Jim Miller - Chairman & CEO Wayne Wetherell - CFO

Mike Malouf - Craig-Hallum Capital Group Jaeson Schmidt - Lake Street Capital Markets

Thank you, Randy, and good afternoon to everyone. As you saw at the close of the market today, we reported financial results for the fourth quarter and full year ended December 31, 2014.

I'd like to begin today's call by speaking first about our results and afterwards I'll walk you through some recent developments and the progress we're making here at ImageWare. In the fourth quarter of 2014, total revenue was $1.2 million versus $928,000 in the fourth quarter of 2013 due to higher channel royalty revenue compared to the prior year quarter.

Gross margin in the fourth quarter of 2014 was 79% compared to 72.2% in the year ago quarter, the increase was primarily due to the higher channel royalty revenue which carries a 100% gross margin. Net loss in the fourth quarter of 2014 was $1.9 million or negative $0.02 per basic share, compared to a net loss of $1.8 million or negative $0.02 per basic share in the year ago quarter.

Now let's be very clear about this, we don't view these numbers as acceptable, not to our management, not to our Board, not to me, and not to our investors; we're tired of saying it as you are of hearing it but as it turns out it has taken a little longer than anticipated, for us the transition to a commercial base provider of biometrics as a service. But make no mistake, we are transitioning and we are setting the table for a very successful future.

As you know, our model is dependent upon our partners; we have formed some very significant relationships with Fujitsu, TransUnion, Computer Associates, IBM, Deutsche Telekom, and more recently with Agility and Extenua. These partners touch hundreds of millions of users, and you don't have to be an advanced mathematician to be able to take a very conservative subset of those numbers and multiply them by a very conservative monthly fee and which results in run rates in tens of millions of dollars along with the profits that go along with those run rates.

That's why we are excited, and that's why although frustrating we're not deterred by the pace of the roll out. At December 31, 2014, cash and cash equivalents totaled $218,000 compared to $2.4 million at December 31, 2013.

Total debt was $1.3 million compared to no debt at December 31, 2013. However on February 6, 2015 we successfully completed a registered direct offering of convertible preferred stock for total gross proceeds of approximately $12 million.

We completed it in record time without paying investment banking fees, and without issuing warrants. We engineered a transaction that was fair to our company and fair to the investors that participated.

We use part of the proceeds to repay all outstanding debt and we'll use the remaining $9.9 million for research and development and other general corporate purposes. Many of our partners took very favorable notice; they realized improved liquidity will allow us to focus squarely on advancing our products and partnerships to capitalize on the fast growing biometric market free from distraction.

The improved liquidity will also enable us to expand our R&D to meet the needs of our market, as well as attract new executive management such as Jeff Harris who joined us as our new Head of Sales & Marketing at the end of 2014. Now moving on to operational and strategic discussions of the business, over the past several months we've seen the continuation of transition period for our company from our government based on premise offering to our new software as a service model with an emphasis on the private sector.

We continue to execute strategic steps that move as closer to our goal of becoming a SAAS-based leader in multi-model biometric. We have now added eight new commercial partners with more in process.

While we certainly expected some of those agreements to be producing revenues today, it's important to note that we are dealing with large organizations that are thoughtful and methodical on the rollout of our potentially game changing software. In some cases they have a plan to incorporate our software in the new products that they need to develop.

I'd also like to remind you that all of these agreements are software as a service deals that would completely transform the financial characteristics of our company. The transition is taking time, but it's going to be well worth it.

We'll talk some specifics. Los Angeles World Airport, we completed work in the first quarter which equates to revenue of approximately $800,000.

Our Mexican contract with the State of California for production of its driver licenses went operational last October, and as a reminder, under the terms of this agreement in which we received an upfront fee and we'll continue to receive recurring monthly revenues from each license produced. We expect this to generate approximately $30,000 per month as it ramps.

As a reminder, our software will help generate $1.5 million licenses between now and January of 2017. This contract all in is expected to generate more than $1.5 million in revenue over its life.

Moving on to our agreement with the major international retailer, identity enrollment was again delayed due to conversations regarding security around the collection of employee data. Our partner Fujitsu and we are working on this issue and we'll update you complete once this move is forward.

Moving to our German projects and specifically our two separate projects with Deutsche Bahn and Deutsche Telekom; as we discussed in 2014 we identified our first German customer in the German National Railway or the Deutsche Bahn. This project has moved further towards implementation, however Deutsche Bahn has specifically asked for liveness detection to be put into face and voice algorithms used in the project.

Since we are the biometric algorithm company, we have been working with two companies to get liveness detection algorithms for both face and voice integrated into our technology. We have now completed this and are awaiting a new installed base from Deutsche Bahn.

Moving to healthcare, we are moving forward with T-Systems, a wholly owned subsidiary of Deutsche Telekom and its partners on a solution to increase security of patient medical records in the German healthcare system. Since this is a national healthcare project, they needed bios from Federal and State governments, as well as doctors and medical associations.

The good news is we have signed off from all these groups, now we are working on different IT protocols so that the standardization for data collection is the same across the board which was not when we began this work on this project. We are advised that we should expect this project to commence imminently.

