Earnings Call Transcript - AUID Q2 2024

Graham Arad, General Counsel

Greetings, and good afternoon. This is Graham Arad, General Counsel at authID. Welcome to the authID Second Quarter 2024 Results Conference Call. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. With me on today's call are our CEO, Rhon Daguro; and our CFO, Ed Sellitto. By now, you should have access to today's press release announcing our second quarter 2024 results. If you have not received this, the release can be found 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. A quantitative reconciliation of our non-GAAP adjusted EBITDA information to the most directly comparable GAAP financial information appears 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. Others are discussed in our Form 10-K and other filings, which are made available at www.sec.gov. I'd now like to introduce our CEO, Rhon Daguro.

Rhon Daguro, CEO

Thank you, Graham, and thank you, everyone, for joining us this afternoon. Our value proposition continues to resonate strongly in the market as we help our customers defeat identity fraud and malicious AI-generated cyberattacks. Let me spend a few moments on one of the attacks our customers are concerned about. On the screen, you will see an AI tool that generates deepfake voices, which is readily available on the Internet. These tools are used to attack call centers, customer support, and help desks to conduct an account takeover. Using tools like the one you see here, any fraudster can type in a few words, train the voice model from any public YouTube video and in seconds, they have a synthetic voice saying exactly what the fraudster wants. Let's hear what our fraudster has to say. As you can see, the fraudster exploited The Rock to have his account reset. Just like any fraudster can exploit any consumer or any employee or anyone on this call to say exactly what they want. It's not difficult to see how this deepfake voice could easily fool any $20 an hour call center agent who is being asked to reset a password. Now, imagine what kind of fraud can happen when a fraudster combines a deepfake voice with a deepfake video. Deepfake tools like you see on the screen allow a fraudster to take any static image or video from the Internet to generate a realistic deepfake that emotes like a naturally real human being with natural facial movements, natural body movements, natural eye movements in combination with mouth movements to match words prompted by the fraudster. As you can see, this video is pretty convincing if The Rock wasn't famous. And it's only going to get even more convincing. I have seen improvements in these tools over the last 30 days. No doubt in my mind that this will drastically be improved in the next 90 days with how fast AI can learn, which doesn't leave companies much time to be prepared. In fact, a fraud attack using a deepfake of a company's CFO was successful earlier this year in fooling a financial analyst to move $25 million out of the organization. Every day, we hear in our conversations with CISOs from some of the largest banks, hotels, and tech providers out there that this is what keeps them up at night, simply because they don't have the technology to stop these kinds of attacks. Because authID can seamlessly detect and protect organizations against deepfakes, the demand for authID's technology is growing. So, let me summarize the pillars of our momentum before I go into them in more detail. The first pillar is our innovative technology. Our biometric authentication technology was already highly differentiated in speed, but our team has worked tirelessly on delivering the highest level of accuracy on our facial biometric matching as well as the highest level of privacy the industry has ever seen. The second pillar is our sales reach, which has expanded exponentially through our partners, which we began building in Q4 of 2023. Through the second quarter of 2024, we have signed six new committed partners that have strong sales teams who are selling to their already robust customer portfolios. What's important to note here is that our partners can partner with anyone. But through their rigorous evaluation process, they have selected to partner with authID because of the unique value our technology brings to the market compared to anyone else. The third pillar is our market demand, which continues to rise. We continue to build a great pipeline at a rapid pace to attract and sign customers. A number of our Fast 100 customers quickly helped us prove out our technology and value proposition. And on a daily basis, authID continues to advance our sales cycles in the Fast 100, the strategic enterprise opportunities with some of the largest financial services, hospitality, gaming, and gig economy providers. And our fourth pillar of momentum can be seen in our performance results, which continued to improve, both sequentially and on a year-over-year basis as we continue to focus all our energy on helping our customers become successful. I will go into more detail across these pillars now. Every day, in conversations with our enterprise prospects and customers, we are reminded that speed and user experience, accuracy and data protection, and privacy are paramount. Over the last quarter, our highly talented engineering team has enhanced our platform with leaps and innovations that address these requirements to eliminate authentication fraud for our customers. Let me highlight the three technology advantages that are driving the excitement with the customers and the partners who are filling up our sales pipeline. The first is speed. Announced over a year ago with our less than 700 millisecond processing time, our competitors have tried to close the gap but are still 5x to 10x slower. Why is this important? In order to participate in payment use cases, you have to get close to 400 milliseconds and below and we definitely have the capability to get within that range. Our speed has opened up a variety of use cases for authID where our customers cannot afford to provide friction or long lead times to their customers. What makes this result even more incredible is that during the sub-second time, authID seamlessly conducts an extensive series of fraud checks, detects presentation and injection attacks for both facial and document images, detects the presence of deepfakes, and performs a highly accurate facial biometric match. The second is accuracy. I am very excited about this. Today, our engineering team is rolling out a world-leading biometric matching accuracy of one in a billion, a phenomenal increase over our previous accuracy rate that matched the NIST benchmark rate of one in 100,000. This achievement is not simply a 100% increase. It's not a 1,000% increase. It has completely separated authID in the market with an increase of 10,000% in accuracy improvement. Said another way, our game-changing accuracy of one in a billion