ImageWare Systems, Inc. (OTCQB:IWSY) Q4 2013 Earnings Conference Call March 17, 2014 5:00 PM ET
Jim Miller – Chairman and CEO
Wayne Wetherell – SVP of Administration and CFO
Mike Malouf – Craig-Hallum Capital Group LLC
Good afternoon, everyone and thank you for participating in ImageWare Systems’ Corporate Update Call to highlight their progress since its last update on November 14, 2013. Joining us today, are ImageWare System’s Chairman and CEO, Mr. Jim Miller; and the Company's CFO, Mr. Wayne Wetherell. Following their remarks, we’ll open the call for your questions.
Any statements contained in this document 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 and will and similar expressions as they relate to ImageWare Systems Inc. are intended to identify such forward-looking statements. ImageWare from time to time may 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 see Risk Factors in ImageWare’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and its 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 dates on which they are made.
I would like to remind everyone that this call will be available for replay through April 17, 2014 starting at 8:00 PM Eastern tonight. A webcast replay will also be available via the link provided in today’s press release, as well as available on the Company’s website at www.iwsinc.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of ImageWare Systems Inc is strictly prohibited.
Now, I would like to turn the call over to Chairman and Chief Executive Officer of ImageWare Systems, Mr. Jim Miller. Sir, please go ahead.
Thank you, Britney and good afternoon to everybody. As you saw at the close of the market today, we reported financial results for the fourth quarter and full year ended December 31, 2013. 2013 was a pivotal year for ImageWare, as we formed partnerships with two of the world’s largest IT providers, Fujitsu and T-Systems, a wholly-owned subsidiary of Deutsche Telekom. We have begun to see a shift in companies evangelizing biometrics, moving from the small biometric companies trying to prove the practical application in the commercial and consumer markets, to many large corporations understanding and promoting the real world benefits of bringing biometric to the mainstream public. This shift has created interactive opportunity for ImageWare, and we plan to leverage our large partner sales and marketing power to capitalize on it.
But before I comment further I’d like to speak about some specific financial results. In the fourth quarter of 2013, total revenue increased to $929,000 versus $926,000 in the fourth quarter of 2012. Total revenues for the full year 2013, increased 135% to $5.3 million, compared to 2012 with the increase primarily due to approximately $1.5 million received in August for software licenses in connection with the $2.2 million contract with the U.S. Department of Veterans Affairs.
Gross margin in the fourth quarter of 2013 increased to 160 basis points to 72.4%, primarily due to reduced cost from the relocation of certain technical support function from our Canadian office to our San Diego office. Gross margin for the full year of 2013 increased to 79.4% from 69.6% in 2012, largely due to higher software license revenues and to a lesser extent, savings from the relocation of technical support functions that I just motioned.
Net loss in the fourth quarter of 2013 was $1.8 million or $0.02 per diluted share, compared to a net loss of $62,000 or $0 per diluted share in the fourth quarter of 2012. Net loss in the full year of 2013 was $9.9 million or $0.12 per diluted share, compared to a net loss of $10.2 million or $0.14 per diluted share in 2012.
Please keep in mind that the net loss in 2013 included $4.8 million loss from the change in fair market of derivative liability, a significant portion of which have been removed for future reporting periods. At December 31, 2013 cash and cash equivalents totaled $2.4 million, compared to $4.2 million at December 31, 2012. We continue to carry virtually no debt and currently hold the $3.5 million unsecured line of credit with our largest shareholder Neal Goldman. The $3.5 million credit line was recently increased from the previous $2.5 million credit line we established in March of 2013. Based upon both current and projected cash levels as well as the line of credit we do not expect to require any incremental equity capital to fund our current operations at this time nor do we expect to drop on the credit line.
Looking ahead to 2014 we expect to recognize revenue from the completion of Los Angeles World Airport project totaling approximately $1 million in the third quarter. We’re also fairly far along the path to securing several seven-figure traditional licensing agreement in the public and private sector. Although as you well know, it’s difficult to best predict precisely when that revenue will be obtained and recognized. We also anticipate a steady increase in monthly subscription revenues in association with other partnerships which we expect to close through our Cloud, SaaS and Mobile initiative as we move throughout 2014.
During the third quarter, we were selected to provide a complete identity management in booking system for the city of Fredericton, New Brunswick which includes mug, photo signature and finger print capture. Under the terms of the agreement we expect to receive approximately $125,000 revenue in the second quarter. Through our work with Fredericton, we expect to secure additional contracted users in the surrounding cities of the New Brunswick [province] [ph] as well as other parts in Canada.
