Earnings Transcript for IWSY - Q4 Fiscal Year 2020

Operator: [Call Starts Abruptly] Systems Fourth Quarter and Full Year 2020 Financial Results and Corporate Update Conference Call. Joining us today are ImageWare's Chair, President and CEO, Kristin Taylor; Vice President of Product Management; Mark Blackman; and Vice President of Go-to-Market Portfolio Strategy and Interim Head of Sales, AJ Naddell. Before we begin, I would like to remind all parties that 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, 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 the Risk Factors section in ImageWare's annual report on Form 10-K for the fiscal year ended December 31, 2020 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. As an additional reminder, a replay of this conference call will be available on the company's website at www.iwsinc.com. Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of ImageWare is strictly prohibited. I'd now like to turn the call over to ImageWare Chair, President and CEO, Kristin Taylor.

Kristin Taylor: [Technical Difficulty]

Operator: Pardon for interruption. We are currently unable to rejoin Kristin Taylor’s line, however at the other speakers your lines are now open.

Kristin Taylor: Okay. I'm sorry, folks. Let me step back then. So the past year has been nothing short of transformative for our business for reasons good and challenging. We'll certainly take the good, and that comes from the process so far, but we're also cognizant of the fact that our vision for ImageWare 2.0 still has a ways to go. The fourth quarter presented its own unique challenges. Both from an internal execution standpoint as well as the external economic environment, but I'm confident we have and are taking the necessary steps to keep moving in the right direction. ImageWare is a biometric first cybersecurity company. Put it another way, we believe that by incorporating a greater number of biometric specific touch points into our current security system, we can provide greater accuracy, speed and transparency to the identity verification process, along with the user enhanced experience. Throughout our history, ImageWare has been focused on distinguishing itself through this biometrics-first approach. Today, that means employing a system agnostic platform, giving users a full variety of use cases, both authentication and re-authentication capabilities. We've spent significant time and effort in recent months, taking our comprehensive offering fleet and updating the back end to meet today's modern access needs. When realized, our vision to have a fully integrated cloud platform, offering a suite of solutions that are unique yet interoperable from the world's top government organizations, Fortune 500 businesses and even private individuals. Beyond building great products, we also have to improve the way we market and sell them. With the proceeds from our most recent capital raise this past December, our teams have been hard at work to deploy these funds on high-value opportunities which should translate into meaningful growth in the coming quarters. We'll get into this more in a minute. Demand for cybersecurity solutions within the public safety, federal government and enterprise verticals continues to grow, and we are working to build a team, solutions and strategy to capitalize on this ever-growing opportunity. Before we get into further operational updates, I'd like to take a minute to discuss our financial results for the quarter and the year. Our financial results are available in the news release on our corporate website as well as in our recently filed Form 10-K. For context on today's discussion, I'll provide a brief summary of those results now. Revenue for the fourth quarter of 2020 decreased 20% to $786,000 compared to $979,000 in the same year-ago period. The decrease in sales was due primarily to the expiration of a certain royalty arrangement and lower professional services revenue due to the timing of the completion of certain projects, which was offset by the higher maintenance revenue. Revenues for the full year increased 36% to $4.8 million compared to $3.5 million in 2019. The increase in sales was primarily due to an increase in product revenue and partially offset by a slight decline in maintenance revenue. Gross profit for the fourth quarter of 2020 decreased 21% to $647,000, 82.3% of revenue compared to $817,000, 83.4% of revenue in the same year ago period. The decrease was primarily due to lower revenues of approximately $193,000. Gross profit for the full year 2020 increased 24% to $3.5 million, 73.9% of revenue compared to $2.9 million, 81.7% of revenue in 2019. The increase in gross profit was primarily due to the increase in product revenues. The decrease in gross margin was due to an increase in cost of revenue for both products and maintenance. With our transition to a new subscription-based model, revenues 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, which are typically 12 months in length. Over time, our goal is to build a steadier stream of predictable revenue, which will allow us to more reliably forecast and invest in our future growth. Operating expense for the fourth quarter of 2020 decreased 18% to $3.1 million compared to $3.8 million in the same year ago period. The decrease in operating expense was primarily due to the revamping of the company engineering and sales departments. Operating expense for the full year 2020 decreased 15% to $12.8 million compared to $15.1 million in 2019. The decrease in operating expense was primarily due to a decrease in research and development and sales expense, offset by an increase in general and administrative expenses. Moving to our profitability metrics. Loss from operations for the fourth quarter of 2020 improved to $2.5 million compared to $3 million in the same year ago period. The improvement was primarily due to the reduction in operating expenses previously noted. Loss from operations for the full year 2020 improved to $9.3 million compared to $12.2 million in 2019. The improvement was primarily due to the increase in revenues combined with the reduction in operating expenses previously noted. Net income