Imageware Sys Inc

Our system's fourth quarter and full year 2020 financial results and corporate update conference call. Joining us today are ImageWare's chair, president and CEO, Kristen Taylor, vice president of product management, Mark Blackman, and vice president of go-to-market portfolio strategy and interim head of sales, A.J. Nadel. 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, Kristen Taylor. Thank you.

Pardon the interruption here. This is the operator. It seems that we have lost Kristen Taylor's line. Please stand by as we reconnect her. Pardon the interruption. We are currently unable to rejoin Kristin Taylor's line. However, the other speakers, your lines are now open.

Pardon me, ma'am, you're now connected. Where do I go? Oh, you're just in the call. You can, yeah, go ahead and resume your presentation.

Kristen, you're now live on the line.

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 biometrics-first cybersecurity company. Put another way, we believe that by incorporating a greater number of biometric-specific touchpoints into our current security system, we can provide greater accuracy, speed, and transparency to the identity verification process, along with a user-enhanced experience. Throughout our rich 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 slate and updating the backend 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 percent to $786,000 compared to $979,000 in the same year ago period. The decrease in sales was due primarily to the exploration 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. Revenue for the full year increased 36 percent 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 percent to $647,000, 82.3 percent 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 percent 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 product 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 1 cent per share compared with a loss of $4.5 million or 5 cent 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 $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 updates, as announced via a press release on November 12 of last year, we closed a 12-point plus million-dollar 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 two 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? Thank you, Kristen. 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 they're 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 provide 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 bio intellect 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 presentation attacks. The solution is leveraged by our ImageWare Authenticate product and is also available as a standalone solution for our partners. While the original service has been in use for years, we recognized 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 multi-factor authentication or MFA into their existing business and consumer applications. Designed for the enterprise security space, Authenticate can easily be used from a 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 weeks conducting sales visits and focus groups to gather feedback. Several customers shared with us that the LE2.0 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 tests of our software to ensure it is compatible with our 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 timeframe 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 and 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 on their mobile phones. 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 demonstrable 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 roadmaps. 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 apps, 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-sponsored patent 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 imageware technology and IPs. This will help determine whether our patents actually intersect with the long-term roadmaps of these companies and will provide a defensible market-based verification of a more realistic valuation of our IP 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 built solutions to spec for a government agency's 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 strategies.

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, refining our focus to expand market share and product footprint, implementing a business partner program, creating hyperlocal 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 to sales and marketing for the first time in recent memory. 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 receive 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 groups 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 up-and-comers who have been previously featured in two Gartner Market Guides, one for Zero Trust and a second for Emerging Technologies in the Zero Trust network access space, in addition to a Forrester NowTech for cloud security gateways. Within the 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 Access, 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 a user's 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 adds 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 one plus one equals three. 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 two 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 four key verticals, financial services, education, real estate, and state retirement, labor, and DMV agencies. I'll go through each opportunity briefly here. we've continued to create encouraging traction within the financial services realm, more specifically from credit unions and small regional banks, as these customers want and, frankly, need an end-to-end solution for identity proofing along with easy-to-use biometric authentication for their employees versus using simple, vulnerable passwords. One recent example of this is our partnership with current customer Landmark Credit Unions. Landmark uses our credential provider for Windows login, which authenticates its tellers through tethered fingerprinting in all other employees through the ImageWare Authenticate mobile app. Another example is our engagement with Catlin Bank, who recently started using ImageWare Authenticate. After a successful integration into their Active Directory environment, we have been fully plugged in on the back end and are helping to verify and authenticate their employees. The feedback we've received from employees regarding our platform has certainly been encouraging, and we've been told that it is easy to use and extremely effective. This strategic approach of providing value to our customers' remote workforce and then further expanding to the end customer base has proved to be successful. We are ensuring customers comply with KYC AML regulations while also making a friction-right solution for using biometrics to log into a profile. Our approach improves customer onboarding, decreases security risk, enhances customer security protection of money and data, and minimizes costs for customer support. We have also learned that smaller partners like the banks and credit unions are appreciative of the care they receive from our team, which is just a testament to our team's operational excellence in leading 24-7 365 customer service. With over 1,100 credit unions and small banks across the U.S. market, we plan to expand our footprint and garner the greatest amount of market shares possible within this vertical. Next, education has also been a promising sector, with a high market turnover rate of 25 percent per year in higher education. With remote education here to stay, The need for technology that seamlessly identifies, secures login credentials for student portals, and leverages biometrics to ensure the right person is taking an exam or submitting an assignment is more important than ever. Another vertical that has a growing market opportunity is real estate. With real estate fraud surging over 50% in the past year, and with 97% of property management firms experiencing fraud within the past two years, companies are facing serious problems. A key nuance of fraud in the real estate space is that crimes are usually discovered only after a person moves in, meaning that they have to go through an expensive and time-consuming process to evict someone. And finally... We intend to tackle the state retirement, labor and DMV agencies to ensure resident identity proofing and secure logins. This is another vertical that continues to see a spike in fraud, particularly in the unemployment area. And we are being asked to address this by a number of states around the country. The second key area of our new solution sale approach is within the law enforcement booking and identification. As mentioned in prior calls by my colleagues, we are only in a small percentage of the 18,000 agencies in North America. Given ImageWare's legacy business and rich history within the law enforcement realm, we plan to further deepen our market penetration by providing industry-leading booking stations and identification capabilities on any device. We also plan to further increase our presence within the public safety realm beyond just law enforcement to include first responders such as emergency medical services. Lastly, we plan to further penetrate our footprint within federal agencies such as border protection, FBI, DHS, and DOD. Given the growing dynamic need for national security, we plan to offer capabilities for users to identify in the field and secure entry within highly guarded facilities. Overall, we have been encouraged by the progress we're making on the business development front. Our sales discussions have yielded record combined bids outstanding. We're getting more shots on goal, and we're getting better at executing. All in all, there's work to be done, but we're moving ahead with better personnel and resources to capitalize on this opportunity. This concludes my update. I'll now turn the call over back to Kristen.

Thank you, A.J., 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, A.J. Nadel 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 eight-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 onboarding 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 image wear 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 footprints. 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 Demetrius and technical and IP strategist Douglas Morgan as well. All told, these changes bring the total count to four members, three 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 a 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 a 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 grit from our collective team to get to this point. I'm incredibly grateful for the efforts of our combined team in dedicating themselves to the building of our vision for the new imageware, and I believe we are well on our way. Though 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.