U.S. Markets closed

Edited Transcript of IWSY earnings conference call or presentation 9-Aug-18 8:30pm GMT

Q2 2018 ImageWare Systems Inc Earnings Call

San Diego Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Imageware Systems Inc earnings conference call or presentation Thursday, August 9, 2018 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* S. James Miller

ImageWare Systems, Inc. - Chairman & CEO

* Wayne G. Wetherell

ImageWare Systems, Inc. - Senior VP of Administration, CFO, Treasurer & Secretary

================================================================================

Conference Call Participants

================================================================================

* Harvey R. Kohn

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, everyone, and thank you for participating in ImageWare Systems first quarter financial results and corporate update call to highlight the company's progress since its quarterly update in March. Joining us today are ImageWare Systems Chairman and CEO, Mr. Jim Miller; and the company's CFO, Mr. Wayne Wetherell. (Operator Instructions)

Any statements made on this call are not historical facts and are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, if, should and will and similar expressions as they relate to ImageWare Systems, Inc. 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 guarantee that such results will, in fact, occur. These projections are subject to change and could differ materially from final reported results.

For a discussion of such risks and uncertainties, please see risk factors in the ImageWare's annual report on Form 10-K for the fiscal year ended December 31, 2017, its quarterly report on Form 10-Q for the quarter ended March 31, 2018, and other reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.

I would like to remind anyone -- everyone that this call will be available through replay starting at 7:30 p.m. Eastern Time tonight. A webcast replay will also be available for 90 days on the company's website at www.iwsinc.com. Any redistribution, retransmission or rebroadcast of this call in any way without express written consent of ImageWare Systems, Inc. is strictly prohibited.

I'll now turn the call over to Wayne Wetherell, CFO, ImageWare Systems. Please go ahead, sir.

--------------------------------------------------------------------------------

Wayne G. Wetherell, ImageWare Systems, Inc. - Senior VP of Administration, CFO, Treasurer & Secretary [2]

--------------------------------------------------------------------------------

Thank you, operator, and welcome to those of you joining our call today. Our quarterly financial results are available in the recently published news release and on Form 10-Q.

Revenue for the second quarter of 2018 totaled $1.9 million, up 78% from $1.1 million in the same quarter of 2017. The increase was due to increased product revenue from the Veterans Administration and several of our law enforcement customers. As we have stated in the past, our government revenue is subject to significant swings due to the nature of the government project business.

Gross profit for the quarter was $1.6 million as compared with $810,000 in the second quarter of 2017. Gross margins increased to 84% in the second quarter compared to 76% in 2017. Higher software license revenue, which generally carries higher margins, contributed to the increase in profit margins.

The second quarter net loss from continuing operations was $2.3 million compared to $2.5 million in the same quarter of 2017. Net loss per share for the quarter was $0.02 compared to $0.03 in 2017. We ended the quarter with cash of $2.2 million.

This concludes my financial review. I will now turn the call over to Jim for the progress update on our business strategy.

--------------------------------------------------------------------------------

S. James Miller, ImageWare Systems, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, Wayne. Good afternoon, everybody. As always, happy to have the opportunity to speak with you all today and give you an update on the sales and marketing efforts of ours and those of our partners.

For those of you who'd like to access our biometric technology overview and learn more about what our game-changing, patented, multimodal biometric technology does, how it's different from and superior to other competing technologies and why it's needed, I invite you to visit our website at iwsinc.com or contact our IR team directly to discuss.

Last quarter, we talked about how several of ImageWare's partners, including Fujitsu, CDW and IBM, had initiated their respective sales and marketing programs and that ImageWare and several of our partners were now out selling. I'd like to begin this update today by bringing you current on the projects we've previously mentioned.

First, in July, we announced the VA awarded our partner, Four Points Technology, a $3.6 million multiyear task order for services and licenses in connection with the biometric authentication system we created and deployed at the VA.

In June, we received via our partnership with Fujitsu an order from a Canadian financial institution. While these orders start as small pieces of business, it's the first purchase order with Fujitsu from an unrelated entity and the first to be entered into in the financial sector in Canada.

Thirdly, the Fujitsu ServiceNow help desk project has completed integration and is only awaiting certification from ServiceNow in order for the project to be announced and marketing and sales to start. We understand that the Fujitsu and ServiceNow customers -- excuse me, we understand that Fujitsu and ServiceNow who supply help desk services to multi hundreds of users will be able to offer their services with our technology embedded in their offering, which will allow a higher and more secure quality of help desk services at a price less than what help desk operators are currently paying.

Fourth, CDW executed 2 additional sales in the quarter and advises us that their backlog of business is increasing and additional sales projected throughout the remainder of the year.

