Jim Miller - Chairman & CEO Wayne Wetherell - CFO

Mike Malouf - Craig-Hallum Harvey Kohn - HRK Strategic Advisory Inc. Bob Clutterbuck - Clutterbuck Capital Management

Thank you, Ebony, and good afternoon to you all. As you saw at the close of the market today, we reported financial results for the first quarter ended March 31, 2017.

I'd like to begin today's call by speaking first about some specific financial results for the quarter, and then walk you through some recent developments. In the first quarter of 2017, total revenues were at $900,000 compared to $1 million in the first quarter of 2016.

Gross margin in the quarter was 71.8 compared to 73.3 in the same quarter a year ago, with the difference primarily due to the impact of lower year-over-year product revenue. Net loss in the first quarter of 2016 was 2.7 or $0.04 negative a share, compared to a loss of 2.3 or negative $0.03 per share last year.

At March 31, 2017, cash and cash equivalents totaled $1.5 million compared to $1.6 million at December 31, 2016. Total debt was $3.9 million compared to $2.5 million at December 31, 2016, and we had $1.9 million remaining on our line of credit.

In the first quarter of 2017, we continue to focus on integrating our patented biometric engine into the cloud and mobile markets, principally, via our award winning GoVerifyID enterprise and consumer products for smart devices. While also expanding into non-government sectors such as commercial, consumer, and healthcare.

However, due to our business strategy, relying on long term engagements with large organizations, results from these initiatives continue to take time to materialize from a revenue perspective. We remain encouraged by the continued strong demand we are receiving behind the scenes, and we anticipate further positive developments and strategic partnerships during the remainder of 2017.

During the first quarter, we did start to see small but consistent revenue from users of our products who pay us for use and hosting on the software-as-a-service CloudID and GoVerifyID solution. As we said just 20 business days ago on our last corporate update, we are disappointed in results to-date, and that we are behind on where expected to be.

As we also said, ImageWare made a conscious decision, not to sell direct as our primary path to market, but rather to leverage our foundational intellectual property and 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 are a 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, sales personnel, based literally all over the world. Our technology partnerships with Fujitsu, Deutsche Telekom, CA Technologies, SAP, Lockheed Martin, now Leidos, TransUnion, Hewlett-Packard, Aruba, Extenua, CDW, and several that have yet to be disclosed are all on strong footing and moving forward, albeit at different speeds.

That said, we remain confident in the strategy, and confident that the outcome desirable be obtained. As we signaled on our call at the end of March, we anticipated movement by Fujitsu towards migrating our technology partnership, to one focused on marketing and selling products.

That has now occurred, with our signing of a multiyear agreement with Fujitsu in Europe to market and sell the IWS family of products throughout Europe, the Middle East, Africa, and India. As part of that agreement, ImageWare and Fujitsu will collaborate on both sales to existing Fujitsu accounts and on sales of new products, such as the smart origination products and the integration of ImageWare's products into additional new Fujitsu products.

So, we have now transitioned in that region from technology partners waiting for a rollout to actually supporting Fujitsu's ongoing marketing and sales efforts to sell IWS products throughout the region, with a specific plan of execution. These sales efforts are now very much underway and we will have additional details to you on this in the very near future.

As we said many times on this calls, the process each partner undertakes is unique to that partner. It's 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 results. [Indiscernible] global or large regional sales campaign is not a casual endeavor.

We are now in the final stages of additional discussions with other Fujitsu companies, as well as technology partners, regarding more substantial relationships that will involve the licensing and white labeling of our products, under their brand and/or embedded in their products in certain geographical areas. In other developments, we are proud to announce that we have signed an agreement with Synnex, for the distribution of our GoVerifyID and CloudID products.

Synnex is a multibillion dollar distributor of technology solutions in 25 countries, and it's an honor to be selected to join the family of products they distribute, as their multimodal biometric offering. And as many of you know already, our GoVerifyID product was named Industry Best by Frost and Sullivan, not only for its innovative approach, but also for its incorporation of best practices.

