ImageWare Systems Inc

OTC:IWSY

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the ImageWare Third Quarter 2021 Earnings Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Brian Prenoveau, Investor Relations. Please go ahead.

[Brian Prenoveau]

Good morning, everyone, and thank you for joining ImageWare's Third 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 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, CEO. Kristin?

[Kristin Taylor, executive]

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. I'll begin with a high-level overview of our operations, followed by Mike, who will provide a review of our third quarter financial results. We will then have AJ who will provide an update on our refocused and rationalized products as well as refocused customer sales efforts. For those of you that may be less familiar with the company, 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. ImageWare identifies, verifies and authenticates who people are, not just what keys and codes they have. ImageWare's suite of products provides multifactor 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. As you know, we rebuilt our products and created a new unified platform in 2020. This platform is competitive and strategic now. The products are interoperable and can be purchased as modules or as a complete end-to-end solution. Our platform consists of 3 distinct functional solutions. One, enroll and identify; two, badge and credential; and three, authenticate. Each solution can be deployed in federal law enforcement and enterprise applications. The core of our platform is powered by our biometric engine consisting of the company's proprietary database that matches biometric data on a real-time basis. The identification and authentication security markets are expected to continue growing at double-digit rate for the next several years. Governments and corporations are increasing their investments in security. Numerous privacy laws are being implemented both domestically as well as internationally. Though our solutions have broad application across many verticals, we are heavily focused on delivering our market-leading solutions in state and local governments as well as federal agencies.

As a biometrics-first cybersecurity company, we're able to give greater accuracy, speed and transparency to the identity verification process. The progress we have made with our refocused product set and focused sales channel efforts is delivering results, which can be seen in some of our recent customer wins. We are seeing increased activity across all major channels, which is translating into not only more proposals but more sales. Yesterday, we announced the largest SaaS deal in the company's history, which AJ will walk you through in a few minutes. As discussed last quarter, we engaged Imperial Capital to assist with an evaluation of strategic alternatives. We have mentioned that all options are on the table related to opportunities, which include M&A, asset divestitures, among others. Although no assurances can be given, we've had interest from a number of interested parties and are currently following up on those opportunities. We hope to provide a more detailed update on these discussions in the very near future.

We are also engaged in discussions to provide the company with additional short-term capital, which is necessary for us to capitalize on the opportunities we have before us and address our working capital requirements. Again, we have a very good relationship with our largest shareholder, and they continue to be a strong supporter. While no assurances can be given, we believe we will have access to sufficient capital to address our short-term working capital requirements and get us to any potential transaction. I would like to turn the call over to Mike Shambach, to briefly address the financial results. which are also available on our website and Form 10-Q. Mike, go ahead.

[Mike Shambach, executive]

Thank you, Kristin. Revenue for the 3 months ended September 30, 2021, and was $778,000 compared to $2.5 million for the same period in 2020. The decrease in revenue was primarily driven by software and services revenue. For the 3 months ended September 30, 2020, 2 customers accounted for approximately 68% or $1.7 million of the total revenue. This represented a large onetime services contract deployment in addition to software licenses. Gross profit for the 3 months ended September 30, 2021, was $622,000 as compared to $1.6 million in the comparable period of 2020. The decrease in gross profit was driven by the same year-over-year decline comparison in revenues. Operating expense for the third quarter of 2021 increased to $3.1 million compared to $2.7 million in the same period a year ago. The increase in operating expense was primarily due to increases in higher professional services fees, licenses, dues and higher insurance costs. In addition, an increase in noncash stock-based compensation expense and onetime charges for discontinued services. These increases were partially offset by lower personnel-related costs and decreases in rent in our continued efforts to reduce expenses. Loss from operations for the 3 months ended September 30, 2021, was $2.4 million compared with a loss of $1.1 million for the same quarter in 2020. The decrease is due to primarily to lower revenue in the third quarter and higher operating expenses. We ended the third quarter with $1.7 million in cash. As a reminder, the $1.6 million Payment Protection Program, or PPP loan, was forgiven during the third quarter. This concludes my financial summary. I'll now turn the call over to AJ for a progress update on our products and platforms.

