Earnings Call Transcript - AUID Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q1 Fiscal Year 2022 Earnings Conference Call and Webcast. As of this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I will now like to turn the conference over to your speaker for today. Grace de Fries, you may begin.

Grace de Fries, Corporate Secretary

Thank you, operator. Good afternoon, everyone. With me on today's call are Tom Thimot, our CEO, Tripp Smith, our President and CTO, Stuart Stoller, our CFO, and Graham Rod, our General Counsel. By now, you should have access to today's press release announcing our first-quarter 2022 results. If you have not received this, the release can be found on our website at www.authID.ai under our Investor Relations section. We are now on Slide 2. Throughout this conference call, we will be presenting certain non-GAAP financial information. This information is not calculated in accordance with GAAP and may be calculated differently from other companies similarly titled non-GAAP information. Quantitative reconciliations of our non-GAAP financial information to their most directly comparable GAAP financial information appear in today's press release. Before we begin our formal remarks, let me remind everyone that part of our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's press release, and others are discussed in our Form 10-K and subsequent filings, which are made available at www.sec.gov. For those of you on the webcast, please note that we have set up the presentation for you to advance the slides manually. You can do this by hovering over the slides and tapping the double arrows that appear on the right-hand side of the slides. Tom and Stuart will also provide you cues for advancing the slides. I'd now like to introduce our CEO, Tom Thimot.

Tom Thimot, CEO

Thank you, Grace. Welcome everyone to today's call, during which we'll talk about the market drivers and our progress made in the first quarter of 2022. Grace, let's turn to Slide 3. The market is moving towards authID, why? Every day, new cyber-attacks haunt the news. Whether it's Lapsus$ hacking Microsoft and Okta, the SolarWinds breach, or gaming operators losing $500 million in cryptocurrency funds, these breaches have all been largely attributable to compromised credentials and reliance on weak legacy authentication methods. Recent estimates indicate that by 2025, the total global cost of cybercrime is expected to reach $15 trillion. Even the White House has instructed all federal agencies and contractors to adopt zero trust, with a specific directive to discontinue support for authentication methods that fail to resist phishing, including one-time codes or push notifications. The failure of legacy methods to deter broad cybercrime is why the biometrics-as-a-service market is projected to grow to over $16 billion by 2026. Just last week on May 5th, World Password Day, the three big tech giants, Microsoft, Apple, and Google, teamed up with the FIDO Alliance, of which we are a part, to announce they will create infrastructure for expanded support of common password-less sign-in standards. As members of this FIDO Alliance, we have also been working towards the same goal. We believe that this announcement significantly enhances the prospects for authID products, as it indicates the industry is moving towards a password-less future in which our biometric identity authentication could play an integral part. FIDO, however, does have some shortcomings, and this is where we see a tremendous opportunity for authID. FIDO authentication is still vulnerable to first and second-party fraud, and an enterprise still does not know with certainty who is behind the device. Yes, my kids can open my phone with my pin-code and order age-restricted goods, but does the alcohol delivery company really know who made that purchase of a case of Tito's? Can I dispute that purchase? In short, device authentication by itself simply does not provide an indisputable audit trail of who made a purchase or who transferred funds. Our verified platform solves this problem because we couple something you have, your FIDO2 device, typically an iPhone or an Android device or a laptop, with something you are, your verified selfie. Together, these factors deliver the highest identity assurance secured by a seamless user experience. Eliminating passwords with 4-5 defenses and high identity assurance in a cloud-based solution is why companies are turning to authID and why we see strong momentum in our sales pipeline. Turning to Slide 4, we continue to build a solid team, which brings a diversity of backgrounds and experience to help shape our strategy, products, and culture. This diversity is critical to delivering ethical AI and identity products in a bias-free manner. Here, we highlight several hires and promotions made in sales and technology in the last few months. In addition, Joe Trelin joined our Board of Directors, bringing invaluable industry experience in technology and product management as the former Chief Platform Officer of Clear and a former executive at NBC Universal and Amazon.com. As we announced last month, Stuart Stoller, our long-time CFO, will retire, and Annie Pham will succeed him as our CFO in June. On behalf of our entire team, I want to thank Stuart for his dedication and help in shaping our mission and building critical processes to support our growth. We wish you only the best. Over the course of her career, Annie has demonstrated excellence across all aspects of finance, particularly with software, subscription, and SaaS business models like ours. Annie also brings broad experience in public company and SEC reporting, secondary offerings, and complex accounting transactions. Annie will be a great addition to help us advance to the next level of growth. Turning to Slide 5, since the requirement for a frictionless user experience is present in every sales conversation, the technology enhancements we made in the first quarter are helping our sales initiatives. These releases include a sleeker user interface, the incorporation of additional language preferences, and enhanced artificial intelligence algorithms that improve both the accuracy and speed of the user experience. Joining the Microsoft partner program with a low-code deployment of verified to provide biometric authentication for Office 365 and Azure broadens the distribution of our verified CloudConnect integration. We also continue to build on our patent portfolio. In addition to our three U.S. patents awarded in December of 2021, in February we received US PTO Notice of Allowance for our patents to be issued tomorrow on May 10th. This patent protects the verified multi-factor authentication methodology, which combines an accountholder's explicit consent for a transaction with identity verification and secures it with a unique digital signature. Critical to fighting fraud, this patented methodology creates an audit trail for all parties. Last week, we announced independent confirmation by iBeta that our Passive Liveness Detection achieved conformance with ISO 30107-3 Level 1 and Level 2 standards for Presentation Attack Detection, or PAD, with a perfect score. Best-in-class liveness detection is critical to ensuring strong protection from penetration attacks, spoofing, and other social engineering attacks that have plagued others in our industry. This is just one aspect of our commitment to continuous platform enhancements so that we may deliver the highest levels of security and build a safer, next-generation, digital identity landscape. Turning to Slide 6, in the first quarter of 2022, we signed agreements with a U.S. medical certifying board, a FinTech provider of tax information to more than 50 lenders, as well as a leading platform for medical professionals. Also, through our U.S. channel partners, we added several FinTech customers who offer consumer, auto, and medical financial services. To achieve our strategic and financial objectives, we will build on these early successes. Using a proven playbook to generate leads, we are building a robust pipeline that focuses on those verticals most impacted by the rising threats of cyber attacks and account takeovers, including cybersecurity vendors, healthcare, and FinTech companies that provide both financial services and cryptocurrencies. Our marketing team is laser-focused on developing campaigns in these verticals, and our sales team is working diligently to turn them into qualified prospects and convert them into booked deals. Turning to Slide 7, from launching our MVP or minimum viable product in October, our team has executed extremely well to rapidly deliver engaging marketing and sales campaigns and product enhancements that speed adoption and implementation with low-code integration. As noted, we have signed agreements and advanced our POB with early prospects to drive product adoption. We believe we will see the benefits from this progress in our sales pipeline and booked deals. As a result, we expect that we will start reporting on our identity KPIs in our next quarterly results call in early August. Those KPIs include identity booked ARR, identity deferred revenue, and identity annual recurring revenue. We believe that these non-GAAP measures focus on sales of our verified identity products and will give a good indication of the outstanding progress that we are making. Now, let me turn the call over to our CFO, Stuart Stoller, to provide an overview of our financial results for the first quarter. Stuart?