means that if there were eight billion people in the world and we digitized all of them, we would only get it wrong eight times. This level of accuracy has been validated by the independent testing organization CSIRO, which has a formal set of standard criteria in their evaluation, and their testing results have shown that the accuracy can even exceed one in a billion, up to one in 34 billion for higher resolution facial images. This means that in any head-to-head accuracy comparison to any biometric identity vendor on the market, authID will be leaps and bounds more accurate. The third is privacy. authID is delivering superior privacy and data protection in biometrics. The fastest speeds and the highest levels of accuracy are crucial to customers. Even more crucial is ensuring the privacy and the protection of their users' biometric data to meet current compliance and future compliance regulations as well as to eliminate any liability associated with storing biometrics. As you would expect, organizations see the value of using biometrics, but they are cautious to adopt because of all the privacy concerns and the jumble of privacy regulations that are developing at the local, state, and national levels. So, our challenge is to provide our customers with all the benefits of using biometrics, but without the increased liability or even the compliance confusion. To meet this demand, authID has been working maniacally on a solution and is now offering a biometric privacy option that eliminates the need to store biometric data anywhere. This revolutionary solution allows facial images to be converted into a public-private key pair, where only the public keys need to be stored, transforming biometric authentication into a cryptographic transaction with no biometric data associated with it. What further differentiates authID from the others is that the private key is never stored and instead is generated each time a transaction is performed using the live facial image of the person, essentially making the person the private key and not the user's device. Let me show you this more closely. So, before I start the demo, what you're going to see is a facial biometric authentication, which is going to use a private key and a public key to make a match. So, we are not using biometric templates or any form of a biometric recall from storage to make the match. Let's see it in action. User represents their face. And there you go. You can see how fast that was. Basically, on the screen, it recorded 360 milliseconds, which is actually faster than the 700 milliseconds that we've been touting. But more importantly, on the screen, you can see the private key on the left, the public key on the right, which is being used to run the match. And once the match is completed, both the private key and the facial image stored are completely deleted. No biometric is ever stored, and the consumer is never affected and the experience remains absolutely seamless. Our new biometric privacy option is a market game-changer because no other biometric authentication provider has this ability. This has absolutely been helping us advance our opportunities with many large enterprise prospects. Moving on. Building a strong channel ecosystem is a key pillar of our success. Our channel partners, including FinClusive, Syntrove, IDMWORKS, Kaiasoft, and just announced today, DataVisor are all the force multipliers that deliver more feet on the street and quicker access to the customers and verticals they already serve. Because of that quicker access, we refer to their customers as the Fast 100. Our partners are excited about the added value and market differentiation derived from our combined product set to fight fraud. More importantly, they embrace the opportunity to grow their revenue and they have had an immediate effect in amping up our sales in our sales pipeline. We have already signed agreements via our partners in Q2 and are in the process of going live with two customers through the channel, which include a large North American gaming customer and a cannabis e-commerce platform. On the direct sales side, authID has advanced opportunities across our Fast 100 pipeline. Those are large enterprise customers with deal sizes that generate higher revenue and longer-term enterprise value for authID. Every day, we demonstrate our value technology to large hotels, gaming platforms, financial institutions, HR providers, telcos, identity access management platforms, and gig economy platforms. The main common denominator between large-scale enterprise CISOs is the fear of the rapid pace of malicious AI-driven attacks and scams targeting both their customer-facing and workforce systems, like I shared in the opening demo. AI-generated IDs and deepfakes are attacking the large enterprises that have the most to lose, which is driving the urgency. Moving on to revenue. Our fourth pillar of momentum is our strong metrics, including our sequential and year-over-year growth in revenue. In Q1 2024, our revenue of $0.16 million approached the revenue in all of 2023. In Q2, we grew revenue by 75% over Q1 to $0.28 million by launching the services with four new customers. Given our current RPO of over $4 million, we expect to continue to see quarter-over-quarter and year-over-year revenue growth for the balance of 2024. Ed Sellitto will provide additional details during his part of the presentation. Moving to the pipeline. Our robust sales pipeline growth also reflects continued demand for authID's biometric solutions. In Q2, our direct sales team and channel partners expanded our sales pipeline to its current value of over $25 million, a 20% increase over the Q1 pipeline of $21 million. Our current pipeline includes 71 opportunities valued at $100,000 plus and 12 deals valued at $500,000 plus. Our continued growth in booked contracts also further confirmed strong market demand for authID's biometric authentication. In the second quarter, our sales team secured contracts valued at over $630,000 in gross BARR, a strong increase over Q1 and approximately triple growth over the Q2 gross BARR a year ago. Our Q2 BARR included both direct and channel partnered signed deals, representing gaming, cannabis, compliance, gift cards, and universal basic income. While both our channel partners and direct sales teams will continue to identify new prospects and add deals to our pipeline, at this point in the year, we are estimating that we could achieve a 33% close ratio on the $25 million in pipeline to attain our $9 million BARR target for 2024. Before I turn it over to Ed, I'm excited that we continue to build strong market momentum. I'm confident that authID is on the right path and that we will deliver upon our mission to eliminate authentication fraud and realize our near-term and long-term goals. Thank you for your time. I will now turn the call over to Ed Sellitto to present our Q2 financial results.

