Earnings Transcript for IWSY - Q4 Fiscal Year 2019

Operator: Good afternoon, everyone, and thank you for participating in ImageWare Systems' Year-End 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. Following their remarks, management will answer your pre-submitted questions. Any statements made on this call 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 Systems, Incorporated are intended to identify such forward-looking statements. ImageWare may, from time-to-time update these publically 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 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 the 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 May 22, 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-K. For context on today's call, I'll provide a brief summary of those results. Revenue for the year ended December 31, 2019, totaled $3.5 million, down from $4.4 million for 2018. Revenue for the fourth quarter of 2019 totaled $1 million compared with $1.1 million for the same quarter in 2018. The revenue for both years primarily reflected our legacy business. Gross profit for 2019 totaled $2.9 million compared with $3.5 million in 2018. Gross margin increased to 82% compared with 80% in 2018. Gross profit for the quarter was $816,000 as compared with $906,000 in the same quarter of 2018. Gross margins for the same quarter decreased to 83% compared with 85% in 2018. The 2019 annual net loss from continuing operations was $11.6 million, this compared with $12.5 million in 2018. The fourth quarter net loss from continuing operations was $2.8 million compared with $3.1 million for the same quarter in 2018. We ended the year with $1 million in cash. Over the last few months, several recent capital infusions, including previously disclosed capital from directors, Triton Funds, and a PPP government stimulus loan, and an equity line of credit with Lincoln Park Capital have all served to materially strengthen our balance sheet. In light of some investor questions, I'd like to clarify the scope of the recent Lincoln Park Capital $10.3 million commitment. It's important to understand that ImageWare has the right, not the obligation, to call on that commitment if and when we choose to. Furthermore, the commitment does not impose any restrictions on our ability to receive capital from alternative sources. We are having and continue to have discussions with a number of potential sources for significant long-term capital. In summary, over a very short period of time, our balance sheet and our financial outlook have improved materially. This concludes my financial summary. I will now turn the call over to Kris for the progress update of our business strategy. Kris?

