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Executives

Jim Miller - Chairman and CEO

Wayne Wetherell - CFO

Analysts

Mike Malouf - Craig Hallum

ImageWare Systems, Inc. (OTCQB:IWSY) Q3 2013 Earnings Conference Call November 14, 2013 5:00 PM ET

Operator

Good afternoon, everyone and thank you, for participating in ImageWare Systems’ Corporate Update Call to highlight the progress since it’s last update on August 14, 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 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 and for fiscal year ended December 31, 2012, its quarterly reports on Form 10-Q for the quarter ended September 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 dates on which they are made.

I would like to remind everyone that this call will be available for replay through December 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 www.iwsinc.com. 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 to everyone, a good afternoon. As you saw at the close of the market today, we reported our financial results for the third quarter ended September 30, 2013. Our strong third quarter results were primarily due to the $2.2 million contract we secured with our largest customer, United States Department of Veterans Affairs. The key contract drove our first cash flow positive quarter in nearly five years. The biometric identity solutions we’re providing to VA which are in strict compliance with U.S. Government standards serve as a working model for facilitating more rapid commercial sector adoption.

But before I comment further I’d like to speak about some specific financial results. In the third quarter of 2013, total revenue increased to 167% to 2.5 million versus the third quarter of 2012. The increase was primarily due to the $2.2 million contract with our largest customer the U.S. Department of Veterans Affairs. The project was designed to expand their personal identity verification credential and capabilities across federal, state and local facilities and is one of the larger orders not only in the history of ImageWare but in the history of our relationship with the Veteran’s administration. Under the agreement we delivered software licenses during the third quarter and received approximately 1.5 million in revenue.

Additionally we’ll receive service revenue valued at approximately 700,000. It will be recognized proportionally over the coming year. Not only are our solutions easily deployable they generally represent gross margins ranging from 60% to 70% or higher and provide a recurring revenue stream due to the management and maintenance we perform. Gross margin in the third quarter of 2013 increased significantly to 88% compared to 72.7% in the third quarter of 2012. The increase was primarily due to the increased software license revenues.

Net income in the third quarter of 2013 also improved significantly to 326,000 or $0.00 per diluted share compared to a net loss of 2.7 million or $0.04 per diluted share in the third quarter of 2012. During the third quarter we generated $1 million in cash flow from operations which augmented our balance sheet. At September 30, 2013, cash and cash equivalents total 3.5 million compared to 1 million at June 30, 2013 and 4.2 million at December 31, 2012.

We continue to carry no debt and currently hold a 2.5 million unsecured line of credit with our largest shareholder Neal Goldman. Based upon both current and projected levels as well as the line of credit 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 line of credit.

Looking ahead to the fourth quarter we had expected to recognize revenue from the completion of the Los Angeles World Airport project totaling approximately 1 million. Due to external factors and not related to our portion of the contract we’re now anticipating the completion date of our LAX deployment to be shifted from the fourth quarter to early 2014. However, beginning late in the fourth quarter of 2013 and ramping throughout 2014, we anticipate a steady increase in monthly subscription revenue in association with Global Payout, Emida and other partnerships which we expect to close through our cloud, SaaS and mobile initiatives.

We continue 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 marketplace. 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, delivered on the Fujitsu cloud trusted public platform. Fujitsu’s cloud platform is one of the world’s largest and most secure cloud platforms and features our cloud ID product suite which is anchored by our patented multimodal biometric engine now in version 2.0.

We believe our cloud ID management suite of products is the first offering of its kind and addresses the growing need to secure the cloud and mobile markets using multimodal biometric solutions. Working with Fujitsu and its cloud platform brings ImageWare to the cloud with a recognized best in class global partner and a leading innovator in the IT space. Under the contract ImageWare invoices its customers on a monthly subscription basis and retains 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 cloud ID. Emida which was scheduled to launch its mobile wallet offering to its subscribers in September has postponed its rollout into the first quarter of 2014 as it negotiates additional contracts with its partners and with new customers.