Stuart Stoller, CFO

Thank you, Tom. Turning to Slide 8. Following my remarks, I will compare the quarter ended March 31, 2022, with the quarter ended March 31, 2021, unless specified otherwise. Total revenue primarily derived from our legacy business for the three months ended March 31, '22 was unchanged from last year at $0.6 million. Operating expenses for the first quarter of 2022 were $5.9 million, an increase of approximately $3.1 million, principally due to higher non-cash compensation expenses of $1.3 million as well as higher salary, technology, and marketing costs. We anticipate that expenses for the second quarter of 2022 will be higher compared to the same period in 2021 as our expanding investment in our core technology and marketing programs began in the second half of 2021. The net loss for the first quarter of 2022 was $5.3 million compared with a net loss of $2.5 million. The first quarter 2022 adjusted EBITDA loss, which is adjusted earnings before interest taxes, depreciation, and amortization, and other non-cash or non-recurring items, was $2.9 million, up from an EBITDA loss of $1.3 million. As announced in our press release, we are initiating plans to exit all legacy businesses in order to minimize cash investment in them going forward and to maintain our focus on growing our core verified biometric identity or authentication revenue. As a result, we expect our core identity revenue, specifically our KPIs, our booked annual recurring revenue (BAR) and deferred revenue, will expand in 2022. With respect to these planned exits, we are working through specific plans. We would like to provide some information on where we currently stand. With respect to our Multi-pay subsidiary in Colombia, we will incur certain costs associated with its employees and other contractual obligations. Multi-pay will continue to service its customer base in the interim as we look to minimize all costs. We look to possibly realize proceeds from the potential sale of Multi-pay assets. We're not yet able to determine the costs to be incurred as a result of this decision, but our current estimates are that cash costs will not exceed $250,000. We have not recorded the potential costs or write-down in the three months ended March 31, 2022. In addition, we're planning to exit the South African Cards Plus business and will seek a buyout of our interest. We have had preliminary discussions, but no definitive terms from the sale have been agreed upon at this point. If we are successful in selling our interest, we would expect a net cash inflow as a result of the planned exit of this business. Based on these preliminary discussions, we have decided to write down the value of the Cards Plus intangible assets and have recorded a non-cash impairment charge of approximately $144,000 in the three months ended March 31, 2022. In the three months ended March 31, 2022, these businesses contributed approximately $0.4 million in revenue, and these businesses had a net loss of approximately $57,000. These amounts do not include any corporate overhead allocation, nor any amounts related to the proposed exits. Turning to Slide 9, with respect to our $22.5 million financing, it included $9.2 million of three-year 9.75% convertible notes, $3.3 million solid sale of stock, and $10 million of revolving credit facilities. We also secured additional flexibility by having the ability to pay the interest obligation on the 9.75% convertible notes with stock to avoid the cash outlay during the middle of 2023. Interest annually is approximately $0.9 million. Furthermore, we were able to extend the maturity of our pre-existing $0.7 million convertible note from February '22 to December 31, 2022. Lastly, the maturity date of the $9.2 million new convertible notes is March 31, 2025, with no principal payments until then. As a result of the financing, our cash on hand as of March 31, 2022, was $13.8 million, and working capital totaled approximately $12 million. There were no borrowings on the new revolving credit facility. Looking ahead, we anticipate our cash burn rate to approximate a million dollars a month, and then improve as we generate revenue from our core operations. We reiterate our previous guidance; we estimate having sufficient cash to fund operations through 2023 and estimate being cash flow positive as we enter 2024. Finally, as this will be my last quarterly earnings conference call before I retire, I would like to thank the investors, the current and former board members, and my current and former colleagues for a wonderful five and a half years. I wish all of you the best in the future. I also want to welcome Annie Pham as she prepares to take over the CFO role, and I will continue to be available on a consulting basis to ensure a seamless transition. I now turn it back to the operator so we can take any questions.