At the end of 2014 we entered into a partnership with TransUnion to integrate their ID Manager Solution with our GoVerifyID product, allowing ImageWare to deliver advanced broad prevention capabilities to organization. Through the relationship consumer identities will be thoroughly analyzed using both biometric signatures and the TransUnion ID Manager platform.

In the second phase of our relationship, TransUnion has now created a white labelled version of our GoVerifyID product, the fair integrating into their new platform. TransUnion expected the combined solution to launch in March of 2015; however, due to the consolidation of their own internal software platform onto one unified platform across the 33 countries they served, this launch has been rescheduled for the second quarter.

With that said TransUnion is involved in prelaunch sales activities and is previewing the GoVerifyID product to its current customers. In January we announced that CA Technologies invited us to be a part of their tech partner program with an advanced partner membership status.

CA Technologies is one of the world’s leading providers of IT management software and solution. For their fiscal year beginning April 1, CA has chosen six partner products to feature as worldwide prime movers, we're very proud to say that ImageWare has been selected as part of that group.

Through its technology partner program, CA enables the development of value added integrations for its products such as ImageWare’s GoVerifyID, which is anchored by our patented biometric engine 2.0 version. These two flagship products will be associated with CA Secure Cloud, formally a product known as CloudMinder; and CA Single Sign-On, formally a product known as SiteMinder.

These products will be delivered to CA customers as a service. CA Secure Cloud provides corporations with identity management, advanced authentication, and federated single sign-on to Cloud and on premise application.

There are cloud identity and access management services are designed to simplify security management and to meet ongoing compliance requirements without the need to manage hardware and software onsite. Single sign-on can provide organizations with enterprise class secure single sign-on and flexible identity access management, so they can authenticate users and control access to web applications and portals.

Across the internet, intranet and Cloud applications helps enable the secured delivery of essential information and applications to employee, partners, suppliers, and customers via single sign-on. It also scales the help me growing business needs with flexible administration tools that can support either centralized or distributed administration.

We're in the final stages of implementation which is the certification of our product integrated with CA Technologies. We expect to go to market with CA early in their new fiscal year which begins April 1.

Our contract with Fujitsu to jointly market Cloud based multi-modal biometric identity management as service solutions continues to progress. In fact, relationship is stronger than ever and we are in the midst of executing a master global agreement which escalates our relationship and paves the way for a true global roll out.

Fujitsu remains equally excited about our prospects and for those of you who haven't seen it; I recommend you view our website at iws.com where you can see Fujitsu talk about the product we are creating in their own words. Now moving on to some more recent and new agreements; as you saw last Friday we signed a binding agreement with Kuwait based Agility to create a joint venture company based in Kuwait which will sell the IWS product suite throughout the Middle East and other countries such as India where Agility has existing customers under contract.

Agility is a nearly $5 billion revenue company employing over 20,000 people globally, and is the leader in supply chain management space. They have existing customers with current needs for our products, under our agreement we will receive a one-time technology fee upon the commencement of the joint venture operation as well, as ongoing revenues from the sale of faster business in the region.

We expect the joint venture to be operational in the second quarter. Finally today Extenua announced the partnership with ImageWare to create the first and enterprise secured cloud storage data encryption and multi-modal biometric identity management platform for office and mobile devices.

Extenua is a pioneering and award winning developer of enterprise security software that simplifies the use and access of cloud storage. Our GoVerifyID Solution will be integrated with our Cloud2Drive product to help enterprises, both large and small, face security challenges posed with cloud storage.

Applying superior encryption techniques, as well as multi-modal biometric identity management delivers advanced broad protection capability to organization. Biometric authentications including voice, eye, signature, fingerprint and facial recognition provide additional enterprise grade security layers and fraud defenses for cloud storage users.

Biometrics also delivers the most effective, most seamless security solution for mobile data and users. Extenua will launch this product on the IBM platform in mid-April of this year.

It's worth noting that this agreement was the result of an introduction via the IBM Blue Mix Program which we were signed to participate in last summer. As a reminder IBM Blue Mix is similar to an enterprise app store allowing IBM cloud customers to choose among the collection of either IBM software and services or those from a variety of vendors such as ImageWare.

We certainly believe the advancements of our products and partnership over the last several quarters are positioning our company to capitalize in the fast growing biometric market. However, this quarter is indicative of the following point; disruptive technology and make no mistake that's exactly what we're offering, represents an opportunity to change the way the world does things.

We communicate the timed element of our expected product launches to our shareholders based on what our large partners communicate to us. Given the disruptive nature of the technology and the size of the partners we do business with, some of which stand multiple countries, it is understandable that expected product launches can be delayed as well.

As we move forward and our growth plan becomes a reality, we are also going to reposition ImageWare in the public market. To that end we have filed our application for listing on NASDAQ and are working with NASDAQ directly to make that listing a reality.

I would also like to remind our listeners once again that all commercial deals we have discussed today are SAAS-based and we are paid on a per person per month basis. Our goal is to completely change the financial model of this company.

