Wayne Wetherell - Chief Financial Officer Jim Miller - Chairman and Chief Executive Officer

Paul Penney - Northland Capital Mike Malouf - Craig-Hallum Capital Group Rob Stone - Cowen & Company

Thank you, Kyle and that’s CFO for those of you that are listening. Welcome to those of you who are joining in our call today.

Our quarterly and year-end financial results are available in the recently published news release and on Form 10-K. Revenue for the fourth quarter of 2017 totaled $1.2 million that’s up 32% from the same quarter in 2016.

The increase was due to higher license revenue in the quarter from Veterans Administration and from Baja California driver's license project. The higher license revenue in the quarter drove the increase in gross margins to 80% in the fourth quarter of 2017, up from 69% for the same quarter of 2016.

We anticipate that we will receive additional orders for licenses from the Veterans Administration in 2018 as they expand the utilization of ImageWare’s identification solution. Fourth quarter net loss from continuing operations was $2.4 million, an improvement of 11% from $2.7 million in 2016.

Net loss per share for the fourth quarter was $0.03 for both 2017 and 2016. We ended 2017 with cash of $7.3 million compared to $1.6 million for 2016.

This includes my financial review and I will now turn the call over to Jim for the progress update of our business strategy.

Thanks, Wayne. Good afternoon everybody.

It's a pleasure to have the opportunity to speak with you today at this pivotal inflection point of our company. And most of you who’re on this call have been on our calls before and you're already familiar with our technology overview and with what our patented multimodal biometric technology does, how it's different from and superior to other competing technologies and why it's needed.

For anyone who would like to drill down into that information one on one, our IR team is available to speak with you. Now that ImageWare’s household name partners including Fujitsu, CDW and IBM are initiating their respective sales and marketing programs, we concluded that going forward on our calls, we're going to focus on discussing where we are in terms of sales efforts.

That said I will start with the brief bit of context regarding estimated timelines. Four years ago, we made a critically important decision to partner with major companies to bring our solutions to market rather than attempting to do so on our own.

Because our addressable market is so vast and because the potential customers are so large, we came to believe that attacking the market on our own would be inefficient at best. We recognized that we were just too small and had nowhere near the necessary capital and resources to go after the broader and diverse biometric markets on a direct sale basis.

Instead, we turned our efforts to attracting leading companies as partners, initially as technology partners who would then become marketing and sales partners. We naively estimated that the timeline for that process of signing a partner to having that partner begin generating sales would be as much as two years.

And you heard me right, I said, as much as two years. Now armed at 2020 hindsight we see how off we were.

The first partner we signed was Fujitsu that took place in 2014. A number of other partners were also signed including CA, HP, Aruba, SAP, [Pemsa], Lockheed Martin and IBM.

We continued with that partnering process successful because it was. Now I will skip forward to 2017 when Fujitsu announced that it had completed its due diligence and began the integration of our GoVerifyID technology into its biometrics-as-a-service solution.

Then in the third quarter of 2017 Fujitsu announced that it was beginning to sell biometrics-as-a-service. So, what we initially thought would be a two-year timeframe turns out to have taken more than double that time.

Having said and lived through that, here we are today. Both ImageWare and several of our partners are now outselling and making sales.

CDW is selling, Fujitsu is selling, and IBM is working with us to help facilitate it. At this point let me go back and bring you up-to-date on several items that were discussed in last quarter’s call but we haven’t covered yet today.

At that time, we said we expected revenues to begin in Q1 and to have in the form of modest initial sales from our CDW partner. Modest so it may be, it’s an important beginning and subsequent orders are expected to be more meaningful.

We talked about IBM and ISAM. We have achieved certification by IBM and IBM has introduced us to several of their larger ISAM customers who have an interest in introducing multi-model biometrics to their employees and customers.

Our sense is that initial IBM ISAM-related sales will start to ramp in the second or third quarter this year. ISAM has been the backbone of IBM security for years and has a huge user base well into the hundreds of millions.

The ISAM opportunity is significant to say at least. Regarding the status of Hewlett Packard, we have not had any significant movement to report since our last call with you.

We did have a very good show with SAP at the recent Mobile World Congress event and are working with them on a new program they are initiating which would accelerate the resell of our products through SAP sales channel. Turning to more recent progress two weeks ago, Fujitsu announced that it has expanded our existing marketing and sales agreement and introduced their MedClick platform into the market.

MedClick is an OEM version of our FDA approved pillphone product to biometrically secure patient engagement, medical adherence, authentication of e-prescription ordering, and clinical trials. This opens a new vertical for our partnership, the mobile healthcare market and marks the second Fujitsu product powered by our technology which Fujitsu is actively marketing and selling.

The MedClick solution addresses the multi-billion-dollar healthcare market with the ability to serve hundreds of millions of users. We will split revenues with Fujitsu on a per user per month basis.

But in the case of healthcare, Fujitsu, we expect that the per user price point could be slightly higher than any of our other joint offerings. It’s too early in the process for any more specificity and I look forward to discussing all of our opportunities in mobile, healthcare in greater detail on our next quarterly call where things are further along or through announcements along the way.

I think it's worth spending some time now to look ahead in particular at Fujitsu’s federated identity system using their biometrics as a service product powered by our GoVerifyID. Federated identity is the ultimate vision for the use of ImageWare’s technology products.