Also in April, ImageWare was selected to provide biometric identity management in credentialing software to five Alaskan airports. Delivery under this agreement has now commenced.

This represents the third agreement, in which an airport has entrusted our multimodal biometric authentication software, to confirm the identity and background of their employees. We remind our listeners, that all of the GoVerifyID and CloudID transactions are done on a software-as-a-service basis.

This means that ImageWare will receive monthly recurring revenue for each and every identity under management of our products. Much the same as we have already executed with FEMSA, which has moved from a pilot to production system for its employees.

We think our partner strategy is the correct one, and that we are in the right place at the right time with the right products. We remain extremely confident, based on our discussions with our partners and our understanding of the companies that our partners are speaking to, regarding the use of our products that these partnerships will pay significant dividends.

And with that, we'd like to open the floor for any questions you might have.

Hey guys, thanks for taking my questions.

Yeah, you bet Mike. How are you?

Good. I am wondering if you can give us a little color on the FEMSA rollout, how that -- we are now in May now, and as we sort of look out over the next couple of quarters, how do you see that impacting result?

Yeah. FEMSA, as I said, has now moved from pilot to production systems.

We have received the first relatively modest purchase order from them under their 2017 agreement, which is good. We have spent a little time since the last shareholder call, so literally, as I said, 20 business days ago.

Putting in a new system, that has to do with biometric asset control, simply using biometrics to ensure that assets owned by FEMSA checked in and out of the system are really being checked out by the people that say -- that they are who they say they are. This was a little bit of a deviation from the rollout plan to employees, it's an extra add-on.

It required a little additional work on our part, and understandably, until it was put in place, which was just this last week, FEMSA was holding on any additional rollouts to employees. But it was delivered and installed and working.

It's actually by the way, a product that can be sold to other customers as well. So we are excited about that.

And it should move ahead. The pace of the rollout is as we have said, entirely up to FEMSA.

It resides in their hands. That's not unique to ImageWare or FEMSA of course, as you know Mike, software-as-a-service, the feature that people like to use when they take that model and purchase, software or license it, is because they can control the speed and the cost, where they roll out.

FEMSA's overall idea here, is to cover all their employees over time, which are several 100,000 plus additional -- 50% additional in vendors and consultants. So we believe that, that rollout will start to pick up, now that we have put in this new biometric asset management system for that, and should favorably impact revenues going forward.

Again, it's a software-as-a-service and we are paid by the individuals identities that we manage on a monthly basis. So there is no reason that we can see why it shouldn't move forward and favorably impact results for the remainder of the year.

Okay, good. And then, I noticed that you commented a little bit about increasing the activity or the direct activity to help sell the solution.

Can you give us a sense -- does that kind of increase, or do you have some budget set aside for that cost, if not, how much should we expect that to increase the set mark [ph]?

Yeah, it's a good question, but I think the cost will be minimal. I mean, truly de minimis.

I say that, because what's really required here, is the support of one or two sales engineers that can jump into presentations in their early going and support any kind of more technical than sales discussion. Fujitsu, like all of our partners is extremely capable and competent organization, and because we have been technology partners for some time, has actually acquired a good bit of skill and ability in the ImageWare software.

So in terms of supporting their efforts, getting them up to speed, we have spent a lot of time doing that already. And as I said, they are quick studies, they know what they are doing.

This would be more, we have someone available and dedicated to them on our side here. So that they know there is a person they can call, if they have any questions.

And again, I think this will be mostly, Mike, as the relationship kicks off and starts.

And Mike, to some extent, that's a reallocation of current costs from a direct sales standpoint to a sales support. So none of that would be reallocation of existing costs.

Okay. That makes sense.

And then just a final question, maybe for Wayne, can you talk a little bit about liquidity and capital needs, and sort of how you look for the next couple of quarters, and what kind of options you have?

Sure. We ended the quarter with about $475,000 in cash and we had -- out of our $6 million line, we had borrowings outstanding of $4.1 million; $4.15 million with the remaining $1.85 million on the line.