The rollout of any of the agreements I discussed, even at a fraction of where our partners model the rollout would accomplish this goal. Based on the expectations of our partners, we expect to be cash flow positive during 2015 and see substantial growth in profitability as we move into 2016.

And now I'd like to open the call to any questions you might have.

Great, thanks for taking my question. Jim I wondered if you can talk a little bit about the pillphone, I know you didn't mention that in the call and I wanted to get an update on that.

Thanks.

Yes, absolutely. We have finished up the development on the pillphone, we are engaged in conversations with several folks who have both indicated an interest in purchasing or licensing directly from us, as well as folks who want to license the technology and in turn resell it.

So we expect to see little more movement on that over the next couple of months. The pillphone is absolutely a terrific product, we're finding that as we go out into the pillphone market some of the folks are equally interested in GoVerifyID which accomplishes some, not nearly close to all but some of what the pillphone does in terms of providing multi-modal biometric authentication.

So it's been an interesting sales process out there in that regard but I think we're getting pretty close to at least see the start of some paying pilots and some movement on the pillphone product.

Great. And then with regards to Agility, obviously all these new contracts are SAAS-based and per pricing based, how does that work with Agility, I think I can figure out healthcare people and terminate that but how would it work for Agility?

Yes, so one of the things that they do – they have a wide variety of businesses as you can see, if you go on their site. The two used cases we have been discussing are for customs brokerage clearing house use, as well as for some services they provide to airports and ports around the world.

So the idea would be that they would – the joint venture will sell the product to existing Agility customers and those are folks that are already under contract with Agility, who have indicated a desire for the products and services. And it will be sold on the SAAS revenue base, so you might take a customs brokerage house and you would sell or implement GoVerifyID for example, you would see so much per person that is using the system.

So, X number of dollars per month times several thousand people that will be using the system. And these are folks that – what they are trying to do is construct the system of identity authentication for people who are not only accessing information stored on systems.

Remember this is supply chain management, so you talk about container shipment in freight [ph], customs manifest, those kinds of things. And to make sure that people who get access to that kind of information are really people that are qualified to have access.

So that's how their used case works, they are looking at those two markets, again, customs and airports and ports, with specific reference to – on the supply chain management side of it.

Great, thanks a lot for that.

You bet.

Jim, I'm wondering if you could talk about any updates surrounding the mobile wallet opportunities.

Yes, you know they are out there and we're still engaged in conversation, but what we've seen is that's an act that has to be I think a little more buttoned up before we're going to see some movement on our part, and I don't mean on our part as much as I just mean – the mobile wallet situation seems to be – to us at least pretty fluid. We do have some spark out there to be sure but you've got a lot of people really rethinking how that's going to work and as I said and SAAS reported to the mobile wallet situation as well, if you're dealing with partners who are still flowing with their product and trying to get it right and get it correct as they should, that has to happen, that's the essential first step before we can enter the equation.

So we are still seeing a lot of folks that are tinkering with their offerings and trying to figure out what to do, in order to put biometrics in you need to have that first step done and we're not seeing so much about it. We're still very much interested, there is still some – I think some good possibilities out there but we've – in addition to continuing those discussions on and starting up discussions in other areas that appear to be moving particular to market.

Okay, that's helpful. And then looking at your international retailer, I know you indicated there is delay surrounding security and collection that of employee data, do you envision that's going to be a major concern from everyone in that space going forward or do you think this is just a one-off situation?

I think it's a first and so you're seeing scrutiny that is probably more intense than if it didn't – the 112 implementation. We also think that yes, look, we're collecting data as part of an employee data collection effort.

And I think anybody that is involved in that is concerned as they should be with the privacy implications involved, and this is – again, no one has done this before, so the steps are being very carefully taken and people want to check and double check and make sure that this goes down the way it should. Frustrating and the delay are really understandable because of the importance of protecting the data that's being collected.

So – and I think a learning experience for all of us in the project on how to address this going forward. So I think in any situation we're in, whether it's public or private sector, our years in law enforcement showed us the great concern that public sector has for making sure that the capturing and the storage of the data is done with integrity.

No different in the private sector, I think it's a little bit like – it's a learning curve, and once you get through the steep part of it, it will go quicker next time.

Okay. And then the last one for me, I just wanted to make sure I heard it right, you expect $800,000 in revenue from the LA Airport in Q1?

Yes, we're trying to wrap all that stuff up. Our work is now largely completed there and as I said before but it is worth repeating, when we're in some of these big projects, we play a role but there is a lot more going on in the biometric identity management here and so to get complete project sign-off which is required for us to move that number to our revenue lines, the entire project including pieces of it which is about 95% of it is the rest of it which does not affect us but yet it's the project that needs to be completed in order for us to put that number into revenue.

So we are anticipating closing it out in this quarter.

Alright, thanks. I'll jump back in the queue.

Well, thank you very much everyone for your time and attention today. As always, we appreciate it and we look very much forward to updating our shareholders on our progress during our Q1 update call in mid-May.

Thank you, and wish all of you a good evening.