Operator, Operator

Thank you. Please stand by while we compile the Q&A roster.

Graham Arad, Analyst

Thank you, operator. Graham with Council. While we're waiting for the question queue to fill up, Tom, perhaps I can ask you a question. You mentioned the announcement by the three major tech companies, Apple, Google, and Microsoft, and I wondered if you could expand a little more on what you believe the impact is of these three announcing that they're working towards a common goal.

Tom Thimot, CEO

Yeah, Graham, absolutely. First and foremost, when you've got an early-stage company that is offering something highly disruptive to the marketplace, there are a number of things you need. First, you need a large market; there's no question that authentication is a very large market opportunity. You need highly differentiable and defensible IP; I think with the combination of our success, positioning our product in the market and the patent success portfolio that we built, we are both highly differentiated and highly defensible. But the one that's always hard for early-stage companies to gauge is market timing. And it's not very often that you see Apple, Google, and Microsoft agree on much, but they have agreed on a framework for password-less log-in and identity authentication. And what does that mean? That means that today, when I log into my Gmail, my Apple ID, or my Microsoft Office 365, I use a username and password, but not for much longer. You're going to have a token on your device, a FIDO-token, that is going to allow you to seamlessly log in. It's always a case of when is that first domino going to fall that the market is truly going to change? People have been talking about password-less for so long, but the time is now. It's one of the reasons that we feel very comfortable streamlining and just getting ready for takeoff on this great market opportunity. Because when Apple, Google, and Microsoft make it that easy for you to log in, every other major institution that deals with consumers is going to have to do the same thing, which begs the question that authID is uniquely positioned to answer. Great, I have my iPhone, is it truly me that is behind my iPhone? Who is the person that's making the transaction, not what is the device that's making the transaction? This makes truly obsolete the idea of sending an SMS to a device; if you already have a token on the device and know the device, why would you send an SMS message to it? You would ask the person to turn the phone to their face and take a selfie. Because this is the way you know who is behind the device. This is why this news is really exciting to all of us at authID; market timing is now. Thanks, Graham. Let's take the next question.

Operator, Operator

Thank you. Please stand by while we compile the Q&A roster.

Graham Arad, Analyst

Tom, while still waiting for the queue, let me ask a follow-up. You mentioned you felt that the time is right now for us, but some investors might have concerns that if these three big companies are getting into this space, why can't they just do what we do? Why would they need us? They have billions of dollars; why can't they just do what we do?

Tom Thimot, CEO

That's a great question. And to Apple, Google, and Microsoft, let's add the fourth horseman, Amazon. For them to agree on a standard of how to accept the token on the device so that it can be identified is one thing. For them to agree on a cloud infrastructure where a cloud-based selfie is stored is another thing. While I think they all can see the convenience they’re adding to their customers by allowing them to log in with their device, I think it is a big leap to think that Amazon AWS, Apple iCloud, Microsoft Azure, and Google Cloud are all going to cooperate on the same cloud platform. And that's part of what gives me great confidence—there is a highly distributed environment among those four players' cloud. So I am very confident that there is going to have to be a single company that becomes the cloud selfie across all four of those platforms. And we built a highly defensible product that meets an enormous market opportunity where, thanks to Apple, Google, and Microsoft, the market timing is now. And Graham, do you have any other questions, or should we address any questions that may have come in?

Graham Arad, Analyst

I think that may be the case.

Tom Thimot, CEO

That's right. There are no other questions. Well then, in closing, every headline of fraud, every story of phishing attack, and even last week's announcement further validates that we are on the right track and that authID is the right solution to support a world with secure password-less biometric authentication, delivering fortified security and strong identity assurance. We are in the right place at the right time. We look forward to continuing to grow our sales pipeline, deliver value to our customers, and report our metrics and guidance on our very next earnings call. Thank you very much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.