As we said, we are anticipating some fairly near term activity in revenues, some of which, have the opportunity to bring in some initial cash and we feel that we are working towards getting to those and we will continue to use that line, getting to that station.

Okay, thank you.

Hey Jim. Hey Wayne.

How are you doing?

Hey Harvey.

How are you?

Thanks for taking my call. Sure, you bet.

Jim, and you answered part of this, but a part of me wants to congratulate you on what seems to be a very positive agreement with Fujitsu. Another part of me, however can't help, wanting to know -- and again you answered this somewhat, what makes this agreement any different from the two or three other previous agreements we have had of -- we have been hearing about over the last couple of years?

Yeah, it's a good question. But here is the answer.

This is an agreement to market and sell the products, coupled with a specific plan of execution. That is Fujitsu came to us and said okay, we are happy with the product and the technology.

We are now going to move the effort from figuring out how to launch our products and how to make sure adoption is swift, which is part of what I explained in the last call, the things they did that, where they have fifth commission studies, or what is the optimum biometrics a user can use? Will they be most comfortable with the system?

The upgrading significantly of their K5 clouds, so if it is a world class competitor to the AWS cloud for example. The creation of a product called catalog manager, which allows for the auto configuration and of a system from any place on the world.

These are, again, it's easy for me to say, in a sense or two, but really heavy lifting significant things that Fujitsu felt they had to accomplish to get the product to a point, where it would be greeted enthusiastically by the market. They have done this.

They have done this a 100% on their time at their expense. This is now an agreement that says, we are willing to put our name, and in some cases, our brand on these products and sell them as if they were our own.

And our experience, not just in this company, but in any company, anywhere suggests, that when people do that, they have calculated the return on investment from that exercise, and they believe it favors them, it's positive. Otherwise, there is no reason in the world to conduct a marketing and sales campaign, unless you think that you are going to sell very-very favorable amounts of product.

So that's really the difference. Fujitsu, studied this, came up with a plan.

They made certain changes to products that they had that worked in tandem with ours. We of course, have come out with our own set of new products in the GoVerifyID line, enterprise and consumer and upgraded those.

And we have come together now to say, okay, it's time to sell these products to the market. Fujitsu configured some new groups, one of which was in Europe, that house all of their cyber security products.

So we are with the right folks in the right place, and as I said, that rollout is now underway. They have commenced their efforts.

And I have no reason to think, that the results will not be frankly exceptional, based on the efforts that they are putting into this, based on the personnel they are putting at it, based on the scale of the folks that are our partners. So it's really the final stage in the transition, Harvey, from technology partnering to market and sales partnering, which of course, is what it's all about.

And as you know, it has been the variable. I mean, we have had a lot of these technology partnerships, where we are integrated and resident and ready to go.

But we have been dependent, as that strategy is by definition, on you know, the partner's willingness to roll out and go to it, in a big way in the market. So in Europe, the Middle East, India and Africa, Fujitsu is doing that, and as I said in my remarks, we anticipate other places in the world will follow and obviously we will keep everybody up to date on that as it happens.

Okay. Thanks.

Second question, it's very clear that after Baja Mexico and FEMSA, where you actually begun -- well you just talked about the ultimate goal of onboarding by end users, as opposed to partnerships. And if we extrapolate numbers from FEMSA and you know, look out, six months a year, it's a pretty impressive partnership right there.

I wonder if you could give us some real numbers, and I know you can't give us names, and how many other major end users are actually doing pilots and how close some of them are to pulling the trigger towards a full onboarding, and if you can give us an idea of the size of some of these, and why it gives you such confidence?

Well good question. A little tricky to answer, because it's frankly all over the block as you would imagine.

There are between us and our partners and just because you haven't seen another partner rollout with a form of marketing and sales agreement, such as we have just announced with Fujitsu in Europe, does not mean the partners themselves are not running pilot efforts with their own customers. So there are literally a dozen to a dozen and a half different places, where from small businesses to Fortune 25 companies in the world are looking at the products, running it through test labs, talking about pricing.

So as I said, it's a little bit all over the block. Those things have been, albeit slowly, have been progressing well for us, and the conversation indicates that there are buy signs amongst a number of those folks.

And so we anticipate converting the pilots in the conversation to sales and revenue. And that's really at the foundation of the confidence we have in the model and the market, is that we are seeing again, albeit slowly, but we are seeing progress being made.

And as I said behind the scenes, folks are doing and saying and acting in the way that is consistent with placing an order for these products. So we have no reason to believe that we won't be receiving those orders, some of which in the short run.

Some of these big companies, as I have said in the past, have really an arduous process. I will tell you in one instance, with a very major oil company; we have had to go through an incredible security bidding process, just to get to the pilot.

And that process by itself can take several months, because it's their process, and we will do it according to their protocols, no way to shortcut it, as I said, as much as you'd like to. And then you get to the test.

So I mean -- but we have quite a bit of -- historically more than we have ever had in this company's history of conversations, of pilots, of test exercises going on. And then our partners have their own, as I said, just because they have been quiet, doesn't been they haven't been active.

So there is a lot of activity going on, between our partners and ourselves here. So again that -- nothing but reason for confidence in that respects.

This is the process people take to buy the product. So it's underway.

Okay. Thank you.

Hi Jim. How are you?

Hi Bob. Good.

Thank you.

Well I figure this will be the last time I probably get to call in on the call. So I was going to ask two, but Harvey stole some of my thunder I wanted to drill down on Fujitsu, but I think he had done that.

So this will be a tough one, but I think we got to address the elephant in the room. Mike asked Wayne earlier the question about cash; and Wayne, I am almost sure you said we are $1.8 million to $1.9 million, ballpark we have earned $2 million in the quarter.

I know you absolutely anticipate revenues, but we have been challenged with revenue delays, and if we get them, obviously, we don't have -- what is the plan, we don't have revenues, because plus or minus July 1st or certainly August 1st, I would guess by our calculations, will be out of catch?

Well Bob, we have a number of alternatives. Obviously, we have had some conversation with the line of credit folks about changing terms on the line.

So that's one avenue that presents itself. The other is, no secret, the company has an active $15 million shelf registration that is effective.

So there is that available as well. And you know, we have had a number of folks interested in making investments in the company, so there is always that alternative.

Devil of course, as you well know, in the details and every one of those thing. But we think with the alternatives on the table and the prospect of revenues, we will be able to effectively manage the company to a successful outcome.

Well believe me, we all root for that. So why don't you to grab the next question, and thanks.

I know that. Thank you, Bob.

I appreciate that very much.

Thanks Ebony. Savvy analysts who cover the biometric space predict a $35 billion to $50 billion market within the next three years.

They disagree only on degree, not on outcome. In an interview yesterday that I read, [indiscernible] new CEO declared biometrics to be the cyber security game changer in the coming year.

Now unless every single one of those folks are incorrect, inflexion is at hand, and we are exceptionally well positioned to replace a 50 year old security construct, PINs and passwords with the only real authenticator of your identity, that's you. I said it in our last call, but it's worth repeating.

Products that are now commonplace and we can't live without, PCs, mobile devices, cable, satellite entertainment, even power steering or color TV, didn't fly off their shelves when they were introduced. Just seems like that to all of us, as we look back.

When they did hit stride, they were enormous success stories, and we believe that biometrics and specifically ImageWare brand of biometrics will be no different. This past week, Verizon revealed its most recent study of security in the mobile space, and found that 80% of security breaches result from the failures of PINs and passwords to adequately protect us.

At 80% levels, there can be little doubt that the move to biometrics is not only close, but eminent. We remain confident that our technology and our business model uniquely positions us to be the leader in our industry.

As always, we'd like to thank everyone for joining and appreciate your time and ongoing support. We look very much forward to speaking with you along the way and at our next quarterly call.

Thank you and good evening to all of you.