ImageWare Systems Inc

OTC:IWSY

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to ImageWare's Second Quarter 2021 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded.

I would now like to turn the conference over to Brian Prenoveau from MZ North America. Please go ahead.

[Brian Prenoveau, MZ North America]

Good afternoon, everyone. And thank you for joining ImageWare's second quarter 2021 financial results conference call. 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 the webcast will be available for 90 days on the company's website at imageware.io. 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 Kristin Taylor, Chief Executive Officer. Kristin?

[Kristin Taylor, President & CEO]

Thank you, Brian, and thank you to everyone for joining us today. Joining me on today's call is Interim CFO, Mike Shambach; and Senior Vice President of Product Management and Sales, AJ Naddell. Mike started working with ImageWare in July. He and I worked together at Qualcomm for many years. Mike worked in the Qualcomm Venture Fund and Qualcomm CDMA Technologies with roles in finance and operations.

I'll begin with a high level overview of our operations followed by Mike, who will provide a review of our second quarter financial results before we turn the call over to AJ, who will provide an update on our products, sales, pipeline of opportunities and marketing efforts, including our partner programs.

ImageWare is a leading cloud-based cybersecurity company that offers multimodal biometric solutions for faster and more accurate identification, to better secure communities, data and assets. In 2020, over 900 billion was lost to cybercrime across businesses, governments and everyday consumers. ImageWare suite of products provide multi-factor authentication for both physical and logical access to your data, products, services and facilities and is applicable across private companies, government agencies and law enforcement agencies.

The second quarter was a period of progress. We will continue to work through several major operational, technical and personnel related obstacles. However, we remain encouraged by the steady progress we are seeing with some of our strategic initiatives designed to return ImageWare to long-term sustainable growth, which include rationalizing products and focusing on core assets.

We are working hard across all fronts of the business and are laser-focused on enhancing our product portfolio, in addition to executing against our sales and marketing objectives.

On the sales and marketing side, we are seeing increased activity across all major channels, leading to more demos and proposals which have translated and should continue to lead to new sales during the second half of the year. Most recently, we were awarded a three-year $2.7 million contract with the Department of Veterans Affairs, or the VA to support its Personal Identification Verification card program. The contract is for software and support services that are required to deliver biometrically enabled credentials to PIV smart cards. It covers a total of one base year with two one year option periods to provide biometric leasing and support, and enhanced security for contractors, employees and agency facilities. The prominence of this win is that it's the largest implementation of biometric smart cards with over 1 million identities managed inside the federal government. We are proud of the work we've completed with the VA in the past decade plus and look forward to closely collaborating with them.

Additionally, our BioIntellic system has obtained Presentation Attack Detection or PAD Level 1 and 2 compliance, also referred to as anti-spoofing. As a reminder, BioIntellic is a revolutionary zero friction anti-spoofing system designed to prevent intruders from breaching authentication systems. The intelligent presentation cyberattack detection solution is used in several ImageWare offerings including ImageWare Authenticate, ImageWare Proof, and the ImageWare Identity Platform, as it provides passes PAD for face images using standard mobile phone cameras. In many instances of cyberattacks, criminals attempt to fake the image of a face of a person in order to gain access to sensitive data.

In the ImageWare Authenticate example, users can take a standard selfie portrait and BioIntellic will be able to verify whether a person is taking a live photo or a fraudulent spoofing attempt has occurred. Reaching this milestone of passive anti-spoofing with PAD Level 2 certification will help more customers who are interested in securing their enterprise with biometric authentication and identification.

Lastly, after a very rigorous review process last month, our ImageWare Authenticate solution became FirstNet verified and accessible via the FirstNet App Catalog as the only biometrics-enabled security solution currently approved for inclusion in the FirstNet App Catalog. FirstNet is the only nationwide wireless broadband communication platform dedicated to America's first responders and public safety community. Built with AT&T in a public private partnership with First Responder Network Authority, FirstNet brings innovative capabilities to public safety communications to strengthen first responders’ incidents response, and to help them connect to the critical information they need every day and in every emergency.

With the approval of our ImageWare Authenticate solution, first responders using FirstNet can now download the ImageWare Authenticate application on their mobile device from the FirstNet App Catalog, which is licensed on an annual SaaS based model. Our solution provides a frictionless way for first responders to quickly access mission-critical data and emergency operations center information. We are proud of this milestone achievement, as it broadens our footprint and provides access to 2.2 million FirstNet subscribers.

As a biometric first security company, we are able to give greater accuracy, speed and transparency to the identity verification process. With the progress we're making in product development and sales channels, we believe our solutions will become more effective, integrated and scalable.

Before we dive deeper into the sales pipeline, I would like to turn the call over to Mike Shambach to briefly address the financial results, which are available on our website and Form 10-Q.

Mike, please go ahead.

[Mike Shambach, Interim CFO]

Thank you, Kristin. Revenue for three months ended June 30, 2021 increased 29% to $942,000, up from $733,000 for the same period in 2020. The increase in revenue was primarily driven by increases in product and maintenance revenues. Gross profit for the three months ended June 30, 2021 increased 39% to $807,000 as compared with $579,000 in the comparable period of 2020. Gross margin increased to 86% for the three months ended June 30, 2021 compared with 79% in the comparable period of 2020.