available to common shareholders for the fourth quarter of 2020 improved to $979,000 or $0.01 per share compared with a loss of $4.5 million or $0.05 per share in the same year ago period. The total basic weighted average common shares count was 133,341,134 compared to 108,946,982 in the same year ago period. Net loss available to common shareholders for the full year 2020 improved to $10.9 million or $0.08 per share compared with a loss of $17.3 million or $0.17 per share in 2019. The total basic weighted average common shares count was a 133,346,309 compared to 104,372,048 in the same year ago period. We ended the fourth quarter with $8,345,000 in cash and cash equivalents. Moving to our capital markets update. As announced via a press release on November 12 of last year, we closed a $12. plus million private placement of Series D convertible preferred stock with participation from both institutional investors and existing accredited investors. Beyond general corporate and working capital purposes, these proceeds have been used to address outstanding payments pulled over from our previous administration. Such areas included duplicate contract commitments, overdue bills, penalties from missed payments, severance packages for departing employees and legal fees. While unfortunate, we've addressed all outstanding financial obligations at this time, and we are now able to move forward without any further payment obligations beyond our normal course of business. Most importantly, with the remaining funds available, we've been able to, for the first time since my coming on board, begin to allocate an appropriate amount of funds for our product, marketing and sales initiatives which are crucial to the go-forward growth plan. As a separate housekeeping item, in February of this year, our Board of Directors and major shareholders approved 2 resolutions. The first resolution provides for an increase in our authorized common stock from 1 billion to 2 billion shares. This resolution is intended to provide us with additional flexibility in connection with future financing, strategic acquisitions, debt restructuring incentives and other general corporate purposes. With the authorized share increase in place, we will be able to take advantage of opportunities without incurring delays and the expense associated with obtaining special shareholder approval in each instance. The second resolution expands the number of shares available under our 2020 Omnibus equity incentive plan. We'll be adding an additional and incremental 120 million shares to the incentive plan share pool to retain, attract, incentivize high-quality talent. Assuming the full conversion of all issued and outstanding preferred stock, the current issued and outstanding common stock equals $724,897,968 shares. I will now turn the call over to Mark for the progress update on our products and platforms. Mark?

Mark Blackman: Thank you, Kristin. Over the past several months, we've made significant updates and enhancements to our platform with the goal of implementing greater levels of integration and automation to unlock broader product value. As a general rule with software, solutions need to be updated on a consistent basis to ensure there compatible with the latest platforms and cloud services being leveraged in the marketplace. And while our legacy products certainly have delivered their intended value, we recognize there are changes that need to be made as technology continues to shift to the cloud-based mobile applications and remote onboarding with contactless authentication. Over the last year, we've been focused on the foundational lifting required to take our legacy solutions and biometric platform to this cloud-based mobile-friendly world. This migration will not only bring down development and operational costs, but will also provide a foundation to build new solutions for problems our customers encounter. As we modernize this platform, we continue to upgrade our existing products which provides sales continuity and new value to our existing customer base. To help guide the discussion, I'm going to spend a minute recapping some of the major milestone achievements from this initiative as well as explain the purpose behind each. First and most importantly, in August of last year, we completed the modernization of our Biometric Engine. This scalable, multimodal algorithm agnostic biometric database has and will continue to underpin all other ImageWare solutions. It's the platform upon which all updates are being built on. As part of the upgrade, we have integrated various open-source software to reduce the development cost, while also greatly improving performance and efficiency. Second, we've made modifications to our BioIntellic anti-spoofing service. As part of the broader platform, BioIntellic is a frictionless and virtually unspoofable solution that requires just a selfie to provide identity matching, while preventing presentations in attacks. The solution is leveraged by our ImageWare Authenticate product and is also available as a stand-alone solution for our partners. While the original service has been in use for years, we recognize that the cost profile of the design was inefficient, which is why we upgraded the service as part of our broader cost reduction efforts. Next, as announced in February, we launched ImageWare Authenticate, formerly known as GoVerifyID. This solution enables users to seamlessly integrate biometric based multifactor authentication, or MFA, into their existing business and consumer applications. Designed for the enterprise security space, authenticate can easily be used from mobile device. On the back end, we are able to conduct biometric matching in the cloud, which enables authentication across multiple devices and seamlessly integrates into existing applications through standardized protocols such as OIDC and SAML. The unique qualities of a person's face, fingerprint, palm print, voice or iris, makes biometric authentication the most accurate method for end-user assurance. As the need of cybersecurity grows biometrics, especially in multimodal formats continue to be the safest, most proven and effective method to authenticate