Ed Sellitto, CFO

Thank you, Rhon. As you highlighted, we continue to expand authID's market reach and advance our growth in Q2 of 2024. Our sales teams expanded our channel partner network by signing new reseller and OEM agreements with fintech and risk management platforms and also increased our booked contracts by signing new enterprise customers. Our engineering and customer success teams work to enhance our biometric platform and roll out services to our customer base. I'll now present our Q2 2024 financial results. Starting with our GAAP measures, the following highlights compare our GAAP results for the quarter and six month period ended June 30, 2024, with the quarter and six month period ended June 30, 2023, unless specified otherwise. Total revenue for Q2 2024 was $0.28 million compared with $0.04 million a year ago. For the six months ended June 30, 2024, total revenue was $0.44 million compared with $0.07 million a year ago. Operating expenses for Q2 2024 were $3.6 million compared with $2.8 million a year ago. For the six month period in 2024, operating expenses were $6.9 million compared with $3.8 million for the same period last year. The 2024 increase is primarily due to a 2023 one-time event, representing a reversal of approximately $3.4 million in stock-based compensation resulting from Q1 2023 terminations. Net loss from continuing operations for Q2 was $3.3 million, of which noncash charges were $0.8 million compared with a net loss of $10.9 million a year ago, of which noncash charges were $9.2 million. For the six month period in 2024, net loss was $6.3 million, including $1.6 million in noncash and one-time severance charges. This compares to a net loss of $12.7 million for the same period last year, which included $8.8 million in noncash and one-time severance charges with approximately $7.5 million related to the exchange of convertible notes for common stock in 2023. Net loss per share for Q2 improved to $0.34 compared with $2.16 a year ago. For the six months ended June 30, net loss per share improved to $0.67 compared with $3.09 for the same period in 2023. Next, let's turn to our RPO. We also monitor and manage our Remaining Performance Obligation or RPO, in accordance with GAAP, and as noted in our financial statements. RPO provides a measure of the minimum revenue expected to be recognized from our signed contracts based on customers' contractual commitments. As of June 30, 2024, our total RPO was $4.24 million, an increase of $0.2 million over the prior quarter. The Q2 RPO includes deferred revenue of $0.24 million. Deferred revenue represents advanced payments received, which are not yet recognized as revenue. The current RPO also includes $4 million in additional noncancelable revenue, which has not yet been recognized under contracts signed in 2023 and through June 30, 2024. This compares favorably with the RPO as of June 30, 2023, which was approximately $0.4 million. We expect to recognize the full RPO of $4.24 million over the entire life of the contracts, which are typically signed for a three-year term. Over the next 12 months ending June 30, 2025, the company expects to recognize revenue of approximately 36% or $1.5 million of the $4.24 million in RPO based on contractual commitments and expected usage patterns. While the RPO was based on contractual terms as agreed to by our customers, the expected time to recognize revenue is based on our best estimates given the current known facts and circumstances. Of course, while RPO was based only on minimal contractual commitments, we have reason to believe that each of these customers will eventually exceed their minimum commitments. Turning to our balance sheet highlights. As of June 30, 2024, our cash balance totaled $14.4 million, which includes approximately $10 million in proceeds received from our successful June 2024 fundraise. Our common shares outstanding stood at 10.9 million with 1.5 million shares added from our fundraising. We will use these funds for several initiatives, including expanding our sales and partnerships team to drive continued bookings growth as well as growing our customer success team to handle the increasing number of customers onboarding to the authID platform. On to our non-GAAP results. Adjusted EBITDA loss was $2.5 million for Q2 compared with a $1.7 million loss for the same period last year. For the six months ended June 30, 2024, adjusted EBITDA loss was $4.9 million compared with a $3.9 million loss for the same period last year. The increase in EBITDA loss is primarily due to our reinvestment in identity domain experts across sales, engineering, and customer success following the early 