Kristin Taylor: Thank you, Jonathan. I am pleased to have this opportunity to speak with all of you today. I'd like to start by saying that I hope you are staying healthy and safe. Our first priority is the health and safety of our team members, and I want to acknowledge the outstanding efforts by all to make our company-wide transition to working from home, a successful one in this COVID-19 pandemic environment. Many of you have been eager to hear from me sooner than today, but the past 55 days have been quite busy. Restructuring of ImageWare is essential. Not only are we changing the tires, but we are doing so at record speed while driving. So far we've reduced the burn rate by 33% per month and we'll continue to trim. We've taken the following measures, none of which, by the way, will impede our ability to generate revenue. We've closed offices in Portland, Oregon, and Tokyo, Japan. Consolidated the San Diego headquarter office into a smaller footprint, eliminated vendors, contractors, consultants, and personnel, reduced and/or eliminated contracts for services. Starting a new job is always an uphill climb, but this time, I've been met by unprecedented human and economic conditions. In some regards, the concentrated time cloistered in my office has given me the opportunity to strategize a strong path forward for ImageWare. On the other hand, the paralyzation of our world has translated to shut downs of the very institutions that make our economy work, which in turn have caused unnatural delays in fueling our business. I want to thank the Board of Directors, employees, shareholders and investors, technology, banking and legal partners of ImageWare for their confidence and trust in inviting me here to lead your company. I would like to share a bit of my background and why I am confident in my ability to turn this company around. I come from an immigrant engineering family in Boston, who taught me work ethic, the importance of my word and a passion for engineering. I have a strong track record of success. I am a passionate, attentive, and decisive leader. I have a singular focus on making money and building mutually rewarding partnerships. My career in the tech sector began in technical equipment sales for AT&T and Lucent in the mid-90s. I went on to enjoy a 13-year career at Qualcomm, where I was responsible for dreaming up new products to materialize discrete streams of revenue. One of the largest products was a six-year project, where I was effectively the CEO of my own company inside of a Fortune 500. I was responsible for not only contriving the product itself, but for also building a large internal team who patented and developed a new standard and created massive partnerships that would eventually spur the creation of a new computing division for Qualcomm. This product drove four quarters of stock growth and sizable revenue for Qualcomm with more than 300 product offerings on 101 models of laptop computers with 18 manufacturers and 27 mobile carriers. I realized that driving a project for internal success was only a small measure for what we needed to accomplish on the outside. Preparing the technical analyst community for what was coming, then financial markets; and finally, global media could make or break the success of a product. It was this notion that prompted me to build significant relationships with the technical analysts from Gartner, Forrester, IDC, and many key independent analysts around the world, who control powerful influence in buying brand and strategy. I developed a methodology whereby I triangulated influence of key analysts to revenue. I went on to use this technique at MediaTek, Qualcomm's biggest competitor, IBM, and now I'm leveraging this role at exit analysts for ImageWare. Relationships are key to business and those liaisons that I've developed through 25 years in the tech sector will be critical now for raising ImageWare. My due diligence prior to coming here with speaking to my circle of mentors and professional friends in the tech sector who emphasized that the time for security, privacy, and unique authentication was now. They believe that a company that has become the most cited in biometric authentication and had secured strong IT was a place that I should lend my talents. People characterized me as a person who likes grand challenges and has built her life around numerous relationships in technical, media and financial circles. My trusted peers greatly supported my decision to accept this position and elevate ImageWare. I believe ImageWare was ahead of its time in the late 1990s. In seeing the world, where leveraging biometrics to identify an authenticated person would be the most secure and fastest method to proving one's identity. The Federal government knew this about biometrics and asked for our partnership, and now the broader marketplace needs have caught up with our pioneering work and we must pounce on the opportunity to deliver to the commercial sector as well. Think of ImageWare in 2020 as ImageWare 2.0. It's a new business with new wind in our sales, with a new leadership team that brings fresh yet proven approaches and rejuvenating strategies to drive market leadership and revenues. In line with this mission, I have invited a number of new leaders to come into this company. So far we have announced a new SVP and CFO, Jonathan Morris. In the coming weeks, I will be announcing more leaders to head engineering, product management, sales and marketing. These individuals come with strong pedigrees and proven track records and represent what I believe is considered to be the top 5% of the job force. While there has been considerable frustration in financial non-performance that has mounted over recent years, we are putting into place a five-year vision combined with effective strategies and execution plans that will restore your confidence in the company and put us back on track for revenue growth and market success. First, on the product side, I've taken inventory of what we offer. The state of those products, related sales and marketplace dynamics and associated cost structures. I feel very strongly that we have a solid foundation of products that the team can build upon. However, there is still fundamental work to do to make them world-class and profitable products. We are not far from realizing this goal. We have some work to do in terms of disciplined, focused team execution through engineering, product management, sales and marketing, as well as tuning the key features of our products with an eye for what the marketplace is asking us for. Our near and long-term roadmaps are focused in three pillars

Jonathan Morris: Thanks, Kris. I was drawn to the opportunity to join ImageWare and excited by the prospects for a number of reasons. Among them are the uniqueness and strength of ImageWare's biometric technology, the size of this fast growing market and the opportunity to work with Kris. I was immediately impressed when I met Kris several years ago. When we met again, she described the untapped potential at ImageWare, which has been providing defense-grade authentication to federal markets for more than two decades. Our desire to expand the products into the enterprise sector, explore the creation of an IP licensing business and grow ImageWare's presence overseas was the professional challenge I've been looking for. In addition, this is a unique market environment where digital identity solutions have quickly moved into the spotlight, and I think ImageWare is incredibly well positioned to take advantage of that. There has never been a better time, and I believe that by streamlining the business, refining our offerings with a stronger messaging and more focused sales and marketing, ImageWare can attract a strong flow of valuable customer opportunities. I also want to be part of something that will have a strong beneficial impact on organizations and people while leveraging my experience in capital markets with a particular emphasis on successful execution. That's why I enthusiastically accepted when Kris asked me to join her in this mission to take the company and its technology to the next level.

