Jim Miller - Chairman and CEO Wayne Wetherell - CFO David Harding - CTO

Mike Malouf - Craig-Hallum Capital Group Robert Clutterbuck - Clutterbuck Capital Management Harvey Kohn - HRK Strategic Advisory Incorporated Tony Fisch - Tony Fisch Consulting

Thank you James and good afternoon to you all. As you saw at the close of the market today, we reported financial results for the fourth quarter and the full-year ended December 31, 2016.

I'd like to begin today's call by speaking first about some specific financials and milestones for the quarter, afterwards I'll walk you through some recent developments and have time for questions. In the fourth quarter of 2016, total revenue remained constant at 900,000 compared to the fourth quarter of 2015.

Gross margin in the fourth quarter of 2016 improved to 69.3% compared to 40.2% in the same quarter a year ago with the difference due to a write-off in the 2015 quarter related to capitalized project expenses. Net loss in the fourth quarter of 2016 was 2.7 million or a negative $0.03 per share compared to 2.6 million or a negative $0.03 per share last year.

At December 31, 2016 cash and cash equivalents totaled 1.6 million compared to 3.4 million at December 31, 2015. Total debt was 2.5 million compared to no debt at December 31, 2015 and we have 2.4 million remaining on our line of credit.

We expect this liquidity to be sufficient as we expect to ramp at least one of several of our revenue generating partnerships in the coming months. During 2016, we did see the start of small, but consistent revenue from users of our product who pay us for use and hosting of the software as a service CloudID and GoVerifyID solution.

Now these numbers speak for themselves. They’re disappointing and they reflect the fact that we're behind on where we expected to be by this point.

A couple of years ago, we made a conscious decision not to direct sell as our primary path to market, but rather to leverage our foundational intellectual property in our best of breed biometric software products that utilize it into the broadest possible network of partnerships. The reasons were as obvious then as they are today, we’re smaller technology company and these large global partners have market share, brand recognition, healthy budgets, and priceless experience in moving new technology to market, and of course they all have sales personnel based all over the world.

Since our first significant partnership with Fujitsu, we have made technology partnerships with Deutsche Telekom, CA Technologies, SAP, Lockheed Martin, now Lighthouse, TransUnion, Hewlett-Packard, Aruba, Extenua and several more with whom we are presently at work and have not yet disclosed. All of those entities are partners today.

In all of that time, we have had two instances where despite executed multi-year agreements, we were not able to proceed because the partner scrapped their plans for rollout of biometric products. One was a California-based mobile payments company and the other was the Mexico operations of a major international retailer.

By the way, they did not choose another technology, they simply did not move ahead, again despite executed agreements to do so. Once the partnerships are in place, each partner has their own process that they work to bring the technology to market.

As some of you may have seen Fujitsu recently announced its identity as a service product in the European, Middle Eastern and African markets. A very clear statement by one of the world's largest companies and our partner in their plan to move biometric based identity authentication as a service aggressively out in the markets of Europe, Middle East and Africa, simple right, not at all.

In order to get to that stage, Fujitsu created a new product from scratch, Catalog Manager that enables its users to configure the requirements of the system anywhere in the world and begin its use very quickly without technical assistance onsite. This configuration is done automatically.

Further they upgraded their K5 cloud so it would be highly competitive in the world markets both on performance and on costs. They also introduced the series of new hardware products which could be used in the same context.

Simple to say perhaps but a lot of very heavy lifting, time and money is required. All of those steps were taken because Fujitsu determined that after an initial look at the market, those items were essential to any successful roll out.

Their process has taken several years and understandably because there is a large amount of work involved. As we have said many times on these calls, the process is the process and every partner has one, its thoughtful, deliberate, cautious and cannot be shortcut.

As we have also said often it's not a light switch that you turn on with immediate result. We are now in the final stages of discussion with Fujitsu as well as several other partners regarding more substantial relationships that will involve the licensing, OEM and white labeling of our products under their brand in certain geographical areas.

Additionally, we are at work with Fujitsu on several significant projects which you'll hear more about in the coming weeks. The good news is that once the process is complete we will go to market with all the advantages of a well respected worldwide partner with a global brand and reach.

