Earnings Call Transcript - AUID Q4 2021

Operator, Operator

Good morning and thank you for standing by. Welcome to the authID Fiscal Year 2021 Earnings Conference Call and Webcast. At this time all participants are in listen-only mode. After the speaker's presentation there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Grace DeFries, Senior Vice President of Investor Relations. Please go ahead.

Grace DeFries, Senior Vice President of Investor Relations

Thank you, operator. Good morning, everyone. With me on today's call are Tom Thimot, CEO; Tripp Smith, our President and CTO; and Stuart Stoller, our CFO. By now you should have access to today's announcement on our fundraise, as well as our press release announcing our 2021 results. If you have not received these, these will be found shortly on our website at www.authID.ai under the Investor Relations section. 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 our press releases today. Others are discussed in our Form 8-K and 2021 Form 10-K which will be made available at the SEC website. I'd now like to introduce our CEO, Tom Thimot.

Tom Thimot, CEO

Thank you, Grace. Welcome everyone to today's call, in which we'll talk about our progress made in 2021, and the groundwork we have laid to accomplish even more in 2022 and beyond. Since the Company's rebrand to authID.ai in June of 2021, significant progress has been made on our strategic objectives including completing an uplisting in NASDAQ, and an $11.5 million investment round in August. And today, we are proud to announce that we closed a $22.5 million financing round through several means. We issued $9.2 million in senior secured convertible promissory notes to new and existing individual investors. We sold $3 million of common stock at a price of $3.03 to a new investor. An additional $300,000 of stock was purchased at a price of $3.71 by senior management and board members. Finally, we have secured a $10 million credit facility with an existing major investor that ranks behind the notes I spoke of above. This latest round, which comes just seven months after our successful NASDAQ uplisting and equity financing rounds, provides us with adequate cash to fund our working capital needs through 2023 based on our current projections. I know I speak for all of our new investors, our existing investors who reinvested, as well as our management team members who participated in this round that this fundraise speaks to the recognition of the strong market opportunity for secure identity authentication, and is also a strong endorsement of the Company's strategy, technology and goals. I'm going to move to Slide 4; Our Vision. With the increasing growth of cyber-attacks, phishing and friendly fraud, our vision reflects that the multi-factor authentication market is moving to lower friction, yet more secure authentication with greater certainty. As we saw in our 2021 fintech survey, 84% of fintech executives plan to increase investments in identity authentication over the next year. Today, authentication relies on legacy methods and insecure factors, something you know, a username and password, and something you have, often a pin-code sent to your mobile phone, or possibly another thing you know, a secret question that could be easily swiped from your social profile; passwords, pin-codes and knowledge-based authentications are done. They cost enterprises time and money and are a leading cause of security breaches. Moving to Slide 5; Our Mission. As I said, passwords and pin-codes are done; quite simply, authID will help organizations eliminate passwords and pin-codes and step-up authentication to more secure biometrics. And most importantly, as the market evolves, make sure that you know who is behind the device. Moving to Slide 6. On Slide 6, you see the three depictions of the multi-factor authentication market; past, present and the near future that we believe will be where authID ultimately wins the market. Before outlining these three phases in gray, blue, and purple, let me provide a quick reminder that there are three ways to authenticate a person. First, as I said before, something you know; typically, username and password. Second, something you have; typically, a computer or mobile device. And third, something you are; typically, a biometric. On the top line in gray, you see the way the vast majority of authentication has happened over the last 20 years. You enter a username and password, and if a second factor is needed, a six-digit pin-code is sent to your phone via SMS or you're asked a question about your favorite pet, your mother's maiden name or a street you once lived on. The second line is where the market is rapidly moving; it's hard to go to a trade show in identity or authentication and not hear the term passwordless. Passwordless is where a phyto-software token is placed on your phone at a point where your identity is first