Fifth, we continue to work with one of IBM's largest ISAM customers, and we continue in discussions on how that customer can authenticate its employees.

We are now at the point where we are discussing pricing.

Sixth, in March, Fujitsu announced it has expanded our sales and marketing agreement and was bringing their MedClick platform into the market. MedClick is an OEM version of our FDA-approved pillphone product for biometrically secure patient engagement, medical adherence and authentication of e-prescription ordering and clinical trials. Since then, we and Fujitsu have successfully integrated MedClick into the Epic electronic health care application. The EPIC electronic record solution for health care provides records for over 200 million patients. So we're very [excited]

[Audio Gap]

commenced its marketing and sales activities around the product and will soon be adding resellers who will target the specific areas of chronic disease management with the product. As we've discussed on prior updates, the health care market is expected to support a higher per person, per month price point.

Seventh, in our last call, we mentioned that we were working to enter a new market, the Internet of Things. A group of stand-alone devices controlled or monitored from a remote location, which appear to be the target -- appear to be larger than any of the individual markets we have been selling into. Our partners, including Fujitsu, are having material discussions and negotiations with several companies in the market, and we are comfortable that this will result in this year business.

In July of 2017, Fujitsu announced that it was working on a federated identity management opportunity, which provides various companies with the ability to use a biometric enrollment for subsequent authentications of transaction, data service or any kind of access to a network with multiple other companies. There's been no real movement on this project, and it seems to us, from the outside looking in, as a little mired in deployment indecision.

And finally, with Fujitsu's help and lead, we have now completed our upgrade for SAP and Biometrics-as-a-Service is now available for sale via the SAP and Fujitsu partnership. You can see that product is now listed on the SAP global website.

As I've said before, it's important for me to remind all of you that the process we take with each and every partner is unique to that specific partner. Each partner has its own set of objectives, market forces and processes that need to be navigated internally prior to going to market. Sometimes those processes, especially those that involve a very large company, move at a glacial pace. But I also need to remind you that they are all, in fact, moving and moving towards very, very large market.

I'd also like to note that throughout the year-to-date, we've increased our sales with partners. In the first half of the year just ended, we closed 11 new deals for our GoVerifyID product, in addition to significant new orders of our CloudID and law enforcement products. GoVerifyID orders were 0 starting in this quarter 1, so progress is being made. And as we've said so often, the adoption curve is not a light switch that goes stratospheric with the snap of a finger. Rather, it's a gradual curve that, most importantly, needs to start somewhere. And start, it has, with more to follow as you will see.

While the issue of financing has been raised by several investors, we have several plans in place, which will solve that problem quickly and relatively painlessly when we conclude the time is right.

And now I'd like to turn our call over to Ben, our operator, to begin the Q&A session. Ben?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Harvey Kohn of HRK Strategic Advisory.

--------------------------------------------------------------------------------

Harvey R. Kohn, [2]

--------------------------------------------------------------------------------

First of all, big congratulations on the -- when you've been a long-term investor like I have and I look back over the years, and I understand that as of January -- sorry, as of December 31, 2017, you actually had no paying customers in the GoVerifyID area, and your rundown of the new paying customers right now is just very remarkable. And I know that the beauty of that model -- revenue model is that it doesn't go backwards. It only goes forward, so they keep adding on each time. My question really is that when you mention names like MedClick and the help desk of Fujitsu, I mean, the numbers on these things are just mind-boggling when you know how many customers they have. But given the current security climate in the country, my question, why does it take so long to close these major deals?

--------------------------------------------------------------------------------

S. James Miller, ImageWare Systems, Inc. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Yes. It's a great question and a fair one and I know on everybody's mind. And I would -- we at management would be not truthful if we told you that we don't ask ourselves that several times every day because it is -- it has been obviously a long process. Well, I think the answer to it is a couple of things. Number one, it's education. People need to understand that biometrics is really simple and easy to use, and the only way to do that is to have test marketing and groups that are focus groups that get to use the product and tell people and companies or people who are looking at rolling out for consumers how really simple and, frankly, I'll say fun the product is to use. The second part is -- and I've said this before, but it's really true, and I think if you relate it to just your personal life and completely divorce it from biometrics, it's a fact that any habit that we have, particularly one that goes on for 50 or 60 years, and I speak now of -- specifically of PINs and passwords, which have been the bulwark and the primary security method we've used to safeguard information stored, have been around 50 to 60 years. If you use that, you're incredibly comfortable with it. And like a lot of habits that we all have, particularly if they're not particularly good ones, you can look at things and say, "Yes, I can go with this a little further along the line even though I know I should do something about it." Change is never easy particularly when it's significant fundamental change, which moving off of a PIN and password system is even when the security climate, as you rightly point out, is crying for that. The area is just -- is ripe for a change. And we see every day that 80% of the data breaches in the world are PIN and password related, according to Verizon's most recent security report, about 82% of the data breaches. But it's a big step, and as we've all learned on the journey that ImageWare has taken, it's not one taken lightly or quickly. So you'd have seen in the space people taking an intermediate step, which is the so-called 2-factor approach. So short of PINs and passwords completely, the ability to just get a yes or no, the ability to get an instant password that changes, that approach has been a comfortable toe in the water, an intermediary step, I'll suggest, that people take on the long journey to biometric authentication. And using the IWS platform, we, too, do 2-factor authentication as well as biometrics authentication. And we have been an enthusiastic evangelist of biometrics. It's clearly superior than 2-factor methods. But that said, if someone wanted to go in the intermediary step, we're positioning ourself now to take a little more advantage of the 2-factor capability we've long had in this company. So what I mean is we're setting it up so that you can buy the biometric platform from ImageWare, start with 2-factor and via one vendor, which would be us, seamlessly integrate up the chain to biometric authentication. And so we're trying to take some positive steps and proactive steps to make the journey for our customers easier and put another step in the middle, which will be revenue generating, of course. I think probably all of us on the call saw that a company called Duo was acquired by Cisco for $2.3 billion last week. Duo is a 2-factor authentication company with no biometrics at all. So there's clearly a market for this step. So I think the combination, Harvey, of education, showing people that if they don't want to go to biometrics all at one time, there's an intermediary step that can be taken and know that you have the upgrade path. People are every day learning more and more about how biometrics work, and I don't mean just consumers: partners, resellers. It's still in the hands of -- while it's been around as a science and technology and a product in the government market, it's still relatively new in the enterprise and consumer marketplace. And we remain as confident and as excited as ever, but I -- and I appreciate that's sort of a long answer to your question, but it is just the long answer to the question because it's a complex situation, and there isn't a quick sound bite I can give you that will answer it. It's a combination of a lot of things. We think we're addressing them all at this point now, and we think you'll see the results from our addressing those factors in the form of sales and additional GoVerifyID customers.

--------------------------------------------------------------------------------

Harvey R. Kohn, [4]

--------------------------------------------------------------------------------

Okay, great. And just it's nice to see those sales coming in every quarter. Looks like that's something that will just continue. So congratulations.

--------------------------------------------------------------------------------

S. James Miller, ImageWare Systems, Inc. - Chairman & CEO [5]

--------------------------------------------------------------------------------

We're -- like -- and I appreciate your comments on the growth of the GoVerifyID product customers. It -- as I said, we started at 0, so -- and while 11 is just a very quick stopping point by -- the market is enormous, every analyst that you can see in the market is predicting an enormous market that is coming to us. So we're looking forward to a pretty explosive growth on that number as well.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

This concludes time allocated for questions on today's call. I would now like to hand the call back over to Jim Miller for any closing remarks.

--------------------------------------------------------------------------------

S. James Miller, ImageWare Systems, Inc. - Chairman & CEO [7]

--------------------------------------------------------------------------------

Thanks, Ben. First, let me thank you for your continued support through what has sometimes been slow progress. It's difficult for the IWS team as well, I can assure you. But the reason we remain confident is because we know we have tremendous technology, we know we have a huge and growing market, and we know we have major partners who will ultimately bring home the sales. We know this because we see the progress on these fronts every single day.

One of the things which allows us to keep our sanity is recognizing the reality of our evolution from a technology company to a marketing and sales effort. Now it was about 4 years ago that we began to realize that the companies we were approaching to license our technology were major companies, and at the end of our discussions and demonstrations with each and every one of them, it was going to be difficult or impossible for them to take such a major move with our very small company. So we decided to try to bring in major companies as our sales partners, and we succeeded.

The first of them joined us about 4 years ago, and they went through their due diligence process as well as their own evaluation of the market and how they would execute a marketing and sales plan. It was only earlier this year when Fujitsu commenced the marketing and sales efforts of our product under their label in earnest. Several other partners went to market on a similar time frame and after a similar process.

The point I'm making is the fact that our partners have only been marketing our or their products for months, not years. They are targeting large enterprise users, which, as you can imagine, is its own process. And the progress that they have been making is good progress, and that will become obvious as transactions are completed and revenues grow.

With that, we thank you again for your attention today and for your continuing belief in our technology and our market. That belief will pay dividends.

Thank you all, and a good afternoon to everyone.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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