Additionally, during the third quarter, we were awarded a contract to provide software and services in support of a one-year paid pilot from an undisclosed United States federal agency to implement Iris recognition throughout 20 states and local law enforcement organizations. Acting as a subcontractor to Iris ID, we have delivered our QuickCapture application to evaluate the use of Iris recognition by public safety agencies primarily for use in correctional facilities. QuickCapture is being used to manage multiple types of electronic biometric transmission specification transactions, including enrollment, identity verification and investigative searches. We continue to strengthen our internal resources and enhance our product offerings to position ImageWare as a leader in multimodal biometric security solution and to accelerate our entry into the commercial and consumer marketplace.
And, we continue to innovate in our fields having filed for 12 new patents during 2014 to augment the named - the nine U.S. patents ImageWare already holds. As you may recall, during the second quarter of 2013 we entered into a contract with Fujitsu to jointly market a cloud-based multimodal biometric identity management solution delivered on the Fujitsu Cloud IaaS Trusted Public S5 platform. Fujitsu’s cloud platform is one of the world’s largest and most secured cloud platforms and features our CloudID product suite which is anchored by our patented multimodal Biometric Engine 2.0. We believe our CloudID Identity Management suite of products is the first offering of its kind and addresses the growing need to secure the Cloud and Mobile market using multimodal biometric security solution.
Working with Fujitsu and its cloud platform, brings ImageWare to the cloud with a recognized best-in-class global partner and the leading innovator in the IT space. Under the contract ImageWare invoices its customers on a monthly subscription basis and retains a majority of associated revenues, receiving a fee for each new subscriber registered and an additional monthly recurring fee per subscriber. Fujitsu will share in the recurring monthly fee.
Our partnership with Fujitsu to utilize their secure global cloud platform helps pave the way for entry into the retail, financial service and healthcare markets we have agreed to jointly target. Due to the early enthusiasm generated by the North American customers, Fujitsu has put in place a dedicated sales team to sell the products and services of our partnership. This team will swing into action on April 1, the start of Fujitsu’s fiscal year.
As we’ve stated in our previous call, we’ve reached an agreement with Fujitsu for a global expansion of our partnership model in the second half of 2014. We believe along with our partners at Fujitsu that there is a tremendous opportunity in the Mobile and Cloud markets specifically surrounding finance, healthcare and retail. ImageWare has already begun partnering with mobile wallet providers, as it presents an attractive opportunity and allows us to showcase our plug-in approach to identity management authentication.
The prepaid market is a fertile place for ImageWare products as the market is starving for a higher level of security, a solution we can easily provide. According to a report by Allied Market Research, the global mobile wallet is projected to exceed $5.2 billion by 2020. And we believe we are uniquely positioned to capitalize on this growing market in fact, we have already signed two commercial mobile wallet partners.
As you may recall, on the second quarter of 2013, we secured our first agreement with Emida, a leader in the global prepayment and value transfer market to provide Cloud Identity Management Services for mobile wallet subscribers and partners using our CloudID product. Emida was scheduled to roll out its mobile wallet offering to its subscribers in the first quarter of 2014. However, given a recent leadership change we now expect Emida’s launch to be delayed into the second half of this year.
During the fourth quarter, we secured our second commercial customer Global Payout, a program manager offering multinational companies, electronic payment and prepaid card solution. Similar to the Emida agreement ImageWare will provide its patented CloudID product suite which will run on top of the Fujitsu Cloud platform for Global Payout’s money track Consolidated Payment Gateway or CPG. The solution will enable a fully validated feature-rich security solution for CPG, providing a one-stop solution for access and payments to international and domestic bank accounts, debit cards and other payment systems in more than 120 countries, via desktop and mobile devices.
We expect Global Payout to begin its rollout in the second quarter this year and we’ll begin to recognize monthly revenue as Global Payout adds drivers to itself. And as well we’ll be involved in virtually every deal like Global Payout find. We also stated that we’ve been in the marketplace looking for other large key integrators that could become CloudID distributors, and that we’ve been working with several other world-class companies in this regard. To this end, you may have seen our recent announcement we began to pilot with T-Systems, a wholly-owned subsidiary of Deutsche Telekom in Germany.
The initial testing phase is to integrate ImageWare Systems multimodal biometric cloud-based identity management and credential and technology in the T-Systems’ existing products. With almost 200 million customers, Deutsche Telekom is one of the world’s leading telecommunication and information technology service company, represented in approximately 50 countries around the globe. We’ve been in discussions with T-Systems for a number of months and have begun to integrate their products with our GoMobile Interactive user authentication solution for mobile devices, our biometric engine database and GoCloudID Software as a Service ID Management platform.