proven. And then the presence of that phone basically approves that transaction or your login instead of using a username and password. The problem here is, for obvious reasons, you don't want to send an SMS to the phone you already verified; it just tells you what you already know. What you really want to do is strengthen the authentication by knowing who is behind the device; this is what authID does. The world is moving to passwordless where the device is known; now you know who is behind the device. The two together for risky or high-value transactions is the way that you make sure your user is properly verified. Moving to Slide 7; The Problems We Solve. There are three main types of fraud that authID helps to stop. First is third-party fraud, generally known in the market as identity fraud, and this is where an individual's identity or personal details are used without their consent or knowledge to gain credit or products. It also includes manufactured identities, also known as synthetic fraud, with the fraudster creating a new identity using stolen and false information. The second is second-party fraud, and that is where an individual knowingly or unknowingly gives their identity or personal information to another person. An example of this might be friendly fraud, where I knowingly give my device to my daughter to make purchases on Amazon, but I wouldn't want to give my 17-year-old daughter the ability to buy alcohol on a website. Finally, first-party fraud is when a person knowingly misrepresents their identity or gives false information for financial or material gain; charge back fraud is a good example of this. This is where an individual denies buying an item on a credit or debit card to get a refund from the card provider; the fraudster claims it wasn't them. As you can see, these three types of fraud cause industries billions of dollars in losses and reputation. Moving to Slide 8; I want to take a few moments to review the tremendous achievements we have made since 2021 when I joined as CEO. Every great company needs a solid management team, and we have one. We've added more than a dozen leaders to our company across product management, sales where we have eight people comprising Inside and Sales Director roles, customer success, marketing and engineering. The addition of outside professional firms and engineering vendors will provide specific expertise that help us to scale even faster. I am also extremely pleased that over 40% of the team members added are people of color and/or women; a culture built on diversity creates a more desirable workplace and strongly supports our commitment to ethical AI and our ability to provide products that deliver bias-free identity certainty. Moving to Slide 9; I am extremely proud of our marketing team and how they have helped to elevate our brand and thought leadership. In 2021, we undertook a significant multi-channel marketing effort to rebrand the company as authID and position ourselves as a leader in the biometric authentication space. We refocused our go-to-market strategy, shifting away from a broad, complex platform sale with often cyclical revenues to a strategy that focuses on verified biometric authentication and a recurring revenue subscription model. First, we did that in digital marketing. Our digital marketing campaigns are delivering out-of-home video and static ads across Twitter, LinkedIn, Facebook and other online channels, and have generated almost 11 million impressions since October. Targeted initially getting the authID name and brand in front of as many relevant targets as possible, these campaigns are quickly shifting to emphasize highly targeted lead generations of buyers of our products. Our PR and media strategy has made great strides as well. We built that strategy predicated on gaining coverage across top-tier business, financial and trade media driven by an equal share of company announcements and industry thought leadership, leveraging timely sector news and trends and the expertise of our management team and Board of Directors, we have secured a range of media placements in business and trade media, bylines in prominent tech publications, and broadcast interviews in the financial media. Finally, our market presence. We have also built an omni-channel strategy to expand our U.S. market presence with exhibits and speaking engagements at industry-specific events including Money 2020, Authenticate 2021, Merchant Risk Council, and this week at the Virtual FinTech Meet-Up, we are seeing strong results in generating awareness, establishing thought leadership, and developing a robust pipeline. Turning to Slide 10; we have the best-in-class privacy-first technology in the market. And I'm very pleased with the tremendous strides our engineering and product teams have made towards a critical objective; enhancing our services, making them easier to implement, and securing critical