data on a perpetrator in the palm of their hands. This software will be an inherent part of the final law enforcement 2.0. But in the meantime, this gives us a powerful product to demo and sell to law enforcement and public safety sectors. The feature already has resonated very well in the past 30 days and allowed for us to compete in more bids of work. We have shown a demo of this product to more than 15 agencies across the globe with an overwhelming interest. Our modernization of the new law enforcement platform includes adding a cloud back-end and more functionality that the public safety users have asked for. We've been providing an innovative digital platform to law enforcement to identify perpetrators faster and more accurately since the mid 1990s. In law enforcement and public safety, we are not only growing existing customers, but we are selling to new police departments across the world. As a reminder, there are 18,000 police departments across North America and we presently sell to a single-digit percentage of them. The market is ripe for us to grow. Over the past quarter, we pitched to over 300 new police and public safety agencies. We pitched to more than 50 existing agencies. We are actively pursuing state and provincial certifications. We are expanding into EMS, emergency medical services such as fire ambulance and senior services, Medicare and other state agencies. We conducted several webinars tailored to law enforcement and attended virtual conferences to locate new prospects to garner and refine our strategy. We have grown the sales funnel by more than 150% in 2020 in this area of our business, and we have retained several key research analyst firms to obtain important data with which to build our suppositions about the law enforcement and public safety market and to place key bets in these strategic areas. Without good data we are operating in a vacuum. Our commitment to the law enforcement market is evidenced by recent addition to our sales team of a member with deep experience in the public safety arena. We're expanding our focus across all 50 states, the Canadian provinces as well as overseas. Moving on to EPI, which is what we call our physical and logical access with biometric smart badging. Work is ongoing to modernize our EPI smart badge 2.0 platform. This area has been a key part of the work we do with Fortune 1000 in providing these clients with physical and logical access. Badging is a key tenant of the Identity Platform and will be leveraged in many implementations such as national identity programs including drivers license projects within the U.S. and Latin America, federal government work including the office of Veterans Affairs, and employee security with EPS cubic transportation on behalf of the New York, MTA, and Saudi Aramco. Jonathan already noted how the sales team is closing deals and building a vital new pipeline of business. More often, we are up selling additional ImageWare products to our existing customer base. This is critical for us to keep revenue coming. Existing loyal customers understand the value of our software and the 24x7 support we have given to them through the years. Our pipeline continues to grow as a result of our strategizing to uncover key customers, new verticals and regions. We have increased marketing campaigns, webinars, analyst and financial engagements, and newsletters. We are accelerating our digital and performance marketing strategies by hiring a talented agency. We are in the process of rebuilding our company narrative which directly ties in to creating a new website already underway. I'd like to point out the obvious. One of the foundational keys to our progress and evolution to ImageWare 2.0 wouldn't be possible without the vital contributions and hard work of Sudheer Koganti, VP of Engineering and his quality first engineering team. I've heard Sudheer say this so many times, if you have quality then you can be fast. Engineering has been busy optimizing as they develop. Some of the key achievements of our creative engineering team include automation of the release process with increased product velocity, which means more features driving more revenue, optimization through open source replacing code for open source reduces cost and increases velocity, significantly reduce cloud costs, lowered resource use and increased automation resulting in what is thus far a 60% cost reduction, also monthly software releases and accompany roadmap and POR meetings that are highly collaborative between engineering, product management and sales. The first new released by the new development team is BioIntellic. This is a feature we announced in July of 2019 and was embedded into the BE. BioIntellic is a critical piece in proofing, and proofing is a critical piece in biometrics. Biometrics within proofing glues the user to a government issued ID, secure on-boarding of users with legal credentials in addition to validating a user with BioIntellic's anti-spoofing and liveliness allows for a complete secure enrollment process. Given the vital role that anti-spoofing and matching play improving, we felt that it was imperative to create standalone functionality for BioIntellic for more competitive pricing and efficiencies. BioIntellic is a distinguishing feature in our work in matching and identification. The new BioIntellic integrates with the refreshed biometric engine providing higher performance at a lower cost. This upgrade is important because it bolsters our joint offering with our relationship with proofing partner contactable in the African market. It also supports our existing MTN business and further it is helping us to aggressively compete for new business with African telecom companies. Our initial Q2 deployment of GVID multi-factor authentication solution to a medium-sized bank in Latin America with our partner in the region, Fujitsu is performing well and has expanded in scope. We anticipate more deals with Fujitsu, not only in Latin America, but in other parts of the world, including some large opportunities already underway in Continental Europe. Biometrics have been in existence for a long time. The military was one of the early adopters to use the human body for identification and authentication. Many players may surround us, but no one has made biometrics first in the authentication process like ImageWare has. The world is now a different place from where it was 10 months ago as the requirements for identifying oneself have evolved to touchless and contactless. Biometric authentication is finally set to explode, particularly in this pandemic world we live in now. Our philosophy of using multiple biometrics, such as face, voice, finger, palm, et cetera provides the highest level of security, greater accuracy, and speed and matching along with enhanced convenience for the user. The fact that we are an open platform, essentially agnostic to deployments for use with vendors distinguishes ImageWare. We want to enable instant binding of our multimodal and fusion capabilities to allow for a frictionless authentication and re-authentication to critical systems, data, or cloud services for banking and other related regulated industries. We believe this idea of continuous biometric authentication or re-authentication is going to become an important part of the user experience. Our work in Zero Trust is increasing. This is a security concept that centers on the notion that organizations should not trust anything in or outside its perimeters. And instead must verify anything and everything trying to connect to its systems. We believe there are several use cases where we see GVID working in Zero Trust implementations. We are working with partners and vendors to increase the use of Zero Trust in our platform. We thank those of you who believed in ImageWare and the team including institutional investors, non to wholly capital management, along with existing and new shareholders who invested in our recently completed $11.56 million offering. This capital infusion unlocks many important doors and opportunities for us. We now have the financial foundation from which to support revenue, fulfill our strategic vision and achieve our goals. We remained focused on the current business plan to restart sales on GVID and expand LE through new product sales and product investments, all while upgrading in a manner that integrates the individual products into the broader Identity Platform and manages the biometric life cycle at scale. We look forward to being recognized in the marketplace and taking our rightful place in the cybersecurity sector. We are focused on three things, sales, sales, and more sales. Looking ahead, we see great promise for our sales in the enterprise in 2021 and beyond. The growing imperative to work remotely and secure remote workers and their data has cemented a paradigm shift, one that is likely to extend far beyond the end of the pandemic, as previously noted. In response, we've been expanding GVID to manage this new paradigm. We have an unparalleled ability to biometrically secure remote workers data and we will look forward to delivering a new product. We have identified numerous expansion opportunities around Zero Trust, about which we'll update you on in 2021. We plan to add additional sales and engineering new hires over the next 60 days in order to expand our overall revenue growth in North America and beyond. We spoke last quarter about our patent and intellectual property strategy to monetize what is one of the most cited, multimodal biometric patent portfolios in the world. Since partnering with ipCapital Group, our licensing plan efforts began in earnest last month. Additionally, the pace to generate more meaningful patents on a monthly basis is also in process with the help of our IP counsel, [Nick Cole], and our engineering organization. We are actively pursuing licenses and hope to see the first revenues from these efforts in 2021. Remember, our IP portfolio only grows more valuable as the use of biometric multifactor authentication expands in the marketplace. We look forward to keeping you updated on our progress. We are building momentum. As I said on our last call, my vision for our company success to use a baseball analogy will be a result of our consistently hitting singles and doubles with an occasional home run. We needed to make a number of completions, enhancements and improvements in various products in order to begin making meaningful sales. A good part of that process is now behind us, and along with ongoing work, we are now beginning to make those sales. We continue to expect that revenue flow will be lumpy. It's the nature of our business in general and not unexpected during this rebuilding phase. While COVID-19 is driving heightened interest in cyber security for remote workers and our multi-factor authentication GVID solution, we are also beginning to see the flip side of that coin. The surge in global pandemic continues to slow some projects and present occasional challenges to closing business. Some meetings are more difficult to set, the unpredictable availability of technical staff, offices reopening and closing can slow down decision-making by customers. As I mentioned last quarter, it's hampered our ability to progress more quickly to develop an agreement we have with a particular foreign government. We have set a course and are now firmly on our way to execute, and achieve our business plan goals. We have the right technology, the right team, and now for the first time are well funded with a clear runway before us. Now it all comes down to focus and execution. I've never been more excited about the opportunities before us or more confident and our ability to achieve them. This concludes our prepared remarks. We appreciate the questions you recently submitted via e-mail. And now, we'll begin our question-and-answer session.