Kristin Taylor: Thanks, Jonathan. Now I'd like to address questions regarding our exceptional technology and what makes it different. Some of the key differentiators of the ImageWare biometric technology are as follows. We are not an algorithm company. We are not a hardware company. We provide highly scalable, highly available solutions that are deployed in cloud, SaaS and on-prem. We are not middleware. We have our own proprietary platform. We support all types of hardware, operating systems and biometric modalities. We provide a turnkey enterprise solution built as a SaaS with minimal integration. We support biometric-based MFA, which is unique. We have 23 issued patents in biometric authentication, many of which are foundational, and we have had success defending them. We have a long history of accomplishment with demanding, mission-critical and loyal government customers using our technology. We enable future-proofing customer authentication by not being tied to any specific set of algorithms or hardware interfaces. This leads us to sales and marketing questions for which I'd like to comment on how our focus and processes have changed. It begins with a new product in sales and marketing process. This includes new e-commerce, a developer portal and a new website. Pricing will be more closely monitored. Professional services will be promoted more. Partners will be leveraged, but we will target more direct sales to capture higher profits. We have a number of questions in the financial category, and Jonathan and I will proceed to answer them. Jonathan?

Jonathan Morris: Our current cash position is approximately $1.7 million, and as Kris mentioned, we have taken actions to reduce our current burn rate by 33% per month. The recent capital infusions mentioned earlier in the call and the PPP stimulus loan of $1.57 million have not only helped to soften any potential balance sheet issues in this challenging environment. It has also provided us with a runway to achieve our goals. We've been asked about the revenue range for breakeven and how investors should model revenue for 2020 and beyond. It's just too early and there are too many variables for me to be able to answer that today. Kris will now comment on the other questions in this category. Kris?

Kristin Taylor: Our goal is to maximize shareholder value by successfully executing on the many initiatives that I've discussed in my opening remarks, which are expected to materially grow revenues and create profitability. When the time is right, it is still the company's goal to uplift our stock to a national exchange, and we will continue to evaluate all options along that path. These financial questions are a good segue into the inquiries about guidance. Historically, the company has not provided quarterly or annual guidance and it's premature for us to revisit that policy now. With a number of initiatives in process, it's really too early to publicly estimate our revenue threshold to profitability. A large number of questions were based around historic projects. I believe it's the most constructive for us to focus forward and report on historic project development when events warrant. We'll close with your questions regarding IP, the significance of the most recent foundational patent and our plans for IP monetization. By foundational patent, we mean a patent that covers an essential way you do something or the basic way in which something operates. Our newest patent is significant because it covers the basic way in which folks enroll in their biometrics and there are not too many options in that area. Our patents are solid and have been successfully asserted in past litigation. We will be pursuing multiple paths to monetize our IP. It is important to note that no entity has an exclusive on our monetization efforts. We'll know more about the potential value of our IP portfolio as we progress further into monetization activities. In closing, I'm sure you agree that we have an exciting, energizing and well thought out set of strategies for our company. We are building on ImageWare strengths and pivoting to use new methods that will broaden exposure to more opportunities with improved products that will scale more easily to drive revenue and profits. I believe new, strong engineering, sales product and marketing hires coupled with talented existing employees will realize great success. We acknowledge the journey with ImageWare has been very challenging for investors. We also feel that the market is creating a unique opening for our company as a dramatic shift from many workers and consumers to access communications, services and resources from their homes is providing opportunities to promote our offerings. The high level of operating from home is creating heightened concern for privacy, security and safety in using online resources and services, especially with the recent reports of breaches. We are responding to these opportunities, so it is both fortuitous and timely that we refresh our products and launch our campaigns with new messaging. While there is a growing interest to secure identities and provide true authentication, ImageWare is uniquely positioned to deliver exactly that. Many competitors claiming authentication, pale in comparison to our methods, flexibility and track record with demanding market segments. State laws on privacy and data protection play strongly in our favor. We look forward to getting our share of this very large market. We feel exactly the same way as you. This has taken way too long. But many projects are in the works. So now it's not a matter of if, but rather when we deliver on our business plan. Our goal is to build a foundation of trust and we'll do that by focusing our communications on what we have done and are doing.

Operator:

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Kristin Taylor: We greatly appreciate your support and thank you for joining today's call. I'm looking forward to speaking to you on the Q1 results call. Good health to you and your loved ones. Thank you again.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.