protection of our best-in-class technology. In the last year, our development and product teams have released a range of more convenient user interface updates designed to increase user adoption and meet the demands of today's mobile users for more convenient seamless identity authentication. We've also deployed enhanced artificial intelligence algorithms that improve the speed of experience, and deliver the highest levels of assurance and mutual trust to businesses of all industries. Accessibility and ease of implementation are core components of our mission to deliver best-in-class class cloud-based authentication solutions with the development of our verified CloudConnect ecosystem our development team has performed several platform-to-platform integrations to provide organizations with turnkey and low-code or even no-code implementations for cloud-based facial biometric authentication. Verified CloudConnect offers a flexible drop-in solution that seamlessly delivers our product to technology platform customers to secure access to B2B, B2C and B2E environments. Verified CloudConnect helps authID empower financial services organizations, as well as enterprises affiliated with Auth0 and Microsoft to quickly enhance their security infrastructure and provide an easier, more fortified authentication experience for their customers and employees. Finally, patents and awards; securing the protection of our intellectual property and technology has been a key objective for authID. In December, authID received its 777th U.S. patent for methodology, which can facilitate a diverse array of global identity transactions that secure a range of use cases such as age-restricted payments, medical records access, and physical facility entry, with the routing of identity information attributes securely and confidentially via the payment networks. And just last month, we received further IP protection through a U.S. patent Notice of Allowance related to verified multi-party multi-factor authentication methodology. This method secures biometric authentication with an account holder's consent to a transaction and provides an indisputable audit trail that can easily defeat fraud attempts. Our expert development and product teams, led by Tripp Smith and Jeremiah Mason, and our patents set authID apart from other identity authentication providers by ensuring strong protection from spoofing and social engineering attacks that have plagued others in our industry. authID is committed to continuous enhancement of our platform in order to provide the highest levels of security and build a safer next-generation digital landscape. So, turning to Slide 11; Where Are We On This Journey? So where have all these accomplishments and this phenomenal product and technology strategy brought us? As I said before, in October, we launched our MVP, a minimum viable verified product that we brought to market, which has just highlighted we have continued to enhance and strengthen. We are now working with early prospects to rapidly enhance product adoption. These efforts will allow us to report upon our new KPI metrics as discussed on our more recent investor calls, namely identity booked ARR, identity deferred revenue, and identify annual recurring revenue. We believe that these measures which focus on sales of our new identity products, all now branded verified, will give a good indication of the progress that the company is making and the trends we are following. We continue to expect that we will start reporting on these non-GAAP metrics by the middle of 2022, by which time we believe we will have meaningful figures to share. So if you look on the slide after the minimum viable product, we have presented to our prospects and customers a value proposition. We are in a stage now where we are proving those value propositions to those customers and prospects. In each POV, our prospect deploys our product across a test subset of users to prove that authID provides the return-on-investment capital we promise in our marketing and sales. Once proven, our sales team negotiates a sale for broader deployment of verified that is typically a three-year recurring subscription with a portion paid upfront, and revenue to be recognized proportionally once a customer goes live. The sum of these customer sales will be reflected in our non-GAAP KPI booked annual recurring revenue that I just spoke of or we refer to as BAR, and it's the earliest metric we can provide to demonstrate our future growth potential. The portion of upfront payment will be captured in deferred revenue approximately 60 days following signing. And finally, the revenue will first be recognized when the customer goes live, which we expect to be three to four months after booking. At that time, we will report a non-GAAP metric annual recurring revenue which is an annualized revenue KPI we use given the subscription nature of our business that we offer