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 high levels of security, a solution which we can easily provide. Therefore we have been aggressively pursuing other Emida like opportunities. In fact subsequent to the end of the third quarter we secured our second commercial customer Global Payout, a program manager offering multinational companies electronics payment and prepayment card solutions.

Similar to the Emida agreement ImageWare will provide its patented cloud ID product suite which will run on top of the Fujitsu cloud platform for the Global Payout MoneyTrack consolidated payment gateway. The solution will enable a fully validated feature rich security solution which provides a one stop solution for access and payments to international and domestic bank accounts, debit cards and other payment systems in more than a 120 countries via desktop and mobile device.

We expect Global Payout to begin its rollout late in the fourth quarter. We will begin to recognize monthly revenue as Global Payout adds subscribers to its service. 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.

Our partnership with Fujitsu to utilize their secure global cloud platform helps pave the way for entry into the retail, financial service and healthcare markets we have agreed to jointly target. As we mentioned on our last call 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.

In addition, due to the early success and enthusiasm generated by the North American rollout we’ve reached the preliminary understanding with Fujitsu for a global expansion of our partnership model in the near future. We are currently in discussions both directly and through Fujitsu with several large multinational commercial entities that are evaluating our technology for implementing cloud based biometric identity management systems for some or all of their employees and customers. We believe we will enter into contract with one or more of these entities in the coming months.

As we’ve said we are aggressively targeting the financial services vertical. On our last call we’ve reported that we had initiated a 60 day mobile biometric security management pilot project with a major financial institution that was introduced by Fujitsu. After the initial pilot testing was complete it requested another 60 day license to continue their testing. Although this process has not yet resulted in an order, we view the latest request as the strong indication of interest in our technology.

As a Fujitsu executive said in a recent published interview, the IWS technology coupled with the Fujitsu cloud is a game changer. And we expect results from our partnership commensurate with that statement as a fee. We are also in the marketplace looking for other large IT integrators that could become Cloud ID distributors. We’ve been working with several other world class companies in this regard and are optimistic that we’ll be able to announce new partnership agreements in the coming months. These large integrators both domestic and foreign have been in the process of thoroughly getting our technology. During the quarter we’ll continue to develop and advance our biometrically secured mobile transaction technology, its build upon the wireless push technology and related patents we acquired from those sell last year.

This July, we introduced to store mobile interactive or GMI, 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 a biometric security for their products services and content along with directed message capability on the Android or iPhone operating systems.

We continue to counter very encouraging feedback from GMI and are currently in subsiding 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’re now able to offer an out of band security solutions that’s 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 clients can utilize such as documenting clinical trials or compliance with pharmaceutical regimes through interactive surveys that can be optionally secured with biometrics.

We’re very excited about and have started our initial marketing efforts on our newest Cloud based product the PillPhone. The PillPhone is our enterprise solution for medication and information exchanges which uses the GMI platform to provide an interactive mobile program with a [indiscernible] to medical regimes as well as the sharing of medical records, prescription ordering along with interactive chronic diseases messaging, instructional videos and healthy tips for wellness.

The information is secured by biometric authentication and uses our patented one click messaging technology combined with our patented biometric engine. The product FDA approved and our plan is to commence delivery in the first quarter of 2014. 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 the mobile and Cloud markets, we will continue to pursue government contracts in fact we are currently bidding for three major domestic airports which is successful with result in 2014 agreements. We’ve also been preparing for a major international deployment as this exclusive provider of biometric identity management for a prime contractor installing cargo scanning standing security at the Republic of Ecuador’s major seaports.

The initial deployment which was scheduled for August at the Port of Guayaquil, the country’s main sea port that handles the majority of its import and exports, was yet again put on hold as they were unable to secure financing for the project in the timeframe necessary to move forward. We’ve now been informed that the prime contractor was currently finalizing financing for the project and believe implementation won’t begin in the second quarter of 2014.

We expect to receive a $150 to $200 per court worker receiving credentials as well as annual management and maintenance fees equals to roughly 35% of the initial credential in cost per worker. Spending on the final numbers of enroll these we expect that contract value to exceed 3 million over its seven year term.