2023 restructuring. We also monitor and report on ARR or Annual Recurring Revenue, which is defined as the amount of recurring revenue earned during the last three months of the relevant period as determined in accordance with GAAP, multiplied by 4. The amount of ARR as of June 30, 2024, increased to $1.12 million compared to $0.14 million of ARR as of June 30, 2023. Turning to BARR or Booked Annual Recurring Revenue, which is the projected amount of annual recurring revenue we believe will be earned under contracted orders looking 18 months from the date of signing of each customer contract. The gross amount of BARR signed in the second quarter of 2024 was $0.6 million, approximately 3x to $0.2 million of gross BARR a year ago. The gross amount of BARR signed in Q2 also increased quarter-over-quarter from the gross BARR of $0.1 million signed in Q1. Our Q2 BARR included both direct and channel partner-signed deals, representing use cases in gaming, cannabis, compliance, gift cards, and universal basic income. Net BARR, which reflects the deduction of BARR from contracts previously included in reported BARR, which were subject to attrition during the quarter was $0.4 million compared to $0.2 million of net BARR signed in the second quarter of 2023. As previously explained during our first-quarter earnings call, BARR comprises two components, which we refer to as CARR and UAC. CARR or Committed Annual Recurring Revenue, as shown in dark purple on the chart represents the total annual customer contractual commitment through fixed license fees and minimum usage commitments. The Q2 2024 CARR represents $0.35 million or 56% of reported BARR. UAC or estimated Usage Above Commitment, as shown in light blue on the chart is an estimate of annual customer usage that will exceed contractual commitments. The Q2 2024 UAC represents the remaining $0.27 million or 43% of reported BARR. Turning to our revenue growth stages. As we work to build a sustainable recurring revenue stream, we continually review our progress through the following revenue growth stages. The first milestone we use to monitor our growth is bookings as measured by BARR. For the six month period ended Q2 2024, we realized a total gross BARR of $0.73 million, approximately $0.5 million increase over the same period last year. Regarding our customer financial commitments, we monitor our Revenue Performance Obligation or RPO. As I detailed earlier, as of the end of the quarter, we've secured over $4.24 million in RPO, a $3.8 million increase over the RPO secured by the end of Q2 2023. Our third reporting metric is revenue as recognized in accordance with GAAP. Our year-to-date revenue of $0.44 million grew substantially over the same period in 2023. And as our customer contracts mature, we will increase our focus on monitoring customer retention and expansion. Key efforts will include refining our sales and support methodologies to deepen our customer relationships and increase the value added by our services through continued usage growth, use case expansions, renewals, and the upsell of new relevant products. Looking at our full year targets and guidance for 2024. On our revenue growth, we're pleased with our quarter-over-quarter and year-over-year revenue growth in Q2 and reiterate our guidance of $1.4 million to $1.6 million in revenue for the full year 2024 based on the contracts we have in place and as our customer implementations continue to progress in the remainder of the year. Looking to booked ARR. Our sales pipeline grew in the second quarter to over $25 million. Based on this robust growth in our projected close dates, we remain committed to our previously stated target of $9 million in BARR for 2024, which represents a 3x year-over-year growth. If we achieve $9 million in BARR, depending on the level of our customer commitments and term lengths, we would expect to also grow our Remaining Performance Obligation to a range of $12 million to $13 million. In summary, authID continues to make progress in advancing our sales and financial momentum. We improved our balance sheet with our recent fundraise and we continue to post strong metrics that reflect quarter-over-quarter and year-over-year growth. Our direct sales team and channel partners are expanding our sales pipeline and signing new customers and our customer success team is working diligently to help onboard and ramp these customers as quickly as possible. We're confident that we'll continue our growth in revenue and value creation for our shareholders.

Graham Arad, General Counsel

Thank you, Ed. Our first question is from Gary Brode. Gary, good to see you on the call. Please go ahead.