our customers. These three KPIs are best practices across the early-stage SaaS subscription companies, and we will be providing reporting on these following Q2. So let's talk a little bit in Slide 12 about some of the POVs we are doing right now with customers and prospects. As previously announced, we launched Hamilton Reserve Bank, an all-for-credit union with CU next-gen in 2021. Our U.S. channel partners have also added a range of enterprise customers, including a multi-national nonprofit, as well as various financial services and fintech lenders offering consumer, auto and medical lending to help reduce identity fraud in customer onboarding. Our authID sales and customer success teams are also working through the implementation of several agreements and proofs-of-value, including a large e-commerce platform for merchants and consumers with a value proposition that focuses on merchant identity verification that helps stop third-party fraud during merchant onboarding. And as we heard at the MRC Show, e-commerce merchants are facing increasing rates of account takeover and manual review of fraud flagged transactions. This proof-of-value will help these merchants defend against account takeovers, and combat second and first-party fraud with a customer biometric audit trail for selective fraud flagged transactions. We are also working on a healthcare proof-of-value with a medical certification organization; with medical identity theft costing more than $41 billion a year, the healthcare industry is a prime target for our pipeline. This proof-of-value, by the way, referred to us and recommended by a leading analyst firm, was initiated to automate identity authentication for certification exams, specifically to defend against fraud of a physician impersonating and provide a low-friction authentication method for records access. The organization is currently working through a communication and rollout plan to their members; this is a great beachhead for authID in working with the healthcare industry, with the potential to expand services across similar organizations with approximately 1 million certified physicians in the United States. Another, we have signed an agreement with Tax Status, a Software-as-a-Service technology provider that provides comprehensive IRS information on consumers to over 50 leading lenders. This service is expected to be deployed in Q2 with automated biometric identity verification and enrollment and authentication for systems access that meets regulatory compliance. After evaluating several other vendors through proof-of-values, the company selected authID because of the superiority of our faster low-friction user experience. Finally, one that I'm most excited about. We are also working with a crypto technology trading platform to deploy a point-of-value to address stronger identity verification and onboarding, as well as cryptocurrency trading transaction authentication. This POV will rely heavily on our recent multi-factor patent to deliver stronger identity assurance throughout the cryptocurrency lifecycle. authID services will help this platform defend against third-party fraud, and more importantly, stop account takeovers as well as first-party fraud in cryptocurrency trading making inroads in the burgeoning crypto market will be another valuable benchmark for authID. Moving to Slide 13. In addition to all these proofs-of-value that we are working on, we continue to grow our pipeline with our outstanding marketing. To achieve the strategic and financial objectives we need to keep building on this, we can't just deliver once, we have to continually deliver and grow. And we need to build on these early successes and increase the pace at which we achieve sales. With rising threats of cyber-attacks, continued identity fraud, ransomware and account takeovers; organizations across all market sectors need a new and improved way to secure assets. We are using a proven playbook to generate leads, turn them into qualified prospects, and convert them into booked deals. Our sales team is building a robust pipeline across a range of verticals that are demanding higher identity assurance, including financial service companies and fintechs, Software-as-a-Service technology providers, and as a result of our recent presence in MRC, we are engaged with new i-gaming vendors, and e-commerce vendors that stretch across healthcare and lifestyle products. As we said earlier in the presentation, these industries are being hammered by stolen credentials, identity theft, chargeback fraud and account takeover; our verified products help defend against all of these fraud types. We are confident that our early success in pipeline will yield increased traction for authID solutions and services, and drive our growth in 2022 and beyond. Now, let me turn the call over to our CFO, Stu Stoller, to provide an overview of our financial results for 2021. Stu?