We remain active with each of our partners albeit a different paces. For example our partnership for biometric authentication in the German healthcare space is still active, but in this case with the federal and state government project we have experienced several changes, delays, twists and turns that are really not at all surprising as we are a subcontractor on a large foreign-based project.

Each pace is different, but what is the same is that ImageWare is the only biometric partner selected. When these partners go to market we're already there fully integrated with the partners products.

We think it's the right strategy and that we are in the right place at the right time with the right product and we are confident we will see the benefits of it in the very near term. 2016 was both exciting and challenging.

We continued to work through the typical barriers of disrupting an industry with new technology. We forged multiple high profile strategic partnerships while building upon existing ones.

No other comparable industry player has these partnerships and our technology was vetted and chosen for reasons. The risk in this strategy has not changed since we first articulated it.

We cannot control the time to market of our partners, several of them have reached the starting line and pulled back due to the market conditions or the need to upgrade their own product to work in tandem with ours or other corporate priorities having nothing to do with biometrics. However, the number of proof of concept test that we are involved with and are making their way to completion clearly suggests that the race to market is now finally underway.

It’s important to reiterate that none of our existing partners have given up or chosen another technology in place of ImageWare. Our relationships continue to progress in the right direction.

Despite the delays, all of our partners continue to work on getting their going to market with our offering. We remain extremely confident that these partners will pay significant dividend.

With that said since our last public update, we forged new key partnerships, expanded upon existing relationships, and hit key operational milestone. First, we entered into a five-year OEM agreement with Avatier to integrate GoVerifyID into their product line, in which we will host the GoVerifyID software as a service on the Amazon Web Services while the agreement enables Avatier to market and resell a combined solution to both new and existing customers including Nordstrom, Marriott, DHL, Cox Communications, Pfizer, ING and Volkswagen.

Avatier did in fact commence sales efforts in very late November and is currently working to sell our solution to one of their large customers. That customer is in the testing phase and we are hopeful an official agreement is forthcoming.

In November, we saw the launch of Fujitsu Smart Origination, a customer on-boarding technology that enables financial institutions to collect, process and verify documents and the identity of new applicants in less than five minutes. Smart Origination is the result of the collaboration of several financial technology companies into a strategic partnership with Fujitsu to offer a product that enables financial institutions to consolidate digital channels and streamline the origination process.

ImageWare provides the multi-model biometric technology crucial to the success of this offering. Fujitsu is the first to market to deliver this as a scalable solution.

In May of 2016, we spoke to you of a paid pilot using our CloudID products in a software as a service offering for FEMSA, $18 billion company based in Mexico that among other things is the largest independent bottler of Coca-Cola products in world along with significant share holdings in Heineken. CloudID is the same product we successfully deployed in the state of Baja California to produce over 350,000 biometrically enabled driver's license.

After a successful pilot, FEMSA and ImageWare have now agreed to continue our service and expand it to other parts of the FEMSA workforce. We've received our first purchase order under that agreement.

Other highlights include being recognized as one of the 20 most promising Computer Associates or CA technology solutions providers of 2016 by CIOReview and our newsletter the first enterprise ready biometric authentication for Microsoft ecosystem featuring insights from Gartner on the benefits of the IWS approach to biometric authentication in the enterprise. What they and we were talking about there is GoVerifyID enterprise suite, introduced by us in the fourth quarter a revolutionary new product that is the first ever end to end biometric platform that seamlessly integrates with an enterprise as Microsoft infrastructure in less than an hour.

The digital workforce which comprises not only employees but vendors, consultants and sometimes customers has continued to expand and data is now extended across numerous devices and systems. A majority of which are also used in a worker's personal life therefore intensifying the need for next level enterprise wide protection.

The cloud-based solution safeguards data against potentially devastating security breaches that could tarnish a corporation's reputation and brand. Working across the entire Microsoft ecosystem, GoVerifyID enterprise offers a consistent user experience and centralized administration with the highest level of security flexibility and usability.