[AJ Naddell, executive]

Thank you, Mike. I'm proud of the progress that we've made and measurable improvements in our overall sales pipeline. During the last earnings call, we spoke about increasing the sales pipeline and focusing on high-value leads. We also discussed the release of our first Law Enforcement 2.0 module, ImageWare Capture in the third quarter. Modernizing the law enforcement platform is a key component of our growth strategy, and we are beginning to see the results from those efforts. Just yesterday, we announced a new win with King County, Washington, the contract worth $1.5 million is the largest SaaS deal that ImageWare has ever closed, selling ImageWare Investigate, a Law Enforcement 2.0 or LE2 platform module. 700 law enforcement officers across King County will be using the solution for digital lineups and biographic searches from anywhere and with any device, including their mobile or handheld devices, tablets, mobile data terminal or MDT or a desktop computer. We will be migrating over 13 million arrest records from on-premises servers to the ImageWare Law Enforcement 2.0 servers in Amazon Web Services, GovCloud. King County will be using ImageWare Authenticate to authenticate into the ImageWare solution. This can also be used for other county-owned applications as needed. King County selected ImageWare based on our cutting-edge solution that far surpasses that of our competitors, visible through our rapid and accurate identification in the field, seamless user-friendly interface for creating digital lineups and quick and efficient deployment while remaining very cost effective. Again, this is the largest SaaS deal in the company's history and one we're very proud of. We spent the previous 18 months modernizing our entire law enforcement platform by updating the UI and UX back end, our licensing structure and even our 24/7 mission-critical customer support. This deal with King County, one of our many long-standing customers is a testament to how our original law enforcement platform was redesigned to be highly desired and utilized by officers. We have a 34-year history of innovation paired with top-notch customer support. This has driven our high retention rate. Our customers continuously look to us to drive more innovation. Our new Law Enforcement 2.0 platform is our answer in the response from our customers, both new and existing, is resoundingly positive. By focusing on the new SaaS contract models, we think we can win higher-margin business with greater lifetime values, which typically reduces customer churn. Contracts like these can be pursued on all product lines. Even Wall Street greatly values SaaS revenue because it's predictable compared to onetime transactions.

Incidentally, we are moving as many of our existing customers over to SaaS over the next year. As a result, we have an exciting 2022 in-store with more revenue coming from law enforcement and federal agencies across both North American and international markets. leveraging our new modernized software and strategy. Our focus on growing our business partner program will also provide us the ability to win higher ticket opportunities and higher closing rates. This year has provided us an opportunity to turn around the products and sales pipeline, and we're making steady progress. Product rationalization has allowed us to focus on a set of products and given us a more targeted market sales effort. Customers are starting to understand the product set and are excited to get on board. We believe we now have high-quality products and higher quality of sales leads and opportunities going forward. As a reminder, federal and state business opportunities have longer sales cycles, especially as deal size increases, and we expect new sales opportunities to take between 6 months to a year to implement. However, we believe we have the right plan in a comprehensive strategy to continue this momentum and drive increased sales. I'll now turn the call back to Kristin to summarize today's call.

[Kristin Taylor, executive]

Thank you, AJ. We are encouraged by the progress we are seeing with some of our strategic initiatives designed to bring ImageWare to long-term sustainable growth. We are working hard across all fronts of the business and are laser-focused on enhancing our new product portfolio in addition to executing against our sales and marketing objectives. I'm proud of the progress that we've made throughout this year and look forward to greater momentum in 2022.

That concludes my prepared remarks. I especially want to thank our employees, partners and our investors for their support. We appreciate your continued interest in ImageWare. I acknowledge that many of you would like to have an open Q&A with management, but because of confidentiality agreements that have been recently negotiated related to strategic discussions, we will not be conducting a Q&A session during this call, kindly understand this mandate. I promise we will have a Q&A in the future. We would be happy to follow up with all investors subsequent to today's call.

[Operator]

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