Stuart Stoller, CFO

Yes. Thank you, Tom. All of my remarks will compare the year-ended December 31, 2021 with the year-ended December 31, 2020, unless specified otherwise. Turning to our financial results in early 2021 and early 2022, we achieved our goal of improving our balance sheet; let me take you through the steps. In June 2021, with the support of our then convertible note holders, we converted approximately $6.1 million of debt and accrued interest to equity. In August 2021, we raised $11.5 million in conjunction with our uplist to NASDAQ. As of December 31, 2021, we had outstanding indebtedness and accrued interest of $0.7 million, with the balance now due in December 2022 after extending the due date from February 2022. As of December 31, 2021, the company has approximately $6 million of cash, not including the plus $22 million of cash availability secured today before expenses. As a result of all this progress, we now expect to have enough cash to operate our business through the end of 2023. We also anticipate that our independent auditors will remove their going concern opinion, this will be a substantial milestone for authID and enhance our standing with potential customers, suppliers, and with readers about financial statements. With respect to our annual results, the company's 2021 revenue of $2.3 million was slightly favorable compared to 2020. This was mostly due to an increase in legacy revenue, compared with 2020 when pandemic shutdowns negatively impacted revenue. Looking ahead, we expect our core verified biometric revenue to grow as we expand the sales pipeline and complete agreements that generate ongoing sales through signed subscription agreements. As we discussed at our annual meeting, we will measure ongoing sales as BAR for booked, annual and recurring revenue, as well as deferred identity revenue; these are the two previously mentioned metrics we will report later this year, as we believe they highlight our progress by measuring the value of contract signings. The company's operating expenses for the year ending December 31, 2021, rose to $20.3 million from $11.2 million in 2020, mainly due to an increase in non-cash stock compensation expenses of $5.9 million, a reserve of about $0.6 million related to several assets from our Columbia operations, and higher salary costs, professional fees, and marketing expenses linked to our growing team. This rise in expenses was largely due to enhanced efforts, especially in the latter half of 2021, on core rebranding, product development, and marketing initiatives that are vital for boosting Q2 revenue. Other non-operating expenses improved in 2021, thanks to reduced interest expenses following the conversion of some convertible debt into equity in June 2021 and the forgiveness of the company's PPP loans, which accounting rules required to be recognized as a gain. Our annual net loss for the year ending December 31, 2021, was $17.7 million, compared to $11.3 million in 2020. We define EBITDA as adjusted earnings before interest, taxes, depreciation, amortization, and other non-cash or non-recurring items, serving as a proxy for cash flow. The increase in adjusted EBITDA loss was due to further investments in personnel, marketing, and technology made in the second half of 2021. Consequently, our cash expenses or cash burn rate for 2022 will be similar to or slightly above the rate observed in the latter half of 2021 as we persist in making investments aimed at building a sustainable and prosperous business. As mentioned, the latest investment round gives authID the liquidity required for essential investments. We will manage our cash and capital investments judiciously to ensure returns for shareholders and value for customers. I want to express my gratitude to our investors, advisors, Board of Directors, and employees for their support and dedication to our goals. I will now hand it over to the operator to begin the Q&A.

Operator, Operator

Thank you.

Stuart Stoller, CFO

Thank you, operator. Tom, while we're waiting for questioners to pose questions, perhaps you'd like to explain a little bit more about the competition that we face in the marketplace and where we fit in; where authID fits in the marketplace.

Tom Thimot, CEO

Thank you, Graham. Yes, as I explained in Slide 6; there are a huge number of companies, most of them venture-backed or private equity-backed, not yet in the public markets, early stage, that are moving towards a password-less world where the username and password is replaced by a phyto-token on your device. And we see companies like Transmit Security, TELUS, Encode; great companies that are providing this technology. But the problem we're focused on is one step beyond that. How do you know who is behind that device? And it's intuitively obvious that sending an SMS to the same device you just checked the token was on doesn't really accomplish anything from an authentication perspective. Finally, I also get asked an awful lot about Clear. Clear is an amazing company in the public markets that most people are familiar with, from sporting events and airports; they are a leader in physical authentication when you're entering an event or entering an airport, where we have a solution that complements them very well is in the digital realm where we're completely focused. Thanks, Graham.

Operator, Operator

Thank you. We have a question from George Sutton with Craig-Hallum. Your line is open.

George Sutton, Analyst

Thank you. Hello, Tom. Hello, Stu. I understand your hesitance to discuss specific metrics until after Q2, but since you are involved with significant marketplaces like Microsoft, can you share what the total addressable market looks like when considering those marketplaces and some of your current partners? This would help us gauge the progress you feel you are making.