A - Kristin Taylor: We've been asked, will the business ImageWare does with IBM be affected by the split up of their operations IBM recently announced that it would cut away the managed infrastructure services cloud business from its larger services business and create a new company yet to be named. [NewCo] will help service more customers to manage infrastructure across the hyperscale platforms. Customers will pay [NewCo] to manage any application on any cloud platform. On a positive note, [NewCo] will give us the opportunity to partner with companies across all cloud vendors for biometric authentication, not just IBM. In 2014, we forged a relationship with IBM Security and IBM Global Services that is unaffected by this split. We continue to team with IBM and look for partnership across global opportunities. In fact, we are in the process of becoming an IBM partner which brings us closer to IBM to team with them. But first, we must go through a certification process. A shareholder noted that I have built a reputation for getting close to those who influence corporate decision makers and asked, has this been happening at ImageWare and with what success? My life is about relationships, and not just corporate decision makers. As many of you have known, I believe that life is about connection and loyalty. Results are important, but relationships are what matter. Although, I have been busy fundraising, I have not stopped my efforts to speak to my large global personal network about ImageWare. I have been reaching out to corporate friends, friends of friends, technical and financial analysts. I'm finding great interest from some of these connections. It is imperative for us to finish our GVID MFA product, refresh the biometric engine as well as get moving on the EPI smart badging platform upgrade. All of these products appeal to the enterprise clients. And in turn, I want to be able to offer finish products that are capable of immediate use. In terms of the law enforcement space, an area I do not have an old network in, I had been developing new relationships with important advisors, who have helped to make critical introductions to heads of state, ambassadors, police chiefs and military personnel. This has been paying off as I have weekly calls with law enforcement and public safety high level officials that have been leading to meaningful business.

Kristin Taylor: This concludes our Q&A session. At this time, I'd like to end our call with a brief closing comment. Thank you again for joining us today. I'll leave you with the thought that the entire team and I do our utmost each and every day to build momentum, drive strong growth prospects to deliver best in class growth, expand sales, and take the steps needed to help make ImageWare, the successful company we all know it can be. We are making progress against our strategic priorities and executing on our broad vision to expand the growth of our company. I encourage anyone with questions or feedback to reach out to our Investor Relations team or myself. Stay safe and be well. We wish you a happy holiday season. Thank you again.

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