Earnings Call Transcript - AUID Q2 2022

Operator, Operator

Greetings. And welcome to the authID Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Grace de Fries, Senior Vice President, Marketing, Communications and Investor Relations. Thank you. Mr. Kris, you may begin.

Grace de Fries, Senior Vice President, Marketing, Communications and Investor Relations

Thank you, operator. Good afternoon, everyone. With me on today's call are Tom Thimot, CEO; Tripp Smith, our President and CTO; Annie Pham, our CFO; and Graham Arad, our General Counsel. By now, you should have access to today's press release announcing our second quarter 2022 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. Quantitative reconciliations of our non-GAAP adjusted EBITDA information to the 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; others are discussed in our Form 10-K and subsequent filings, which are made available at www.sec.com. For those 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 slide. Tom and Annie will provide cues for advancing the slides. We will have a Q&A session following our presentation. To participate in the Q&A, you must be registered on the telephone. I'd now like to introduce our CEO, Tom Thimot.

Tom Thimot, CEO

Thank you, Grace. Welcome, everyone, to today's call. I'd like to start on slide three and talk about the high technology standards we've achieved and the multiple points of validation we've earned for our platform advancements. During the second quarter, we completed two major security certifications in asset stations that demonstrate to our customers that they can count on authID to protect their security. Building on our previous achievements of meeting the SOC 2 security standard, we successfully upgraded to meet the ISO 27001 Standards for information security management programs. This means that our biometric authentication platform has met the rigorous security management industry standards that encompass key aspects of confidentiality, integrity, and availability. We also achieved a perfect score under the ISO Standard for presentation attack detection or Pad Levels 1 and 2 that measure the verified platform's liveliness capability and success in detecting harmful attacks. During this test, Verified successfully recognized and prevented more than 700 presentation attacks for a perfect performance. This demonstrates that we have the highest level of security to stop fraudsters from attempting to spoof biometrics. These independent tests are important for us to earn and promote because they help us reach organizations with IT and compliance departments that have high vendor management and control standards. These certifications give these decision-makers the confidence they need to choose authID to be their trusted partner in defending against cyber attacks. In May, we issued a patent that protects Verified multifactor authentication methodology, critical to fighting fraud, and this patented methodology creates an unchallengeable audit trail for all parties. We were also pleased, along with our customer, Hamilton Reserve Bank, to receive the FinTech Futures Banking Award for best use of risk, compliance and fraud protection. These independent assessments confirm the quality of our innovative technology. By continuing to apply our key patents and know-how, we have the opportunity to forge a lead in this quickly evolving industry. Looking ahead, we will continue to enhance the capabilities of our biometric authentication platform to meet the industry's changing needs. Our technology, as validated by these independent assessments, will help us gain traction and recognition for Verified's best-in-class identity security management and authentication capabilities. Before we talk about our newest team members, I would like to take a moment to remember Ted Stern, who sadly passed away on July 29. Ted was a significant investor, as well as a Director of the company from 2017 to 2021, and he helped the company navigate through a series of critical changes. Ted will be fondly remembered for his great business insights and sense of humor, and we send our sincere condolences to the Stern family. Turning to our team, during the quarter, we were honored to have Joe Trelin, the former Chief Platform Officer of Clear, join our Board. Joe brings invaluable industry expertise and technology product management to authID. I'm also pleased to introduce on this call our new CFO, Annie Pham. Annie is a great addition to our team and brings a stellar background in finance. Her experience includes SonicWall, Applied Micro Circuits, and Avago, which is now Broadcom. Annie has deep experience with the SaaS business model and has dealt extensively with public company and SEC reporting, as well as complex transactions. She has scaled teams and implemented best practices in finance that supported billions of dollars in revenue growth. We're happy to have Annie on today's call with us, and you'll hear from her shortly. I'm also pleased to announce that Jared Hufferd joined our sales organization in June as our VP for Cybersecurity Sales. Jared brings 24 years of experience in cybersecurity sales and business development. Most recently, Jared was VP and GM for the go-to-market strategy for a new Zero Trust access platform at Ericom ZTEdge e business unit. Previously, he was VP of Sales for Stellar Cyber and the top-performing executive leader at Protectwise, now part of Verizon. Jared has been integral in helping us craft our verified workforce strategy and our go-to-market approach with major cybersecurity players. Now turning to slide four, this quarter, the American Board of Radiology selected authID to deploy its facial biometric authentication solution after extensive testing. With the ease of a selfie to confirm identity through either a webcam or a mobile device, Verified provides the ABR with strong identity authentication to maintain the integrity of remote medical professional certification exams. Now instead of using a disruptive verification process, candidates will perform an identity verification ahead of the exam and then simply snap their selfie to confirm identity at exam time. Our customers' success and development teams work very closely with the ABR to carry out a proof-of-concept trial, which we passed with flying colors. As Scott, the ABR CIO, said in his compliments of authID, 'I am certainly going to focus on security and ease of use when I present to the other medical boards about authID. I will also mention that authID is a great partner.' Our whole team has been extremely impressed with how helpful and knowledgeable authID has been. The ABR win is a great demonstration in the healthcare industry of our value-add. Health care is fraught with attacks on compromised credentials that trigger both ransomware and sensitive data breaches. And as with everything health care, these breaches are very expensive to fix. IBM reported that data breaches in the healthcare sector had the highest average cost amounting to over $7 million per breach. Health care is a key target market for authID where the demand for secure seamless authentication for both workforce and patient use cases is strong. In the past quarter, we signed contracts in the FinServ and FinTech segment, adding several new customers to integrate Verified into their FinTech digital banking platform providers. Our channel partners also added several financial service providers, along with a global online media company, to use authID to verify customer identity and account ownership. In the quarter, we launched a new tack with our Verified workforce product set. This was in response to seeing longer sales cycles in the Verified consumer side, as well as increasing corporate investments in cybersecurity, passwordless, and zero trust authentication solutions. Yes, the same Verified platform that protects users' bank accounts is the same technology that delivers strong cybersecurity tools for critical infrastructure industries. Verified prevents hackers from logging into corporate production systems with stolen credentials, bypassing weak authentication methods, accelerating sensitive data, or impersonating employees trying to reset credentials. It's a testament to our agile sales and marketing teams that we have swiftly developed programs targeting enterprises where our Verified biometric chain of trust eliminates passwords and protects critical systems. We quickly created new web content, deployed new digital advertising, and targeted expanded sales prospect lists with new outbound workforce messaging and campaigns. We are also building our market presence at key cybersecurity conferences, including Identiverse and RSA in June, Black Hat this week, and exhibiting at the Gartner Identity Access Management Conference in August. Looking at the big picture, while we've made a good deal of progress in the last six months, our sales have not met our internal goals. However, I'm very pleased with positive signs in our pipeline. Our sales team is working on converting several workforce opportunities and cybersecurity partnerships into booked deals. Let me highlight a few key deals the team is working through. First opportunity is with a U.S.-based business providing customer onboarding and risk assessment. We are proposing that they integrate verified to mitigate identity fraud and automated secure onboarding for their enterprise financial service companies and their customers. The second opportunity is with a technology company that will look to embed Verified into a workforce solution offered by one of the three major wireless carriers in the United States. Another opportunity is to integrate our Verified platform with one of the largest cybersecurity software companies in the United States in order to deploy our Verified workforce solutions as part of their zero trust authentication and access services to their portfolio of customers. As we stated in our last quarterly call, today, we will report on our key performance indicators of booked annual recurring revenue, annual recurring revenue, and deferred revenue. While these KPIs are not yet where we wanted them to be, we have assessed our pipeline and have set sales goals that support our existing guidance of targeting positive cash flow by the time we enter 2024. Now let me turn the call over to Annie, who will give us an update on our financial results and KPIs. Annie?

Annie Pham, CFO

Thank you, Tom, and thank you for your earlier kind introduction. I'm very excited to have joined authID. I came to authID because it presents a compelling opportunity to grow our business in an exciting and fast-growing industry with a very talented team. I look forward to continuing our growth goals, thanks to financial management and capital management, all of which will contribute to adding value for our customers and shareholders. Now turning to slide number six. The following highlights comprised results from continuing operations and reflect our previous announcement that we are exiting the company's non-core businesses in South Africa and Colombia. This business is now classified in our financial statements as discontinued operations or assets held for sale. Accordingly, all of my remarks will compare results from continuing operations for the quarter and six months ended June 30, 2022, with the quarter and six months ended June 30, 2021, unless specified otherwise. For both the three- and six-month period, Verified software license revenue increased year-over-year. Verified revenue for the quarter increased over the prior year by 178% to $51,000. For the six months in 2022, Verified revenue increased over the last year by 163% to $87,000. Total revenue for the quarter was $1 million, compared with $0.1 million for the prior year. For the six months in 2022, total revenue was $0.2 million compared with $0.3 million, due mostly to the discontinuation of our legacy product. Operating expenses for the second quarter of 2022 totaled $6 million compared with $3.4 million for the prior year, principally due to higher non-cash expenses of $3.2 million. Operating expenses for the six-month period totaled $11.2 million compared with $5.6 million for the prior year, principally due to higher non-cash expenses of $5.4 million. The non-cash expenses comprised mostly of $2.6 million of stock base compensation for the three-month period and $4.5 million of stock base compensation for the six-month period. Our second quarter of 2022 expenses rose from last year as we accelerated our investment in SaaS technologies, sales and marketing, which started in the second half of 2021. Net loss for the quarter was $6.4 million compared with $3 million. And for the six months, net loss totaled $11.5 million compared with $5.4 million. Net loss per share for the quarter was $0.26 compared with $0.15. For the six-month period, net loss per share totaled $0.48 compared with $0.27. Adjusted EBITDA loss for the quarter was $3 million compared with $1.3 million. For the six months in 2022, adjusted EBITDA loss was $5.9 million compared with $2.5 million. Now let me present our KPIs. We're committed to providing you today with the following KPI: booked annual recurring revenue or BARR, annual recurring revenue or ARR, both of which are non-GAAP measures, and deferred revenue. Booked annual recurring revenue BARR is the amount of annual recurring revenue represented by the minimum or estimated amount payable under contracted orders for our Verified products. The cumulative amount of BARR through June 30, 2022, is $161,000. Annual recurring revenue or ARR is the revenue as determined in accordance with GAAP, derived from sales of our Verified products during the last month of the quarter, multiplied by 12. ARR as of June 30, 2022, is approximately $154,000. The total revenue or GAAP metrics recognized as of June 30, 2022, is approximately $46,000. As Tom indicated earlier, our sales team is working on closing deals in our pipeline, and we expect our Verified subscription revenue to expand significantly in the second half of 2022. Now turning to our balance sheet, as of June 30, 2022, we had approximately $10 million in cash. There are no borrowings on the new revolving credit facility. Looking ahead, we anticipate our cash burn rate to be approximately $1.1 million per month and then improving as we add revenue from our core operations. To reiterate our previous guidance, we estimate having sufficient financing to fund operations through 2023 and believe our strong sales pipeline gives us confidence that we can achieve our target of positive cash flow by the time we enter 2024.

Graham Arad, General Counsel

Tom, Graham Arad. While we're waiting for the queue of questions to be compiled, I can ask you a question. Ask you to clarify a bit more what it means for our workforce product in the marketplace that we're targeting now for the workforce services and how that compares to other products in the market?

Tom Thimot, CEO

Absolutely, Graham. Thanks. Clearly, as we highlighted earlier, when the consumer side of our business, where a business uses our authentication technology to authenticate a user who is a consumer, we saw - while that was going down, we saw an increase in interest in our workforce product. This is very typical in the cybersecurity industry. In downturns in the economy, there is actually more investment made in cybersecurity to protect corporate assets, and we have seen a significant uptick in interest in our products for that particular use case. It's why we have centered a lot of our marketing and sales around that. And we think that we are uniquely positioned because as most companies are moving towards passwordless authentication, where you no longer will log into your corporate environment with a username and password, but rather use a passkey or a token on your phone, the way to step up that authentication to ensure it is the right person behind the phone is through biometrics like what we offer in Verified. We think we have the best product in the market to solve this problem.

Graham Arad, General Counsel

Thank you. Just as a reminder to people who are listening to us on the webcast or not able to ask a question directly, the company is always open to questions from investors. You can contact us at investors at authid.ai. You've had a chance to review the various materials that we've published today, and also to speak with a member of management. If you have further questions, please feel free to contact us at that time. Another question comes in the workforce marketplace, who would you say are the main competitors that we're trying to look at?

Tom Thimot, CEO

A number of companies we've been looking at as competitive in the marketplace are traditional providers of texting solutions that would step up authentication through a PIN code, like Twilio, alongside a number of other solutions that are made independently by IT departments where they choose to go to a standard SaaS solution. One of the things that is exciting about the workforce marketplace, as opposed to the consumer marketplace, is you tend to log into your work environment every day. You might log into your bank account once or twice a month. As a result, the value that we create and the price we're able to obtain is much higher in workforce than it is in consumer. Also, from an implementation perspective, it typically takes much longer to implement on the consumer side because you are constantly concerned with gaining consent and ensuring that the friction does not drive away the consumer. When you're an employee of a company, you typically sign documents that say you will use the security protocols that are required by the company. So consent is not something that is gained by an employee; it is given when they accept employment with the company. This is one of the reasons that we see a significant opportunity and an opportunity to partner with the existing IAM, identity and access management companies in the marketplace because we are augmenting this and making it more secure so that they can verify not just the employee's device, but also that the employee is actually behind the device.

Operator, Operator

Thank you. Please stand by for our question. Our next question comes from the line of David Lerner with Renrel Partners. Your line is open.

David Lerner, Analyst

Hey, Tom.

Tom Thimot, CEO

Hello, David.

David Lerner, Analyst

A couple of questions. You mentioned Twilio, so clearly the plan is still to be a replacement to a one-time password. And it seems also that Twilio's own employees gave away their credentials. Do you see that as our big opportunity, number one? And then you mentioned a couple of new deals won in telecommunications, one in IAM or cybersecurity is not the same company, and maybe we could elaborate on those and maybe some of the timing of those.

Tom Thimot, CEO

Absolutely. First and foremost, yes, when the world moves away from passwords and moves towards what's called commonly a passkey on the device to token - a piece of software that's put on your phone or laptop that identifies that the phone or laptop is present and, therefore, logs you in. And then when there is either something risky you're doing, maybe you're accessing a certain area of information inside the company or an area that has a much greater loss if it is breached, then the user is challenged to verify their identity with the biometric. This is a very different ecosystem, and this is where authID, to use the overused metaphor of skate to where the puck is going. We saw when we came to authID that the world was going to finally move away from password. When they did, there would need to know who is behind the device, not just that the device was there. That is a much safer and more secure world than where you remember a password and get tested a code. As for the companies we are speaking to, whether it's in the health care market where we see significant need for securing sensitive data or the telecommunications opportunity that we're addressing serving small and medium businesses needing to secure their employees, we are best positioned to offer a solution because that has been our focus. We have looked to divest ourselves of businesses that are not tied to our ability to use biometrics to step up authentication.

David Lerner, Analyst

Yes. Thank you. Last question I have, if I may. Annie, nice to meet you. You mentioned a couple of things, I heard an expansion to revenue and bookings, everything in the second half of this year. Obviously, it hasn't happened in the first half. Where do you see - I'm looking at $167,000, I think I saw with the ARR in maybe last quarter, so you've got this quarter 1.5 more. Like to what magnitude is substantial, what do you think we can look for - is it 20X, 10X, 1X? I mean, substantial from a small number is a watch?

Tom Thimot, CEO

The one thing that we have very clearly stated, David, is that we remain confident that given our sales pipeline, by the start of 2024, we can be cash flow positive. We burn today roughly $1.1 million in cash, which is approximately $13.2 million on an annualized basis. To state the obvious, to have cash flow positive, you would have to have receipts in excess of $13.2 million in order to be flowing cash positive. So while we sit here in the middle of 2022, I think we see a line in a path to reach that end goal that is only 18 months away. Yes, we would obviously have to significantly pick up that $154,000 of ARR to get to $13.2 million of ARR. I should clarify that because this business has deferred revenue and pre-payments, the combination of deferred revenue and ARR would need to exceed that, not just the ARR by itself. Does that make sense?

David Lerner, Analyst

100%. So are there - in particular large customer, is this going to be one customer that if the number is $13 million, $15 million next year, how should we look at it? 100 customers, meaning workforce, two customers, one large customer, how do we kind of think…

Tom Thimot, CEO

All of the above, David. I mean, here's the thing - we're in a very early stage company, a size company that typically you see in the venture markets. We consider - we're honored to be in the public markets, but we know that we have to bring investors that may be used to much more mature companies along with us on this journey. You typically start with very small customers that prove out your solution and then you gradually expand the size of your agreements. Ultimately, then when you improve in your customer satisfaction, win awards, which we've been doing, then some of the larger software companies say, 'Wait a second, this makes sense for us to put inside our solution because everyone's focused on eliminating passwords.' There is a flow where these small deals help us prove out our product, get all the certifications - we had 700 presentation attacks detected, a perfect score; everything that could be thrown at us to try and defeat our technology failed, and we succeeded. This happens because you have really good early customers that help you develop and refine the solution, allowing you to take it to larger clients, which is our focus.

David Lerner, Analyst

Thank you, Tom. Thank you, team. That was also very nice to mention Ted Stern been a wonderful man, and you guys enjoy the rest of your night and congrats on a lot of really good stuff that's getting done. Keep up the good work.

Tom Thimot, CEO

Thank you, David. Operator, we...

Tripp Smith, President and CTO

So it doesn't seem like there are any more questions right now, but as I say, reiterate that anyone who would like further information or follow-up questions can contact us either through the contact page on our website or by email to Investor Relations at authid.ai. Tom, I think, just remains for your closing remarks.

Tom Thimot, CEO

All right. Well, I'd like to thank everyone for their interest and investment in our company and their questions and insights today. In closing, we'll continue to focus our sales efforts on protecting the workforce and securing corporate assets from hackers and cyber criminals. I really want to thank you for your time today. Take care, everyone.

Operator, Operator

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