We're very excited about the future of this offering as we believe it's a true game changer in biometrics. This product was also recently named the most innovative product by the respected analysts at product Frost & Sullivan and was specifically called out for its use of best practices in the biometric field.

In fact at a recent Aruba's Atmosphere 2017 trade show we had a record high 24 companies request the pilot of the product further demonstrating demand for this offering. Subsequent to year-end we also achieved official certification for compatibility with Microsoft Windows Servers which validates the full compatibility and seamless interoperability of GoVerifyID the entire Microsoft eco system.

More recently and another partnership with SAP. We showcase the GoVerifyID integration with the SAP HANA cloud at the Mobile World Congress in Barcelona, Spain.

This integration allows for single sign on, multi-modal biometric user authentication for all SAP HANA cloud platform applications providing a secure personalized user experience. Now we've said to you often there's a lot of noise in the market and some of it can be downright confusing.

For example, many of you have heard about the FIDO approach to biometric authentication in the market and some of you have asked us to help you understand the difference between this and our cloud-based approach. Now there is no one better to do that than our Chief Technology Officer, Dave Harding, a well respected industry expert on the subject.

So turning it over to Dave for a short primer and a little education on what we do, how we do it and how we do it against the other approach that you might have been hearing a bit about. Dave?

Thanks Jim. In the past several months there has been much advancement not only in ImageWare Systems but in the biometric identify management industry at large.

ImageWare Systems is leading the charge in providing not only the most state of the art solutions but turnkey cost effective end to end biometric authentication solutions for the most impacted market sector, namely the enterprise. Our GoVerifyID solution is truly unique and innovative, it's built on our patented real-time biometric platform CloudID which includes our award winning IWS Biometric Engine database.

GoVerifyID is fast, reliable and most importantly scalable to meet today's demands as well as the demands of tomorrow. In fact, IWS biometric engine gives us an advantage that no other biometric systems integrator or product has, namely, we're not middleware, our biometric database is a real-time highly available, highly scalable database that was built from the ground up to support hundreds of millions of identities in a multi-mobile world.

No other company has it, no other company has anything like it. In fact every one of our competitors use a standard database technology and middleware.

This is why they can't match our scale, our speed or our flexibility. This is also why Frost & Sullivan awarded it the same product innovation award in 2006 [ph] which makes us the only company in our space who has won this award multiple times.

As Jim mentioned, I'd like to address the answer or address the question that we've been asked a lot over the past year namely how do we compare or address fast identity online or FIDO. Now FIDO has seen some traction over the past year, but there is a clear and distinct difference between what we do and what they do.

FIDO is a device authentication solution, not a biometric identity authentication solution and this is not open for debate. They claim this, in fact their claim has always been the device is you.

While I respectfully [indiscernible] that the device is not me or you, I don't disagree that match on device which is what they use, it's what we have on our iPhone, it's what we have on our Android for fingerprint can provide higher level of security as a two factor authentication solution and that's why at ImageWare, our GoVerifyID not only supports matching in cloud but it also supports match on device. However, match on device which is what FIDO uses is not true identity authentication.

For that you need to be able to reference a single biometric enrollment to authenticate an identity using any device anywhere and this is not what FIDO does. In fact this has never been their mission.

Unlike FIDO we provide real identity authentication solutions that go beyond two factor authentication. The two factors of what you have and what you know.

We provide the critical third factor of who you are. No one else provides a complete solution including all three factors for identity authentication in a software as a service model that can scale in population size as well as transaction load.

No one else provides the true identity authentication that works with your existing network, your cloud infrastructure and your single sign-on products right out of the box and with no coding and no integration required. ImageWare systems is in a truly unique position and we're excited that the industry is realizing that we stand alone in providing the solutions needed in today's market.

I hope that addresses the issue and with that I'll turn the call back over to Jim.

Thanks Dave, I appreciate that. As we said, 2016 was both exciting and challenging.

We continue to work through the typical barriers of disrupting an industry with new technology and we forged multiple high profile strategic partnerships while building on existing ones. In 2017, we will remain steadfast with our objective to solidify ourselves as the premier biometric identification solutions provider.