and validate someone's identity. Finally, after a lot of behind-the-scenes planning and work, we have completed the first phase of development of our law enforcement 2.0 solution or LE 2.0. As discussed earlier, the initial goal for this revamped solution was to produce a web and mobile-friendly platform from which our -- from our legacy solution, resulting in cost savings and higher levels of integration to support workflows across the individual products backed by this platform. After a successful set of internal demos, our team has been out in the field for the past couple of weeks, conducting sales visits and focus groups to gather feedback. Several customers shared with us that the LE 2.0 offered a seamless UI and a level of innovation they haven't seen in competing products. Our goal is to capture the greatest amount of market share within the massive law enforcement space, and we feel confident in our ability to do so with the backing of this solution. We take great pride in the fact that ImageWare has one of the most comprehensive IP portfolios and was an early pioneer in our industry. However, that pioneering spirit needs to continue for the business to thrive. As mentioned earlier, we have spent the majority of resources building out the new platform through product innovation. These product development initiatives have taken serious time, effort and energy. To be where we're at, at this point in just 12 months is nothing short of remarkable. Further upgrades and new offerings will come, but it will take time. We can only go to the market with the products that are ready to go. Our business involves lead times and sales cycles of several months as customers need to conduct thorough test of our software to ensure it is compatible with their internal systems. So while we have minimal viable products in several key areas, it will take some time before we expect to see broad market adoption. We have also started researching longer-time solutions leveraging self-sovereign identity or SSI. SSI is an emerging set of standards that makes digital identification more akin to a driver's license in a wallet than the digital account-based identification that is the norm today. Rather than relying on third-party service providers like Google or Okta to protect and store user credentials, SSI provides a security layer that enables users to store and control their own credentials through cloud and blockchain services, all under mobile phone. This technology gives autonomy to the users and empowers them to manage their own privacy by controlling how and when their information is shared. This is also beneficial to corporations and service providers who will see reductions in the expenses and liabilities related to the storage of large data sets of sensitive information. Additionally, this may provide a standardized method to comply with KYC and AML regulations and privacy laws such as GDPR. This technology has been in development for years with large blue-chip companies such as IBM and Microsoft, having built and released foundational SSI services for companies like ImageWare to innovate upon. While ImageWare is not the very first company to introduce biometrics to SSI, we are early enough to be highly competitive and differentiated in this emerging space. In particular, we will be focused on using SSI based biometric solutions for digital onboarding, KYC AML, identity proofing and securing cryptocurrency and other digital assets. Our product team has already started market research and product design with the goal of having a demonstratable proof of concept by the end of the year. Over the last three months, we conducted an intellectual property review with independent consultants. The first phase was mostly backward-looking to reflect and assess the value of the current portfolio. In reviewing the existing patents, our team looked to forward citations to determine potentially relevant companies and then attempted to evaluate whether or not our patents read against their actual products or their projected road maps. Ultimately, we decided to develop a forward-looking IP strategy to better understand the ways in which our products, technology and IP would support possible joint venture or co-development efforts with industry players. Our main takeaway from this initial review was to focus on completing the cleanup of what we have, such as assignments and the status of foreign and then working to create an internal focus on innovation and development towards building up our IP portfolio. Longer term, this could involve the creation of a patent committee, a company seminar to further educate the current technical and sales teams and the creation of a patent award program to encourage our philosophy of actively developing valued, patentable invention. Lastly, we plan to execute targeted outreach to select companies to determine and assess their interest in possible collaboration and/or licensing for image work technology and IP. This will help determine whether our patents actually intersect with the long-term road maps of these companies and will provide a defensible market-based verification of a more realistic valuation of our IT portfolio. I am pleased to share that we'll be officially kicking this effort off in the next couple of weeks in early May. Like many other companies, ImageWare has adopted to the countless changes resulting from COVID-19. Notably, the pandemic has forced us to transition to a market-first approach. What I mean is that the way we sell products has changed. Historically, as a private sector business -- public sector business, the vast majority of our business was won through traditional RFP processes, meaning that we build solutions to spec for our government agencies specific needs. As we continue to garner interest from customers across different key sectors, it also means that the solutions we offer need to fit the use case of each respective scenario. We need to go broader. Our team is tackling these new bigger growth markets with our novel and improved solutions. With that segue, I'll now turn the call over to AJ for a progress update on our sales opportunities and go-to-market strategy.