T-Systems has a partner we planned to enter the European market in the near future as well as other worldwide markets T-Systems services such as the Middle East and Latin America. We are currently in discussions both directly and through Fujitsu and T-Systems with several large multinational commercial entities that are evaluating our technology for implementing cloud-based biometric identity management systems for some or all of their employees. We believe we will enter into contracts with one or more of those entities in the coming months.
As we’ve said, we are aggressively targeting the financial services vertical. We’ve now completed two 60-day in mobile biometric security management pilot project with a major financial institution that was introduced by Fujitsu. Although this process has not resulted in an order, we believe their interest in running these pilots is a strong indication of the attractiveness of our technology. During the quarter we continued to develop and advance our biometrically secured mobile transaction technology that's built upon the patented wireless push technology we acquired from VOCEL in 2012.
In July, we introduced GoMobile Interactive or GMI the industry’s first biometrically-enabled mobile identity management platform. Integrated with our Biometric Engine GMI allows companies to offer users biometric securities for their product, services and content along with directed messaging capabilities on the Android or iPhone operating system. We continue to garner very encouraging feedback in GNI – in GMI excuse me, and are currently in substantive discussions with several new clients regarding licensing opportunities. We strongly believe that this technology provides yet another significant competitive barrier to entry.
By supporting multimodal biometrics on a mobile device, we’re now able to offer an out-of-band security solutions that is far superior to traditional passwords or pin protection. Targeting verticals such as mobile banking and value transfer, retail, healthcare, and entertainment services, GMI also includes a standalone application that can be used as a turnkey solution or software development kit enabling integration with the customer’s existing applications on the Android and iPhone. Additionally, GMI supports dynamic information gathering that clients can utilize such as documenting clinical trials or compliance with pharmaceutical regimen through interactive surveys that can be optionally secured via biometrics.
We’ve now started our marketing efforts on our newest cloud-based product the PillPhone. The PillPhone which is FDA approved, is our enterprise solution for medication and information exchange, it uses the GMI platform to provide an interactive mobile program that assist in adherence to medical regimens, as well as the sharing of medical records, prescription ordering along with interactive chronic disease messaging, instructional videos and healthy tips for wellness.
This information is secured by biometric authentication and uses our patented one click messaging technology combined with our patented Biometric Engine. In fact, we recently attended the Mobile World Congress in Barcelona for the reception we received around the PillPhone was incredible. While we were there we’re also recognized as 2014 Innovation and Design Award Winner for our Biometric Engine, by the industry and research firm, Envisioneering.
As we move forward, we continue to view intellectual property as a key component to overall strategy. So at the beginning at 2013 we filed 12 patent applications in the United States around our biometric and mobile technology. In addition to our strong U.S. patent portfolio, we have been awarded patents on our multi-modal biometric engine in Canada, Australia, in China and have applications pending currently in Europe and Mexico. ImageWare’s proven track record of government experience, executing best-of-breed patented, fully compliant biometric solutions will drive the standards for commercial and consumer adoption. As we have stated, we are on plan to accomplish our goals.
Although the financial numbers are not yet were you or we, want them to be, we continue to build a backlog of opportunity that give us great optimism as we move forward. Working closely with our technology partners, we are currently in discussions with several plans regarding licensing opportunities. We will continue to target large enterprise businesses and emerging applications and believe the steps we are taking to advance our Cloud, Software as a Service and Mobile offerings and the commercial and consumer marketplace will continue to build shareholder value. Along with providing greater visibility that includes a healthy recurring revenue stream.
Now we’d like to open it up for the calls to any questions you might have.
Thank you, sir (Operator Instructions) Our first question comes from the line of Mike Malouf with Craig Hallum Capital. Please go ahead.
Mike Malouf – Craig-Hallum Capital Group LLC
Hey guys, thanks for taking my question.
Hey, Mike you bet.
Mike Malouf – Craig-Hallum Capital Group LLC
So, can we talk a little bit about the distribution on Fujitsu, you said that they would go live April 1, and then grow out globally. How many – can you talk to us a little bit about how many people are involved, and how the whole global rollout will happen?
Well Fujitsu, started out the marketing of the product last year and initially I think it was – putting it amongst their regular sales force who of course sold another literally a dozens of other different products. And I think that the excitement that we saw on the marketplace caused them to come to the decision to build a dedicated sales force that would concentrate solely on selling the ImageWare-Fujitsu joint partnership product which is absolutely tremendous new we think for us and for ImageWare and its shareholder, because it is a specialized product.