And we will continue to pursue high profile strategic partnerships that we believe will yield consistent revenue as demand for higher levels of security and biometrics continues to strengthen. And with that we’d like to open the floor for your questions.

So, can we just start a little bit on the - some of these partnerships you have specifically with FEMSA. How close are we from actually getting some revenue on the SaaS business?

So we have been receiving SaaS revenue all along. For the cloud ID project, it's sold as a service since May of 2016.

What's changed is that here very recently, FEMSA and ImageWare agreed to convert the pilot over to a production system and we have just now received our first purchase order for work under that new arrangement with FEMSA.

And how long will it take them to roll that out I think?

That's a question I don't have an answer to Mike. That is in their hands to do that.

They are now putting together specific plans to acquaint the various operating groups with how the technology works. It has up to now been used in the corporate headquarters group that was where they agreed to location for the pilot and is now in the process of expanding beyond that to things like distribution centers.

So they have that task underway as they prepare the materials they need to do for other parts of the workforce.

Okay. Great.

And then without maybe giving specific names, can you give us a list a little bit of insight into perhaps some of the others that are finally moving through the pipeline perhaps by describing them as financial or industry or some sort of discussion?

As we said specifically and they themselves have reported on it as well already to the public, there's a lot of progress being made with our partners, that’s Fujitsu. They've done a lot of work to retool the K5 cloud and to introduce other product sets that integrate with biometrics.

They are, as anyone can see from looking at their website, very, very big and bullish on biometrics as a service and identity as a service and the first launch for that targeted set of products was the Europe, Middle East and African territories. So from England to South Africa from Russia to South Africa, the company Fujitsu will be selling aggressively this product.

Our fiscal year by the way starts on Monday, actually technically Saturday. But April 1.

And we're the product. The understanding with the Fujitsu is that, they can sell and resell our products and I think going forward, you'll see more of a move to White Label or OEM, certain of the ImageWare products under the Fujitsu brand, which we’re tremendously excited about.

I don't think there's a bigger compliment that can be paid to a company, its technology, its products, its people, then another company putting their big worldwide brand on your product. I think that there's a couple of other ones that we expect to see some movement out of, we've seen movement out of some that have been sort of quiet for a bit.

TransUnion is a name that comes to mind that is looking at how they can reenter the marketplace and reenter with our products. So they would be, I think, another one.

SAP has also an eye as does Deutsche Telekom and ongoing interest in creating products to combat the cyber threats that we all face. And again with the partnership there, we have ready products that either under our name or theirs could be sold tomorrow into that space.

I think all of that activity is symptomatic of a move in the market that is finally coming to grips with we have to do something about the pin and password issue. We all know they're not terribly secure.

As David said, they’re the cause of at least two thirds of all the data breaches in the industry or in the world last year. But it's been difficult to dislodge them, because it's 50 years of habit and like any habit that any of us have, it takes some doing to move you out of it, but I think now as people recognize that there are problems, you'll see a resurgence in activity from a number of the partners.

And also Mike, as I said, and forgive me, but I am not allowed to name it, we have a number of things going on with folks who are partners, but have not --are not out in the public for reasons that involve confidentiality under specific projects or products that we're creating. But there are a lot of very pleasant surprises from companies who have really thought through biometrics.

It seems like maybe it's been ridiculously quiet in some respects over the last couple of years in this industry as a whole, but what we're finding happily is that a number of very significant companies have been using that time to educate, to think through, to be thoughtful and deliberate as I said in the remarks about creating an approach so when they get ready to do it, they have a plan and they execute according to the plan. No guesswork, no maybe, we're going to do this.

And they have really thought through biometrics, how to deliver it, who should have, what kind of backend, how important is scale, all the very things that all of -- we've all talked about on these calls over the past few years. So we're pretty excited because those kinds of things run right to our sweet spot.

We have those products available today and we can't wait to get going with a number of these people, but we do see some significant movement to real traction and let's get this product to market now that we haven't really seen before. It's a graduation I think from technology partnering to actually market and sale partner.

I think that's probably the best way to look at what we're seeing.

Okay. Great.