Tom Thimot, CEO

A company that I admire and like to draw comparisons because the business problem we're solving is the exact same one they solve today, and that is a company called Twilio. And Twilio today is the leading provider of step-up authentication when you're using a pin-code to verify a risky or high value transaction. So I think their market cap, I don't want to cite it, I don't have it right in front of me right now, but shows the significance of just solving this business problem irrespective of whether you solve it with a selfie or a pin-code; so we believe that's one parallel that you can look at. I think also, you can look at a number of software SaaS companies that have brought themselves to market, you know, bringing a new way to do an existing process; one that always comes to mind is DocuSign, we used to always physically sign documents and fax them around. And when they first came out with the idea that we do it digitally, the market was waiting patiently, but it was clearly a very large market. All of these SaaS markets where a vast user base will be using a product lead to a very, very large TAM. And you know, whether it's measured in tens or hundreds of billions of dollars, and what percentage of that TAM we think we can get, we think we've got the most logical solution for the next step as password-less becomes the norm. I hope I answered your question?

Stuart Stoller, CFO

I answered your curiosity, Twilio's market cap is $28.9 billion.

George Sutton, Analyst

Thanks.

Operator, Operator

Thank you. We have a question from Ricky Solomon, who is a private investor. Your line is open.

Unidentified Analyst, Analyst

Congratulations on securing the financing. Could you elaborate on the use of crypto? Specifically, how do we integrate into that process to prevent fraud? Additionally, how significant is the use case for crypto and what are the levels of fraud present in the space?

Tom Thimot, CEO

Thank you for the question. I am very enthusiastic about the crypto sector, not as a personal investor, but in terms of how we can support that market. Firstly, biometric authentication plays a crucial role; making a financial transaction is of great value, and it's clear that relying on a phrase or an accessible wallet for identity verification is not as secure as using facial biometrics. In the crypto market, we see ourselves contributing in two main ways: firstly, by providing enhanced authentication to ensure that both the buyer and seller of crypto are who they claim to be. Secondly, our patented technology can embed biometric data in transaction records, which could significantly benefit the crypto sector. This means there will be clarity about who initiated a transaction and when, as the biometric information will be part of the crypto transaction itself; therefore, there will be no need to remember a phrase. This makes it easier to maintain an audit trail for proper use of crypto in financial dealings and clearly identifies who purchased what and when. We believe this will enhance the security and trustworthiness of the crypto market because authentication hinges on trust, which is ultimately what we provide—ensuring that the individual behind a transaction is indeed who they claim to be. I hope that answers your question, Ricky?

Unidentified Analyst, Analyst

Yes, it does. Thanks. And I have one more follow-up. I would imagine that GDPR would be a huge opportunity for the company. Is there anything happening in that area?

Tom Thimot, CEO

That's another great question. I mean, we put privacy first. And so anyone that uses the authID software, either on the consumer or employee side when authenticating, we make sure it is consented, and we do not store your personal identifiable information, your PII. Unlike many of the others in the authentication space, we store a representation of your face, that without a key that our customer holds, you can't unlock; and that has many, many benefits to authID and to our customers. First, it doesn't make us a honeypot for hackers to come after, to steal PII. But also, it ensures that our customer ultimately holds literally the key to allowing that transaction to go through; that authentication decision is made by our customer, not by authID. We basically say yes, we believe the face matches; the customer has the information of whose face it is, what their PII is, and decides when and how to allow the transaction to go through. We think this is very beneficial for GDPR because we're not keeping information about the customer that is private to them; we leave that to our customer to follow their own privacy and compliance with GDPR, California privacy, Illinois and the others. I hope that answers your follow-up question?

Unidentified Analyst, Analyst

Yes, it does. Thanks.

Operator, Operator

Thank you. And I'm showing no further questions. At this time, I'd like to turn the call back to Tom for any closing remarks.

Tom Thimot, CEO

I'd like to thank everyone, particularly those that invested in this round. I think anyone that understands the macroeconomic environment today knows that it's not the easiest time to raise money but I think the fact that we were able to raise $22.5 million is a strong statement that authID really is skating to where the puck is going, to use the overused Wayne Gretzky analogy. But it would not be possible without an amazing investor base; so many of our existing investors stepped up, and so many new investors joined us. I am really, really excited about the future at authID, and this now gives us the working capital cash that we need to operate through 2023. And I'm confident that the authentication market will move to biometrics, and we will become the leader in that market. Thank you very much for your time.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.