And if you’re a sales person however capable and you’re selling hardware and professional services and then some software that’s a big bag of products with quite a bit of diversity to have to worry about every day. So there is dedicated sales approach makes nothing but sense. Initially it’s concentrated in North America, and then in the second half of the year they will add folks and move out into other parts of the world. Now, this doesn’t mean that the whole total sales force of Fujitsu which numbers thousands of people will also be involved in the sense of generating leads and opening doors. But, think of it as a sort of specialized sales swat team that is going to be the resident, geographic experts in biometrics that will help close out the deal. And as I said, we couldn’t more pleased we think it’s just a great – a great approach to move in the products ahead to the market.
Mike Malouf – Craig-Hallum Capital Group LLC
Okay, great. And then you mentioned, that you have some entities, some large contracts kind of in your pipeline. Can you give us a sense of may be just generically what the use would be and how would a rollout like that happened?
Sure, good question. Well, the use for the products that we’re seeing is several, but in terms of a contract that we have been pursuing they are for including Biometric Identity Management, full identity management in for employees and company. So, this would allow a large company across its complete enterprise to get full scale of Biometric Identity Management, they would take that over the cloud, they would take that as a service therefore pay us on a person enrolled then subsequently on a per person per month basis, and they would roll that out throughout their entire enterprise.
The rollouts we expect will be a little bit all over the block from the standpoint that, some of these companies have several 100,000 employees it just seems logical to me that they would do so many employees or it be a facility or be a geographic area, and then roll that out. So you won’t see all 300,000 employees to 400,000 employees in that case come online immediately I think that’s realistic, more likely it will be rolled out over a quarter or two. But it will not be a long drawn out rollout either, because this is – once the decision has been made to procure the product it’s available to you via the Fujitsu Cloud you can enroll your employees 24/7. So, we think once the contract is signed the rollout will happen evenly but it will take a few months to get the entire employee population.
Mike Malouf – Craig-Hallum Capital Group LLC
The other thing we’re seeing is, interest in the GMI product as well. So, and particularly from mobile wallet or folks that are selling products or services who need more than pins or passwords to properly secure data products, good services going over a mobile device. And, that is something that will also rollout we think in sort of in a paced approach you won’t get all 150,000 people on day one, it will take a couple of months. But once it starts, it should go relatively evenly throughout the entire population. So those are the two – so those are the two things that we’re seeing with Fujitsu where there is a lot of interest and the two things that as we said, we look forward to reporting concluded deals in those areas in a relatively time.
Mike Malouf – Craig-Hallum Capital Group LLC
So, these companies are actually in the – they’re not in the test-based or maybe let’s put it this way, they’re not in the concept-based where they’re just trying to see if biometrics work for them there are more the let’s see, who can do it the best for us before we choose or have they actually noted down to you and they’re just negotiating the contract?
Yes, Mike these are companies that have decided they’re going to put biometrics into their system in the fiscal year they’re in. So they have a plan, a budget, a need now it’s a question of okay, let’s get the paper work done and let’s start going – let’s start going.
Mike Malouf – Craig-Hallum Capital Group LLC
Right, thanks a lot for.
Yes, you bet, you bet.
Thank you (Operator Instructions) Our next question comes from the line of Bob [indiscernible] Capital Management. Please go ahead.
Hi guys, also thanks for taking our question. Our question really is along very similar lines as the previous question. You obviously have beyond any shadow of a doubt, world-class partners of Fujitsu and Deutsche and I’m not sure you can do much better. But, the Fujitsu start-up really isn’t starting until April 1st. How long do you anticipate the Deutsche ramp up and – and really the question isn’t so much do we have credible partners but I think we’re all grasping for what is the time period we think they will manifest into significant revenues?
Yes, it’s a good question Bob, and thanks for asking it. With respect to Fujitsu before I move to Deutsche, Fujitsu had - was out in the market and has been out in the market acquainting their customers with the ImageWare products. I think the only change to that plan has been I think a very happy one and that is the [inaudible] of a dedicated team to help move those products to market and generate sales quicker. They like us are interested in generating revenue as well.
Deutsche Telekom was slightly different. Deutsche Telekom had been working as the release alluded to for the last several months with us on developing specific business cases. So, there is a pretty good idea of where the products are going to go and who it is that’s going to take them. So, we’re looking at a much quicker time to market and therefore time to revenue than we’ve seen in the Fujitsu relationship. So just different approaches both equally good. I think but in the Telekom case they had been building the business cases with specific partners throughout the time we have been talking about how the technology would best integrate with them.
So, we look to see something there. Again impossible for me to give you the exact date. I know you don’t expect that but soon, you know we think we’ll see things in the second quarter, early third quarter that will result in revenue.