And then just a question for Wayne. Can you give us a sense of capital needs at this point?

Do you feel like you're okay with regards to your debt capacity and the cash that you have on hand right now?

Well, we've got as we said, the $6 million line of credit that as of last year, we were right at a little over 1.5 million, against or excuse me a little over 2 million pulled on and with that plus the anticipated revenue that is coming from the pipeline that Jim has been talking about, we feel that that should get us there.

So I think you have enough cash to get to cash flow positive? Is that what you said?

Yes. I mean it is largely dependent upon the timing as we've said.

Some of these significant deals we're working on, but some of them are significant enough that they will generate some significant cash.

Jim, at least from my viewpoint, the good news, really good news is that we have kept all of our partners and peers, do you have more arrows in the quiver that hopefully some of the arrows you’re talking about [indiscernible] once again, this past quarter, revenues proved very illusive. Jim, during the November call or paraphrases, I asked at that time that if ImageWare doesn’t get the revenues that we anticipate prior to the call that we’re having now, prior to end of March, we’d think that there was a disconnect between our expectations and reality and if so, should we consider bolt-ons.

So with the tough revenue quarter, with the great quarter and expectations with the tough revenue, I’ll ask that question again.

Yeah. Okay.

Thank you, Bob. And it's a good and fair question, which I appreciate you asking.

I think the answer is simply this. We've made a lot of progress toward getting that revenue to come to fruition and if we didn't see that meaningful progress, we would explore any and all other options available.

It's just that simple. But as I said in the remarks and I say again, we are very confident that we are making significant progress with significant players and closing in on significant revenues and reference accounts that will lead in turn to other significant players and significant revenues.

So I think we're at a inflection point, we're at a point where in a number of ways that it's time to make this happen. We understand that better than anybody can tell us, believe me, we understand that.

And if that inflection point was not forthcoming, I think that this management and this board would absolutely consider other alternatives rather than continue down the road that was bearing no fruit. It’s just as simple as that.

Well, a lot of my questions were answered. So I just would like to say congratulations on the final movement of FEMSA over what I'll call the starting line, not including the corporate network.

It's exciting to see [indiscernible] which again is a great reference over the list, I guess it’s the year growing to a few hundred thousand people, but it’s also really exciting to see FEMSA which has a network of over 350,000 potential on borders and I love to see a revenue stream and a network, which gets larger every single month. So with two of those now across the starting point and I don't know how many other of these companies are at this final stage, assuming we have a six to a dozen other companies, it's pretty exciting to see all of us who've been waiting a long, long, long time for this to finally come out to see two major players moving forward in terms of a reference and actual incumbent revenue coming down.

So keep it up and I appreciate and thanks so much.

Yeah. Thank you, Harvey.

FEMSA is a very exciting development for us obviously and instructive in a lot of ways of the process I spoke about. It was a seven month pilot.

They took a couple of months to consider whether or not they considered it successful enough to move on, they did. And it moves on, but the start to finish has taken -- gone over a couple of quarters.

The good news as we have been generating small, but as I said, consistent revenues from the pilot and we have gotten our first order under the new arrangement. So we're going to support the heck out of their efforts to move this out to as many people as quickly as we possibly can and increase the monthly revenue.

That's the reason for the model and the beauty of the model when it happens. So we're pretty excited too.

Thank you.

Hi, guys. Again, congratulations on the production, FEMSA purchase order and I think it's a great milestone for the company.

Really appreciated listening to David Harding’s explanation of FIDO and there are two, I think, very significant news items that kind of show this week. One was a little bit back channel but as witnessed on Redmond Channel Partners, the other is a little more broad spread.

We found out that Apple has purchased really facial recognition company, RealFace and as well as later in the week, a image was shown all over the Internet of an iPhone 8 with a -- what looked to be a thumb print reader on the face of the phone. There's a lot of talk that in the short term, we probably will see more significant roll out on the strategy that Apple is going to undertake, perhaps reaching beyond FIDO, but keeping FIDO in mind and then looking at another piece of information that came out in Redmond Channel Partners, which is that Microsoft who does incorporate FIDO has more recently received some significant enterprise customer pushback because of how vulnerable the FIDO authentication really server less can put Microsoft customers and put them in real harm.