Operating expenses for the second quarter of 2021 increased 17% to $3.54 million, compared to $3.04 million in the same year ago period. The increase in operating expense was primarily due to increases in sales and marketing as well as G&A expenses, slightly offset by decrease in research and development. Loss from operations for the three months ended June 30, 2021 was $2.74 million, compared with a loss of $2.46 million for the same quarter in 2020. The decrease is due primarily to increases in general and administrative, and sales and marketing expenses. We ended the second quarter with $2.7 million in cash.

I also wanted to note that the $1.6 million Payment Protection Program or PPP loan was forgiven subsequent to the quarter end. A material improvements in both our results and our financial outlook provide us with the runway needed to execute on our business plan. I'm pleased to say that, we've made important progress in Q2.

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 our way to becoming cash flow positive. Driving interest in our products and services and increasing revenue remains our priority.

This concludes my financial summary. I'll now turn over the call to AJ for a progress update on our products and platforms.

[AJ Naddell, Interim Head of Sales]

Thank you, Mike. In the four months that I've been In-Charge of Sales and Product Management, I am proud of the progress that we have made in the measurable improvements in our overall sales pipeline. The improvements to our core biometric engine, our multi-factor authentication and law enforcement products are providing promising sales leads and wins. Much of the work the team has done is improving the quality of sales options and putting less emphasis on quantity in the pipeline. We conducted an exhaustive review of our overall pipeline and are making concerted efforts to focus on higher quality and higher ticket opportunities. To help accomplish this, we have made key additions to the sales team, improving the overall quality of our salesforce.

We've recognized, however, that federal and state business opportunities have longer sales cycles, especially as deal size increases. New opportunities might realistically take between six months to a year from initial concept to implementation. However, we believe with the right people, a defined plan and a comprehensive strategy, we can turn more opportunities into revenue generating sales.

In addition to the existing pipeline, we are focusing much of our sales strategy around our business partner program to help increase awareness, drive revenue growth and improve the quality and quantity of deals in our pipeline, as mentioned in prior calls. We are partnering with three key groups: systems integrators for both government and enterprise work; embedded partners to integrate our biometrics into their applications; and technology providers to enhance our portfolio capabilities and solutions. All of this helps us position as a leader in the biometric orchestration space. Partnering with organizations such as IBM, 22nd Century, Leidos, TECH5, SISCO, Contactable, Safe-T and others, opens up doors into opportunities that would be out of reach for companies of our size and enables us to deliver market leading end-to-end biometric solutions to the market.

A recent example of this is our global partnership with TECH5, an innovator in the field of identity management solutions, enabling ImageWare to resell their solutions. Through this agreement, all TECH5 offerings will be available in all ImageWare solutions. TECH5 provides top rated biometric algorithms and matching platforms for face, iris and fingerprint recognition for use in both government and commercial enterprise solutions. TECH5 also provides innovative technologies such as contactless fingerprint capture and digital ID solutions protected by biometrics. With this partnership, ImageWare also recently announced it is providing SISCO Inc., a leader in visitor management systems in the marine and healthcare industry, with the ImageWare Identity Platform, including the TECH5 technologies.

As a hardware and software vendor for approximately 40% of the cruise line industry, SISCO can now offer this product as an upgrade to existing customers and a differentiator for attracting new ones for onboarding passengers. And for emergency situations at muster stations, which greatly increases the convenience, security and the speed of both processes. We’re encouraged by our sales pipeline and the momentum that our products and services are gaining. We believe that this will translate to rapidly increasing sales in the near future.

I'll now turn the call back to Kristin to summarize today's call.

[Kristin Taylor, President & CEO]

Thank you, AJ. As you can see, we've been incredibly busy, both from a products and solutions as well as a sales and marketing perspective. Our management team continues to strategically orchestrate efforts on multiple fronts, and we have begun to witness the fruits of our labor. The work we've done on the technical side, ensuring that we have developed products that are market competitive, has set the table for future wins. We recently announced the engagement of Imperial Capital to assist with an evaluation of strategic alternatives. We've been undergoing a comprehensive transformation process, rebuilding and creating products, and we received increasing inbound interest from outside parties. We believe having an independent third party evaluate all of our business opportunities can greatly assist and help determine ways to maximize shareholder value.

In addition, we're in the process of divesting non-core assets. We are also investigating other sources of government funding, SBA loans, for example, to address potential capital needs. We have a very good relationship with our largest shareholder and they continue to be a supporter. We believe we have access to enough capital to get us to any transaction. I am proud of the progress that we've made across all fronts of our business in the first half of this year, and look forward to the rest of 2021 and beyond.

That concludes my prepared remarks. I especially want to thank our employees, partners and investors for their support. We appreciate your continued interest in ImageWare. We would be happy to take any investor relations questions after today's call on an individual basis offline. We very much look forward to speaking to you soon.

[Operator]

Thank you for joining us for today's ImageWare second quarter 2021 earnings conference call. You may now disconnect.