AJ Naddell: Thank you, Mark, and hello to everyone joining us today. I'm looking forward to sharing some of the new and exciting initiatives we have on the sales and marketing end. I'll be elaborating on our current go-to-market strategy and providing additional color on some of the key verticals we're looking to tackle. To begin, I'd like to acknowledge that we did encounter various sales and execution-related challenges in the fourth quarter, which impacted our results to a degree. Though this was not the result we were hoping for, we are proactively implementing changes to adjust these areas and believe we have a solid foundation on which to build going forward. These changes include upgrading our sales force and leadership team, we're finding our focus to expand market share and product footprint, implementing a business partner program, creating hyper local events and having a targeted business development to senior executives in specific industries and regions. With these initiatives in place, we expect to see improved bookings and sales results beginning in the second half of 2021. As Kristin mentioned at the outside of this call, thanks to our recent capital infusion, we have more funds to allocate the sales and marketing for the first time in recent which is a great first step. As I just noted, we believe the latter half of this year will be the time to show these efforts starting to bear fruit. From the time we received the actual funds to building the team and strategy to execute on these plans to attracting targets and ultimately closing sales, these programs will take time. Another example of our enhanced sales efforts is through our newly revamped business partner program. In addition to increasing our partner selectivity to support greater input and adoption, we're actively targeting groups and organizations that can provide value beyond the simple reseller arrangement. A prime recent example of this is with Safety Group's subsidiary, Israeli-based safety data, which we announced via press release last month. A reason why we chose to work with Safety is because they are who have been previously featured in 2 Gartner Market Guides, 1 for Zero Trust and second for Emerging Technologies in the Zero Trust Network access space, in addition to a Forrester Now Tech for cloud security gateways. Within the Zero clouds -- Zero Trust space, Safety is a truly prominent group that we are excited to work with. In our collaborative effort to develop a joint Zero Trust Network Assets or ZTNA, we combined their Zone Zero solution with ImageWare Authenticate to create the first ever biometric based ZTNA solution. Zero Trust 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. This means that before granting access, the ZTNA solution collects and matches biometrics, either in the cloud or on-premise to ensure users true identity. With more companies normalizing remote work, it is imperative for data to only be accessed by authorized individuals. By adding biometric authentication to Zero Trust, ImageWare add significant value by verifying the person instead of the device itself, while also improving the user experience with quick contactless authentication. Safety functions as a value-added reseller or VAR that embeds our product into their comprehensive solution. Our combined offering should enable us to expand our universe of addressable opportunities, presenting us with more leads in more industries for more use cases. It's a case of 1 plus 1 equals 3. We'll be looking to announce more partnerships like this in the coming months. I'll now take a minute to discuss our updated go-to-market motion. From a high level, we'll be transitioning from technology sales strategy to a solution sale approach. More specifically, we plan to break this into 2 key areas or use cases. The first being customer onboarding and authentication and the second being law enforcement and public safety, booking and identification. Within the customer onboarding and authentication space, we plan to tackle 4 key verticals

Kristin Taylor: Thank you, AJ. Though we continue to fight an uphill battle in the short term, we are setting ourselves up for long-term sustainable growth. Let me provide some brief HR-related updates. First, as you've heard, AJ Naddell is our Vice President of Go-to-Market Portfolio Strategy and newly appointed Interim Head of Sales. As the focal point of product management, marketing, product design, sales and customer success, AJ will play a pivotal role in collaboratively and strategically developing powerful revenue-driving go-to-market programs. He will be tasked with conducting operations across a number of key verticals within our business and will be responsible for delivering our critical offerings to the marketplace, while also driving future customer needs. AJ has demonstrated success previously, closing 8-figure deals for blue tip organizations and has also played a crucial interim role on the