Considering Jim that the intellectual property protection that you have with a pretty amazing patent portfolio, have you guys thought through and have you engaged with Microsoft or Apple at all in discussions of how we may be able to partner with them and if you haven't, might they down the road be forced to deal with you?

Yeah. Tony, great question.

Well, the short answer is yes and yes. We have had discussions with both folks.

I won't go over it suffice it to say that we are pleased to see others now seeing what we saw as the shortcomings in the match on device approach to begin with. It's not that there isn't a place for that technology.

There is, but if -- as our friends at Gartner have said often and other analysts have said uniformly, if security is your goal, match on device is not the place to get it, period. And yet, it is an easy way to get into biometrics and I suspect that's one of the reasons people do it.

Apple knows the advantages of a couple of things, the multi modal. And as you've seen by the purchase of the facial recognition company.

The fingerprint was, as they've said a number of times, certainly privately and I think also publicly, the fingerprint was for convenience. It wasn't for security.

If you're going to have true security, you need to move to multimodalities of biometrics. The facial recognition add is I think acknowledgment of that.

Now, depending on where they go from there, it will be an interesting thing to watch and certainly an interesting thing for discussion and we'll be watching it as potential partners. I can assure you and we'll be watching it as owners of intellectual property around biometric matching in the cloud.

So I think that on either road, you at some point run into a group called ImageWare. On the Microsoft side, similarly, Microsoft was dedicated I think to the FIDO approach for some time and like a lot of big companies with inertia and projects, they moved through it and into it.

And now I think, they've seen some flaws in that. I saw the same report you saw, which indicated that there was some perhaps significant pushback from some of the larger clients.

So for us, that's nothing but opportunity, not only to have a discussion with our friends at Microsoft about this, particularly given the new product, go verify ID and enterprise which has been certified as a Microsoft partner product, but also on the intellectual property front. There's a lot of things that the two companies have in common about how they think about security and of course Microsoft is a company large enough to give wings to a vision of the so-called federated identity that is a biometric identity that is enrolled and warehoused and used across multiple different partners other than just Microsoft, but it’s various partners or anybody else for that matter, the federated identity approach is not unique to Microsoft.

So, yeah, we're excited about this. I think as I said, a lot of the things we've been saying, a lot of the things that we've all been talking about on these calls you're seeing now actually play out in current events that are being reported.

There are certain places where that sort of match on device technology is just fine and there are certain other places where there's a better approach and we believe it’s the cloud based authentication approach we employ and around which a number of our patents are.

Thanks, James. I'd like to remind all of us that the private sector biometric business is still really emerging from infancy and the example of that very recently, we had a conversation here at ImageWare with a global social media giant who said they're studying biometric options this year for a fuller implementation in 2018.

Now, the good news is that they called us to be part of that conversation, but this is the thoughtful deliberate approach I referred to earlier. While we and our partners have had to build ability and capacity step by step, the really good news is that we are ready for the coming market expansion and there will be a dramatic expansion for unless every single market analyst in this space is dead wrong, biometrics is headed to be a $30 billion plus market in the next several years.

Our strategic partnership initiatives have taken time to materialize, but it most certainly has not discouraged us. We're making great progress, but when you're trying to disrupt a fifty year pattern of pins and passwords, it absolutely takes time to build the level of confidence necessary to become the norm.

Disruptive products which are now commonplace and can't live without in our lives such as PCs, mobile devices, cable and satellite entertainment did not fly off the shelves when they were introduced. It just may seem like that looking back at it, but it wasn't the case.

Biometrics remain a very real, large exciting opportunity that continues to emerge everywhere. Consistent security breaches are a constant reminder of the need for biometrics at both the consumer and enterprise level and we remain confident that our technology and business model uniquely positions us to be a leader in this space.

As always, we'd like to sincerely thank everyone for joining today. We appreciate your time and your ongoing support and we're very much looking forward to speaking to you along the path and on our next earnings calls.

Thank you and a good evening to all.