Terrific. And would you anticipate in 2014 an additional Deutsche or Fujitsu?
You mean as an additional partner?
No, no, someone else along the lines for a major player like that guys on the…
Yes, yes absolutely, yes. We’ve – as we’ve said in previous calls and we’ve made no secret about it is we’ve talked around to investors. We are a product company and our plan depends on partners helping us go to market, particularly in those geographic parts of the world where we do not have a presence. And so, along those lines yes, we are – we continue to be in discussions which we believe will be productive and produce at least one if not more partners of the same kind that we’ve been talking about today, yes.
Terrific. Well keep up the good work.
Thank you, Bob. I appreciate that.
Thank you. Our next question comes from the line of David Tim [ph] with Celeste Capital [ph]. Please go ahead.
Yes hi. I was wondering if you could touch upon what you see as sort of the revenue opportunity for Global Payout and provide some details there as you did for Emida a while ago, just sort of how many subscribers are there, what’s the contribution margin, how much upfront you expect to get per enrollee?
Sure, I’m a little hesitant to comment on global business plans as you would understand; there is that something that they properly should do. But, they’re public and so you can see the kinds of the deals that they’re entering into and they’re doing I think outstanding job of signing up some between Visa and China UnionPay some very outstanding clients. The revenue model is per person upfront and per person as we go along and that model is $0.50 a person upfront and $0.50 a person a month. And, that the up – the part one, the enrolment fee is 100% ImageWare, part two, is split 70%-30% with our partners at Fujitsu, 70% to ImageWare.
Okay. And I guess, is there – so you’re going to start to recognize that revenue, did you say the second quarter?
Well, we think that’s when they have indicated to us that they’re ready to rollout. This is a or – this is a application or a feature that we’re providing that sits on top of the program that they’re selling.
So we have – we go to market when they go to market, they’ve indicated that they are ready to go here in a very, very shortly and yes in the second quarter, we’re pretty excited by that and we’ve seen a reason why that’s not going to happen, so yes.
Okay. So, you’re sort of already seen - those the track will be ready to roll out in the second quarter, but I mean, are you confident that there are that I guess there is a -- that people are sort of ready to kind of enroll in it, that the base that they’ve got right now that there is a strong possibility for conversion onto what you’re offering?
Yes, I think, with all these folks I mean look…
…these guys – they guys have done their homework before they enter into an agreement with us. They’ve gone out and they’ve tested the market and tested their clients and their future projected clients for interest in this. So they wouldn’t be signing this agreement if they didn’t already know that there was an appetite and an interest in taking the ImageWare product onto as a security future on top of the products they’re selling. So yes, absolutely we’re not concerned about that.
Now, as they roll out, will 100% of every single user elect to use the product? I mean, I don’t know. But they’re offering it to every single person that they sell it. That’s what they have told us down several times and in fact if you go on to their site, you can see that they’ve got some pretty significant folks signed so we’re excited by that.
Right, right. Okay, all right thanks.
At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Miller for closing remarks.
Thanks, Britney. I'd like to conclude by assuring you all that things continue to move along nicely at ImageWare. We’re at an incredibly exciting intersection of three major market moving forces the Cloud, Mobile computing and biometrics, and we’re laying the foundation in that relationship that we believe will translate into significant recurring revenue opportunities.
We reiterate our guidance from our previous call. We’re dealing with some of the world’s largest companies and these entities make no decisions quickly. No matter how much you or we wanted to. When you think about it, no one can reasonably expect otherwise. As they move to put some of the world’s most recognizable brands on ImageWare product in deals with their largest customers they will be deliberate, calculating and we’ll strictly adhere to their internal process.
However, there is absolutely no doubt in our mind that our patience and yours will be well rewarded. Some of you wondered are these relationships the kind that will actually generate revenue, and to that we say a resounding, yes, and respectively ask, do you really think these companies are engaged with ImageWare because they’re not serious, they have nothing better to do, well of course, not.
In summary, our strategy to diversify ImageWare’s revenue stream and decrease our dependency upon larger government products is now close to bearing tangible result. You will continue to see us pursue government contracts that fit our products, however, we will emphasize our Software as a Service, Mobile and Cloud offering in the commercial and consumer markets which will provide us with more stable recurring revenue stream and a clear picture of ImageWare’s long-term opportunity.
We appreciate your continued support and interest and in return, please know that we remained absolutely committed to returning shareholder value. We thank you for participating in today’s call. And we look forward to speaking with you again on the future calls. Thank you and good afternoon.
Thank you. Ladies and gentlemen, this does conclude our call for today. We thank you for your participation. You may now disconnect.
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