Again the high end biometric secured credential solution we are providing for Ecuador is essentially the same underlying technology being deployed for Los Angeles world airport. During the third quarter we were selected to provide a complete identity management and booking system for the city of Fredericton, New Brunswick in Canada which includes mug, photo signature and finger print capture. A new system which we’ll also be using ImageWare’s (NYSE:FE) designer, will provide administrative employees and officers in the field with the full suite of investigated tools as well as the ability to create unique reports agency define line ups, risk spam’s and employee inmate badges with bar-coding or coated magnetic strips.

Under the terms of the agreement we’ll receive approximately 125,000 in revenue in the first quarter of 2014. Through our workers spread, can we expect to secure additional contract with users in the surrounding cities of the New Brunswick province and beyond in other parts of Canada. Additional during the third quarter, we were awarded a contract to provide software and services in support of one year paid pilot from an undisclosed United States federal agencies to implement it Irish recognition through our 20 state and local enforcement organizations. Acting as a subcontractor to Irish ID, ImageWare will supply its quick capture application to public safety agencies to evaluate the use of Iris recognition, primarily for use in correctional facilities, quick capture will be used to manage multiple types of electronic biometric transmission specification transactions, including enrollment, identity verification and investigative searches.

We estimate that we will complete delivery in this project in the fourth quarter of this year. As we move forward we continue to do intellectual property as a key component to our overall strategy. Since the beginning of 2013 we have filed 10 patent applications in the United States around our biometric and mobile technology. In addition to our strong U.S. patent portfolio we have been awarded patents on our multi modal biometric engine 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 complaint biometric solutions will drive the standards for commercial and consumer adoption.

More than ever we are confident that the steps we are taking to advance our position in the cloud, SAS and mobile offerings in the commercial and consumer marketplace, will provide increasing shareholder value with better visibility and a strengthening recurring revenue stream. As we have stated we're not quite yet a quarter to quarter company, but we're gaining on it. And make no mistake, that's our top priority. As our new subscription revenue projections come online we will witness the fundamental transformation of our business and revenue model and we're closing in on that goal rapidly. Now I’d like to pause and open the form up for some of your questions.

Question-And-Answer Session

Operator

Thank you, sir. We'll now begin the Question and Answer session, (Operator Instructions). Our first question comes from the line of Mike Malouf with Craig Hallum, please go ahead.

Mike Malouf - Craig Hallum

Wonder if you could give us a little bit of color on the Global Payout contract, how much on revenue per sub that you're registering, how much do you get on that, or, the ballpark?

Jim Miller

Mike, it's, I'm not at liberty to say under the agreement but we can say that it's slightly higher in both initial registration and continuing management fees than the Emida deal which was disclosed at a quarter for each.

Mike Malouf - Craig Hallum

And then what's Emida seems to be pushing out a little bit, is it because they're trying to get sort of the big elephant with regards to their partner with them or what's really going on there?

Jim Miller

Yes, Mike that is exactly what's going there, I think their plan called for, they were going to independently release the product but they decided to pause while they negotiated a deal with a much larger, more widely recognized name to be deployed at the same time. So that's the delay you're seeing there, in fact that's the only reason for the delay. Just to give them the time to complete that transaction.

Mike Malouf - Craig Hallum

Okay so the recognized name transaction has been identified and is in the process of being rolled out or are they still looking?

Jim Miller

They are in the process of finalizing their agreement with an entity, yes.

Mike Malouf - Craig Hallum

So it totally makes sense for them to push it out a little bit, given that they've already identified this partner?

Jim Miller

Correct yes.

Mike Malouf - Craig Hallum

Got it, okay. And then with regards to the financial services pilot that you had, I think you said you're in the second 60 day pilot; can you give us a little bit - is the second pilot different than the first or did they have some issues that they still needed to work out or if you could give us just a little bit of the feedback that they've given you, that'd be helpful.

Jim Miller

Yes, absolutely, happy to do that. Well, look I think, this is new technology for these folks and they're putting it in to an existing infrastructure and it's going to involve asking clients and customers to use it and to react to it, now you know we’re the backend piece of that equation, we are the engine at the backend that verifies the different biometric inputs going forward. And I know that part of the testing was to see how a number of biometric algorithms independent of the biometric engine were working. So there are a number for example of voice recognition algorithm providers that are being tested and I believe also that's true with the facial recognition as well which are the two biometrics that they are pointed to deploy.