sales end as we continue expanding our team there. To fully maximize our efforts on the front end of our business, we have officially begun the search for a new head of sales to support our expanded growth goals. The growth of our sales and sales leadership team is crucial in our effort to commercialize our ImageWare 2.0 solutions. More recently, we also announced the on-boarding of Lauren C. Anderson to the Board of Directors. This marks an important milestone as Lauren became the first independent female board member in ImageWare history. With nearly three decades of security, counterterrorism, diplomacy expertise, Lauren possesses a truly unique combination of experience and skills that are well suited to our near- and long-term objectives in expanding the law enforcement and public safety sectors in state, local and federal markets. Through her multi-decade career with the FBI, Lauren has established herself as a well-respected global security expert at the highest levels within the federal government, a key market for ImageWare historically and going forward. As we roll out our next-generation products for new and current law enforcement and government agency customers looking to expand internationally, we expect to benefit from her strong relationships in the field to increase our footprint. In her near two months at ImageWare, Lauren has been extremely helpful in making introductions in and outside of law enforcement, participating in our local and state law enforcement focus groups and advising ImageWare on security and ethics. Sticking with the Board, in November, we appointed Iris Biometrics industry leader, Jim Demitrieus; and technical and IP strategists, Douglas Morgan as well. Also these changes bring the total count to 4 members, 3 of whom are independent. As noted in our recent corporate update, former ImageWare Chairman and CEO, Jim Miller, has also left the business effective April 12, 2021. Jim had been operating under consulting agreement since November of 2020. Lastly, we also recently announced the resignation of our CFO, Jay Lewis. We understand and respect Jay's decision to step aside at this point in his career to pursue a better fit for work-life balance. Although his time with us was limited, we are appreciative of his efforts and wish him the very best as he pursues other opportunities. We are also well underway in the search for a new CFO with deep operational and turnaround skills including regulatory, financial reporting, M&A, capital markets and corporate finance experience. We understand that having the right individuals in the correct role will put us in the best possible position for growth. Our team recognizes that tough decisions sometimes have to be made, and it is absolutely vital to move quickly and make sure we have the right people in place to execute our strategic vision. Moving on to elaborate on Mark's previous point, we are continuing to face certain lingering impacts from COVID-19. More specifically, our ability to close deals quickly compared to the pre-pandemic times continues to be impacted. The specific reason for this impact relates to our potential partners inability to properly and thoroughly test software and hardware in proper use environments. What many don't know is how critical this phase is during the due diligence process as customers tend to go through several trials of testing before proceeding to sign a deal. Unfortunately, we are witnessing this trend across each industry segment we serve. Our federal clients are not able to physically go into their labs, police officers or directors of IT within the public safety realm in many states still aren't able to go to work at their office in person. And on the enterprise side, many companies are still working from home, where they aren't able to properly test our solutions. When I first joined the company 13 months ago, we had limited capital, significant debt and major hurdles to overcome. It has taken time and serious grip from our collective team to get to this point. I'm incredibly grateful for the efforts of our combined team and dedicating themselves to the building of our vision for the new ImageWare. And I believe we are well on our way. So I am encouraged by the development of our product offerings, marketing campaigns, internal processes, go-to-market and sales initiatives, there is still much work to be done. Cyber crimes are becoming more prevalent and sophisticated with each passing day. The need for dynamic cybersecurity solutions need to step up as well. ImageWare is strategically positioned to be the primary solution for companies seeking biometric based solutions to address this growing need. That concludes my prepared remarks. Thank you for joining us on today's call. I especially want to thank our employees, partners and our investors for their support. We appreciate your continued interest in ImageWare and look forward to updating you on our next call in May.

End of Q&A: