ImageWare Systems' CEO Hosts Corporate Update Call (Transcript)

| About: ImageWare Systems, (IWSY)

ImageWare Systems Inc. (OTCQB:IWSY) Corporate Update Call August 14, 2013 5:00 PM ET


Jim Miller - CEO


Jeff Perry - Aberdeen Investment Management

Nick Stanberry - Revelation Capital


Good afternoon, everyone and thank you, for participating in ImageWare Systems’ Corporate Update Call to highlight the progress since it’s last update on May 10, 2013. Joining us today are ImageWare Systems’ Chairman and CEO, Mr. Jim Miller; and the Company's CFO, Mr. Wayne Wetherell. Following their remarks, we will open the call for your questions.

Any statements contained in this document that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, if, should and will and similar expressions as they relate to ImageWare Systems Inc. are intended to identify such forward-looking statements. ImageWare may from time to time update these publicly announced projections, but it is not obligated to do so. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will in fact occur. These projections are subject to change and could differ materially from final reported results. For a discussion of such risks and uncertainties see Risk Factors in ImageWare’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, its quarterly reports on Form 10-Q for the quarter ended June 30, 2013 and its other reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as amended. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made.

I would like to remind everyone that this call will be available for replay through September 14, 2013 starting at 8:00 PM Eastern tonight. A webcast replay will also be available via the link provided in today's press release, as well as available on the Company’s website at Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of ImageWare Systems, Inc. is strictly prohibited.

Now, I would like to turn the call over to the Chairman and Chief Executive Officer of ImageWare Systems, Mr. Jim Miller. Sir, please go ahead.

Jim Miller

Thank you, and good afternoon, to everyone. As you all saw at the close of the market today, we issued a Press Release that provides a corporate update highlighting ImageWare’s progress since our last call in May. I’d like to start out by saying how pleased we are with the strides we’ve made to strengthen our internal resources and enhance our product offerings to position ImageWare as a leader in multimodal biometric security solutions and to accelerate our entry into the commercial and consumer marketplaces.

Since our last call, we’ve achieved multiple milestones in product development and further penetrated our target markets. As you may recall during the first quarter of 2013, we entered into a contract with Fujitsu to jointly market a cloud-based multimodal biometric identity management solution to be delivered on the Fujitsu Global Cloud Platform.

Fujitsu's Global Cloud Platform is one of the World's largest and most secure cloud platforms and features our CloudID product suite anchored by our patented multimodal Biometric Engine now in version 2.0. We believe our CloudID identity management suite of products is the first offering of its kind to addresses the growing need to secure the cloud and mobile markets using multimodal biometric security solutions. Working together with Fujitsu and its global cloud platform brings ImageWare to the cloud with a recognized best-in-class global partner and a leading innovator in the IT space worldwide. Under the contract ImageWare will invoice its customers on a monthly subscription basis and receive a majority of the associated revenues.

As a result of this contract, during the second quarter of 2013 we secured our first agreement with Emida, a leader in the global prepayment and value transfer market, to provide cloud identity management services for mobile wallet subscribers and partners using our CloudID. Together, ImageWare and Fujitsu will deliver and fully validated feature-rich security solution that will provide unprecedented identity and value exchange protection for financial transactions over smartphones.

As is true with all of our Fujitsu agreements we will retain a majority of the revenues associated with these services receiving a fee for each new subscriber registered and an additional monthly recurring fee per subscriber. Fujitsu will share in the recurring monthly fee.

Emida plans to launch its new mobile wallet offering to its subscribers in September, and we estimate that we will start seeing revenue from this agreement in the fourth quarter of 2013. To give you an idea of scale, Emida currently operates in 37 countries throughout the world with millions of subscribers to its prepaid services, and supports a network of more than 54,000 retail points, with an annualized dollar payment volume in excess of 1.5 billion and more than 240 million payment transactions processed each year, partnering with Emida on its new mobile wallet offering presents an attractive opportunity for ImageWare and showcases our plug-in approach to identity management authentication.

The prepaid market is a fertile place for ImageWare products as the market is starving for higher level of security, a solution we can now easily provide. Therefore, we are aggressively pursuing other Emida like opportunities which we hope to announce shortly. We couldn’t be happier with our partnership with Fujitsu to utilize their secured global cloud platform, which helps pave the way for entry into the retail, financial services and healthcare markets we’ve agreed to jointly target.

The North American Fujitsu retail sales team is now trained to market our solution and they are out in the marketplace calling on their accounts. As such, we are currently in discussions with several clients regarding licensing opportunities and we’ll continue to target large enterprise business and emerging applications.

Due to the early success and enthusiasm generated by the North American roll out, we have reached a preliminary understanding with Fujitsu for a global expansion of our partnership in the very near future. As we have said, we are aggressively targeting the financial services vertical.

In fact as a result of the Fujitsu introductions, we are pleased to report that we have initiated a 60-day mobile biometrics security management pilot project with a major financial institution and we are about half way complete. The pilot is progressing as planned.

We are also in the marketplace looking for other large IT integrators that could become CloudID distributors. We have been working with several other world-class companies in this regard and anticipate having another agreement in the near future.

We have reached a very exciting crossroads where could and mobile computing have intersected with biometrics. The rapid expansion and availability and use of mobile devices presents an absolutely incredible and worldwide opportunity. As these devices have become culturally ubiquitous nothing short of phenomenal and the reliability and robustness, the doors has swung wide open to provide security for the myriad of transactions that occur on these devices every single day.

Where you can easily ascertain that it’s your phone or device, you can really be sure who exactly is using it. The more transactions and sensitive information that can be accessed via mobile devices, the more important of this critical security piece of the puzzle be solved.

Happily, it is the solution that the new generation of the ImageWare products addresses and solves. During the quarter, we continued to develop and advance our biometrically secured mobile transaction technology that is built upon the wireless push technology and related patents we acquired from VOCEL last year.

Last month, we introduced GoMobile Interactive, the industry’s first biometrically enabled mobile identity management platform. Integrated with our biometric engine, GMI allows businesses service and content providers to offer users biometric security for their products, services and content along with directed messaging capability on both the Android and iPhone operating systems.

The response we have gotten from GMI is very encouraging and we are currently in substantive discussions with several new clients regarding licensing opportunities. We strongly believe that this technology provides yet another significant competitive barrier to entry.

By supporting multimodal biometrics on a mobile device, we are now able to offer security solutions that are far superior to traditional passwords or pin protection. Targeting verticals such as mobile banking, value transfer, retail, healthcare, and entertainment services, GMI also includes a standalone application that can be used as a turnkey solution or software development kit enabling integration with existing applications for Android and iPhone.

Additionally, GMI supports dynamic information gathering that allows our clients to be able to do such things as documenting clinical trials or compliance with pharmaceutical regimes through interactive surveys that can be optionally secured with biometrics.

At the beginning of last year, we set a goal to establish a leadership position in biometric base identity management for cloud and mobile security technology. Although our focus is towards these mobile and cloud markets, we well as we said continue to pursue government contracts as well.

Earlier this month via Prime Contractor relationship, we rewarded at $2.2 million contract by our largest customer, the United States Department of Veteran Affairs to expand the personal identity verification credential and capabilities across federal, state, and local facilities. We have first implemented our multibiometric identity management solution with the VA in 2007 whereby ImageWare has provided enrollment and ongoing management of face, live scan fingerprint, and fingerprint minutiae.

These services which are incompliance all U.S. government standards provide a greater level of security and a working model for commercial sectors standards and adoption. This is not an insignificant order and frankly it’s one of the larger orders in the history of ImageWare and is the largest reorder of software from VA in the course of our relationship. This is a testament to the quality, service, and produce we provide and in a time of challenging government budget issues, needless to say we’re pleased to receive it.

Under the terms of the agreement, ImageWare is to deliver software licenses during third quarter of 2013 and will receive approximately $1.5 million in revenue. Those licenses have in fact already been delivered. Additionally, ImageWare received service revenue valued at approximately 650,000 that will be recognized proportionally over the next year.

As part of the system expansion, the VA will also be upgrading to our patented biometric engine 2.0 which enables the enrollment and management of unlimited population sizes, should the VA decide to rollout the solution across the entire organization or its body of patients.

As stated on our previous corporate update call, we expect our third quarter to be cashed well positive, in large part due to this contract. We have also been preparing for a major international deployment as the exclusive provider of biometric identity management for Prime Contractor and solving cargo scanning security at the Republic of Ecuador’s major seaports.

Despite another delay from the Prime Contract, they have told us that the initial deployment is now scheduled to begin this month at the Port of Guayaquil, the country's the main seaport that handles majority of the country's imports and exports. We expect to receive revenue of approximately $150 to $200 per port worker receiving credentials as well as annual management in maintenance fees equal to roughly 35% of the initial credentialing in cost per worker.

Depending upon the final number of employees, we expect the contract value to exceed $3 million over its 7-year term. Again, the high end biometric secured credentialing solution we are providing for Ecuador is essentially the same underlying technology being deployed for Los Angeles World Airports, which we announced early last year.

Both LAX and Ontario are expected to be complete at the end of fourth quarter. In fact we can easily replicate this platform for virtually any port system that needs biometrically enabled transportation worker identification cards or wishes to use biometric identity management to safeguard its workplace.

And speaking of airports, we recently started work at the George HW Bush Intercontinental Airport in Houston to help speed up customs process using biometrically enabled automated kiosks. Our software will be deployed by United States customs and assuming a successful pilot we expect it to be installed in international airports around the U.S. On this specific project we anticipate receiving revenue of $150,000 and we're scheduled to complete the product during this third quarter of 2013.

Additionally we have recently been notified that we have been awarded a paying pilot worth approximately 100,000 to provide a biometric application, utilizing iris recognition to a prime contractor working with a major U.S. federal agency. We estimate that we will complete delivery of those products in the fourth quarter of this year.

Moving on to some financial information, in the second quarter of 2013 total revenue increased slightly to 1 million compared to 966,000 in the second quarter of 2112, which I would like to remind you is all from our traditional government client base. We expect to see a significant increase in revenue during the third quarter, due to the recognition of the VA order.

Looking ahead to the fourth quarter we expect to recognize revenue from the completion of the Los Angeles International Airport project totaling approximately 1 million. Additionally beginning in the fourth quarter and ramping throughout 2014, we anticipate a steady increase in monthly subscription revenue in association with Emida and other partnerships through our cloud, SaaS and mobile initiatives.

Not only our solutions easily deployable but they generally represent gross margins ranging from 60% to 70% or even higher and they provide a recurring revenue stream due to the management and maintenance we perform. We look forward to using our unique patented technology to provide a strong steady revenue growth along with excellent forward looking visibility.

The net loss in the second quarter of 2013 was $5.6 million of $0.07 per diluted share. Compared with net income of 1 million or $0.02 per diluted share in the second quarter of 2012. The $6.6 million difference is primarily due to a $6.4 million shift in the change in fair market value of derivative liabilities caused by the increase in the market price of our stock.

On June 30, 2013 cash and cash equivalent totaled $1 million down $1.2 million from $2.2 million in the first quarter of 2013. However current cash is approximately $2 million and our accounts receivable balance is nearly $3 million. We continue to carry no debt and currently hold the $2.5 million unsecured line of credit with our largest shareholder Neal Goldman.

Based upon current and projected cash levels as well as the recently secured line of credit in VA deal, we do not expect at this time to require any incremental equity capital to fund our current operations nor do we expect to draw upon the credit line.

As we have stated we're not yet a quarter to quarter company, but we’re gaining on that goal. Make no mistake it's our top priority. As our new subscription revenue products come online, we will witness the fundamental transformation of our business and revenue model and we’re closing in on that goal rapidly.

As we move forward, we continue to view intellectual property as a key component to our overall strategy. Since the beginning of 2013, we have now filed nine new patent applications in the United States around our biometric and mobile technology. In addition to our strong U.S. patent position we have been awarded patents on our multimodal biometric technology in Canada, Australia and China and have applications pending in Europe and Mexico.

ImageWare's proven track record of government experience executing best of breed patented fully compliant biometric solutions will drive the standards for commercial and consumer adoption. While we continue to pursue government contracts, the steps we have taken to bring our cloud and mobile products to the commercial and consumer markets will provide us with forward looking visibility along with strong and recurring revenue.

Now I would like to pause and open the call up for some of your questions.

Question-and-Answer Session


(Operator Instructions). And our first question comes from the line of Jerry Novak with Genko (ph). Please go ahead.

Unidentified Analyst

No question.


(Operator Instructions). And our next question comes from the line of Jeff Perry with Aberdeen Investment Management. Please go ahead.

Jeff Perry - Aberdeen Investment Management

The mobile product, I was curious, the development at Fujitsu, has that matured to the degree that you can speak of it in terms of conventional sales pipeline and some progression and visibility into how that is proceeding.

Jim Miller

Yes, Jeff, it absolutely has. As I said in the remarks they are out alongside of us calling actively and aggressively on accounts, by definition their accounts, being the size of the company they are, I believe they’re the third largest integrator in the world, a very large company, Fortune 500s and up and we have been out there making those sales calls and they have been opening those doors. I couldn’t be happier. And so yes, in terms of your this specific question you asked, we are now seeing the formation of a pipeline and we are in the process of opening those doors and bringing those opportunities through the pipeline to closure, yes.

Jeff Perry - Aberdeen Investment Management

For example with major financial institution in which you are in pilot, I was just curious how long it took for that to develop and that if there are follow-on institutions that might come through from that. And then secondly, if the pilot goes well, what kind of process or timeline might there be to get to a, say where Emida is.

Jim Miller

Well the process was very quick. From the time to initial call to the commencement of pilot was roughly 40 days and as I said the pilot is 60 days and we are half way through. I think it would be a little premature for me to say what happens, and throw numbers and all that out. At this point we are concentrated on getting through the pilot which as I said is going exactly as it should, up to date. And yes, this will be very similar to the process we are seeing in other places where Fujitsu and ImageWare are working together.

Jeff Perry - Aberdeen Investment Management

And, in any case major financial institution who decided it, I am assuming it’s a U.S. institution and would it be fair to say it’s the top-ten bank or how would you characterize the world major?

Jim Miller

Yes it is a very large U.S. based financial institution. That’s I think all I am going to say at the moment, just given the fact that we have a lot of agreements, talking about what we can say and not about that.

Jeff Perry - Aberdeen Investment Management

Okay, and if I might, the notion of digital wallet and mobile security is obviously a very hot item in terms of you’ll find yourselves in a very good place. There was recently some, in our record on the internet about Apple introducing fingerprint technology in perhaps iOS 7, and then the whole motion of the digital wallet and the (inaudible) to what bound the identity before transactions were incurred. Can you talk about how that is proceeding with the context of your GMI product, your global mobile product relative to the digital wallet application?

Jim Miller

Well, the beauty of the ImageWare solution as we have said is of course it’s anchored by our biometric engine which supports multiple biometrics. So not just finger print, but as many different biometric modalities as our end users would like to use. So if someone wanted to use fingerprint, and then they had that requirement, the biometric engine and the mobile platform and GMI as a product support that.

Right now what we are seeing is interest in voice and face. They are very consumer friendly. They come without some of the hurdles that fingerprints face. That is just the statistics and the population of people that have worn ridges on their fingerprint therefore making capture somewhat problematical. So voice and face seem to be free from at least those problems.

But, again I’ve said this many times, the beauty of our solution is what biometrics would you like to use? We are not limited to fingerprint. And I think just the fact that Apple is coming out with that and going down this path is just yet another validator of the ImageWare solution and it’s place in the market.

Jeff Perry - Aberdeen Investment Management

And if I might ask one another item last, I noted the last month, the NIFC came out with standards for iris recognition in particularly related to federal personal identity verification and I was wondering if just what kind of way to put on that on that and our considerations about; does that open up some pent up demand perhaps for projects that might have been waiting for these types of standards to be set? I am thinking perhaps in context with the federal airport, the TSA applications or other larger federal population rollouts.

Jim Miller

You know maybe but I am not so sure to be honest with you Jeff, about that. The federal government has been working on a body of standards and it reviews them and re-applies them and re-announces them and tweaks and amends them as they see appropriate. We think the better way to look at those standards is the crisper and more complete they are, the better they will serve to be the standards adopted by non-governmental users in the commercial and consumer space, because they don’t have to re-invent the wheel. Government has spent the last ten years doing just that.

As I said in the remarks, we are compliant with those. The pilot that we are involved in is iris based as I mentioned. We are compliant with those standards. So to us it’s again, which biometric would you like to use? If it’s iris, great, we are a big fan but if it’s some other way you want to go then well we have a solution for those other biometric modalities as well.


(Operator Instructions) And our next question comes from the line of Nick Stanberry with Revelation Capital. Please go ahead.

Nick Stanberry - Revelation Capital

Just a couple of quick questions if it’s all right. You have said in the past that this might be the sort of time where you might be able to begin talking about giving forward looking guidance on a kind of 12 month type of view. And are you yet able to be able to start doing that? Are you able to giving indications that how far away that might be?

Jim Miller

I don’t think yet. As I said, I don’t thin, we're just not yet a quarter-to-quarter company but we are pretty close. I would think that we will be able to get that sort of visibility certainly by year-end this year.

Nick Stanberry - Revelation Capital

Okay even on a kind of 12 month view, you think kind of forward looking on a 12 month view is still impossible at this point?

Jim Miller

Well to be really precise and accurate so that the guidance given would be worthwhile to someone, yes there is so much going on right now. Nick, it’s just a lot of moving parts. I would be very hesitant to go down that road at this point.

Nick Stanberry - Revelation Capital

And then the second question, kind of slightly standing to what I think Jeff was asking, the pilot project, the 60 day pilot project that you are running at the moment, I think you said you were approximately half way through? So 30 days roughly to run?

Jim Miller

That’s right.

Nick Stanberry - Revelation Capital

Does that mean we would be likely to see an announcement on this in kind of 30 to 40 days or is it going to take a lot longer after the end of the pilot project to come to an announcement?

Jim Miller

Well that actually don’t know with any certainty. The agreement is to run for 60 days, how long after that it takes to formulate a new agreement which is what we would do assuming a successful completion of the pilot. It’s a bit problematic for me to guess that but I would think that both parties would go at it with the same good faith and aggressiveness they have gone after the pilot. So again I don’t have an exact number but I would think shortly after that, yes.

Nick Stanberry - Revelation Capital

And then finally before I let someone else on, you have obviously told in the past and we've talked in some detail about the opportunities that’s out there from licensing revenues and I understand your pursuing those relatively aggressively in terms of coming after other companies who are using your pace and technology without paying any license fees. How much progress has been made on that this quarter and are you able to give any comments on kind of how large you see that revenue size opportunity being and maybe kind of 12 to 18 months out or are you not yet at that sort of stage?

Jim Miller

I don’t think so. Plus it’s a sensitive issue in the sense that are three matters in litigation. We have been in settlement discussions to see if there is a non-judicial way to settle these things but that is pretty much kind of where it’s at right now. So no I am not in that position to quantify a more exact number at this point.

Nick Stanberry - Revelation Capital

Okay and on timing, are you able to give anything on timing or neither that either?

Jim Miller

Well as I said, the discussions are all underway across all fronts. I am again hesitant. When you are dealing in these discussions and you are dealing with individuals and emotions and obviously subjects of money, who can tell how long those things would take, although it’s certainly helpful that they are in settlement discussions but how long; no, I don’t think I can say with any accuracy.


Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Miller for any closing remarks.

Jim Miller

Well thank you and thank you all for taking the time to listen in today. I'd like to conclude by saying we really couldn’t be happier with the way things are going these days at ImageWare. As we said earlier we are at an incredibly exciting intersection of three major market moving forces, the Cloud, Mobile Computing and Biometrics. Inside our company and you have heard us say this before, we often talk of this as not being your father’s ImageWare anymore, and I can tell you that’s just right out the truth. The pace of our business, the interest in our products and our pending opportunities with world class companies are setting the table for a whole new era at the company.

Now some of you are worried that our progress was not as rapid as you would like. We want you to know two things. First we want it quicker, just like you. We are working hard to make that happen. Second, rest assured there is an abundant of good things in progress but world class companies are no different than you and I. They will not put the brand on anything without a lot of homework. These are not snap decisions they are lightly made. That homework is coming to completion and we expect to see some very good things as a result.

In summary, our strategy to diversify ImageWare's revenue stream and decrease our dependency on large government projects is gaining traction. Although we'll continue to pursue government contracts, our SaaS, mobile and cloud offerings in the commercial and consumer markets will provide us with a more stable recurring revenue and a clear picture of ImageWare's long-term opportunities. We appreciate your continued support and interest and in return know that we remain absolutely committed to returning shareholder value.

Thank you again for participating in today's call, and we look forward to speaking with you again on our next call. Good afternoon.


Ladies and gentlemen this concludes our conference call for today. We thank you for your participation and you may now disconnect.

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