So there is - some of these things relate to the testing on our piece, and some of them relate but they're not directly our piece that's being tested, it's the algorithms that they'll have to use going forward. Of course the advantage with ImageWare as you know is that the choice, the customer's choice of the biometric modality, you know we live with whatever they, we can support whatever they would like, because the biometric engine is agnostic with respect to those things. So while it doesn’t matter with respect to our performance for say we’re a prisoner if you will to the test that go on with those algorithms.

Mike Malouf - Craig Hallum

Where are they in that second program? Are they almost done with that?

Jim Miller

Yes, they are coming to some kind of completion with that and I think it goes to operations type people to decide the deployment, region of deployment, pace of deployment, that sort of things.

Mike Malouf - Craig Hallum

Got it okay great. And I know you’ve mentioned that there were several applications that some of these potential clients were working on some of these are named discussion that you have going on, I am wondering if you could just give a couple of examples maybe generic examples of how some of these customers plan to use the back end engine in their applications.

Jim Miller

Yes, so it is the back end engine and it is coupled with the, in some cases the use of our GoMobile Interactive platform. So one of the ways this would work is if someone has a charge that they incurred in a foreign country, your phone would get a message saying that you just spend $600 in Madrid, Spain. If you say yes which presumably if you’re the authorized user you would you would then be asked to authenticate your identity by using one of the preregistered biometrics and you would offer that biometric, you would if you were registered, be authorized and literally in several seconds, your transaction is now authorized and complete.

This would replace a number of things including a lot of us have had this happen where you have a credit card company who was wondering about the charges that are coming from foreign country who oftentimes under current practices today will actually stop your credit card. You then are forced as the user to get on a phone call, it happened to me in Asia last year an hour and 45 minutes to restore a credit card. This will restore literally in a minute. So that, and of course that’s just a financial services example, you could apply that example to all kinds of things including authenticating my identity for access in and out of a facility, in and out of a computer system logical access.

In employment situations, people are - prospective clients are interested in registering employees with biometric data as this allows them to better check their backgrounds for any criminal activities particularly in sensitive industries where that would be of interest to employers. Also it allows them to get their background to determine whether or not certain employees have for example already been employed by an entity or discharged for less than satisfactory performance and are now seeking to reenter that employer’s workforce through and altered or different identify and this is an issue in workplaces specially in big companies that employ 100s and 1000s of people.

So those are a couple of examples of what we’re out there showing and what the product does and as I said there is a tremendous amount of interest for that particularly as it works on mobile platforms and phone platforms.

Operator

At this time, it concludes our question and answer session. I would now like to turn the conference over to Mr. Miller for closing remarks.

Jim Miller

Well, thank you very much. I'd like to conclude this afternoon by assuring you the things are moving along nicely at ImageWare. We are at an incredibly exciting intersection of three major market moving forces, the cloud, mobile computing, and biometrics. As we speak to shareholders some worry that our progress is not as rapid as you like. We have been asked if things are looking so good where is the hard evidence. Well rest easy.

There are number of very high profile relationships in the works but as we’ve said and as you know world-class companies are no different than you and I. They will not put their hard earned brands on anything or risk that brand without a lot of homework. These are not snap decisions that are likely made. And there is no shortcut through the vetting process but do not make the mistake of thinking. The timing means lack of progress quite to contrary.

In summary, our strategy to diversify ImageWare's revenue stream and decrease our dependency upon 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 stream and a clear picture of ImageWare's long-term opportunity.

We very much appreciate your continuous support and interest and in return know that we remain absolutely committed to returning the highest possible shareholder value. Thank you to you all for participating in today's conference call and we look forward to speaking with you again real soon.

Operator

Ladies and gentlemen, that does conclude the ImageWare’s System Inc Third Quarter 2013 corporate update call. We would like thank you for your participation. You may now disconnect.

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