Federated identity management represents a huge of exciting opportunity for us. It requires a slow and deliberate process of customer acquisition or enrollment and the creation of databases that would ultimately roll out over a period of a couple of years to tens of millions of users, very simply put it, federated management provides various companies with the ability to access a user's single biometric identity enrollment for subsequent authentications of transactions, data service, or any kind of access to a network.

For example, if the user enrolls their biometric identity via bank X, and if your credit card company A is enrolled in the federated management system then with your permission of course you already enrolled biometric identity can be readily access to the identity when you for instance login to your credit card account to pay your bill. Fujitsu originally announced that project to commence late Q3 2017.

They're currently working on refining a proof of concept and their updated timeline calls for sales deployments in the summer of 2018. We continue to anticipate that the federated management opportunity will have a significant positive impact on our company.

As in any large project you and we have ever seen these wheels turn slowly and I look forward to providing updates over the course of the year in future calls. This brings me to once again remind all of you that the process we take with each and every partner in unique to that specific partner.

Each partner has its own set of objectives, market forces and processes that need to be navigated internally prior to go into market. Sometimes those processes move at a glacial pace, but I will remind you that if they’re all in fact moving and moving towards very large markets.

Before I close I'll spend a minute to review how it is that ImageWare generates revenue from the licensing of our high margin software. Though there are some variations on the structure among different partners essentially, we are paid on a per user per month basis.

Leaving aside the new healthcare market, our net revenue will typically range from a low of $0.25 per user to a high of $1.50 per user, depending on volume lower volume equals higher per user rates and whether or not we're selling via partnership where we split revenues or directly or selling direct. With the ultimate potential for tens to hundreds of millions of users, you can see why we are enthusiastic about the enormous opportunity before us.

While the revenue generation model is the same in the new healthcare market, the per month per customer price point is expected to be higher. We believe that our share could be in area of $2 to $3 per customer per month In summary we want to acknowledge the long and difficult road, this has been for management and for you, our stockholders.

The question I've been asked most for the past six months is when are your partners going to begin actually selling? And the answer finally is now.

As you've seen from the many analysts who report and follow the size of the biometric market. The opportunity is as big or bigger than we first envision, and our partners have the ability to deeply penetrate that market in a way we could not.

And now they are finally beginning to do so. Consequently, I'm comfortable reiterating our prior guidance that we anticipate achieving cash flow positive run-rates later in this calendar year.

And now I'd like to turn our call over to our operator Kyle to begin the question-and-answer-session. Kyle?

I think in more detail on your strengthening the Fujitsu partnership. And in terms of [what visions] [ph] are you about to sign?

And in your conversations with them, can you force rank the top priorities that you guys collectively talk about?

Yeah, sure. Let's talk about regions first.

We are active with agreements, which again are multi-year sales and marketing licensing agreements in Europe, Middle East, India, Africa all the Americas North and South and in what they called Oceana which would be Australia, New Zealand, Southern Pacific areas. Still pending are the Singapore, Southeast Asia region and Japan.

We are in active discussions with both. And we're looking I think over the next certainly 30-45 days to completing that.

Fujitsu has committed to us that this is the true global rollout, they need not literally global. So, we see nothing that would indicate any other approach other than just finishing off the paperwork that is out there and then get ramped up in all those places.

In terms of priority, there is a process as I said in my remarks, and in terms of what we have to do then in order to go to market I mean you don’t just wake up on that Tuesday after you sign these agreements and go out and start doing these things. If you're looking at enterprise or commercial consumer deployments you need for example a help and support capability.

So, over the last bit we trained literally several hundred people between sales, marketing and support activity when that when the phone rings and under our agreement as we've covered in prior sessions Fujitsu is response more for the service and support at those levels. They needed to have a complete staff, which is 24/7 around the clock because of the global rollout that we're working with them on to train.

So, the priorities have been really training, so far both sales and marketing as that set into support. Also, we have been doing some work on refining the products and the sale of this product, biometric as a service is sold as a part, it's sold individually of course as well, but it sold as a part of Fujitsu Security Stack.

So, we've done a little bit of refining on the sales and marketing message out there to reflect how it fits into that unique space. And that’s taken four, five months really to get through those fundamentals and those buildings blocks so they can now turn to full scale to sales, which is what we are doing.

So, it’s a very exciting point as I said, a true inflection points for us to have that hard work behind us and now being actively out there selling. So that’s really the priority is sales execution for both companies, us through them, but they are in the same place we’re in.

They are out there with a lot of folks trying to get sales completed and move on.

Thanks, Jim. And then switching CDW looks like you’re off to a start there with them.

Can you just context in terms of what changed in terms of the sales arrangement with them, in terms of maybe altering the pricing to motivate them, to actively sell your product and what do you think are the prospects for even larger deals going forward?

I think CDW is a tremendous partner. I think we on our side -- they needed to learn and understand the product.

And because you are talking about one of the world’s largest software distributors, we are not the only product on their play on any given day. So, they had to train and understand the product and then of course relate that back to their customers who are interested in biometrics.

On our side, we had to learn that process. It may seem obvious but we had to learn how to be actively engaged on a daily basis with the various vertical market sales teams at CDW.

As we’ve reported in order to make that work more efficiently for us, we actually have a full time employee on the sales team who is based at CDW in Chicago working exclusively for us and making sure that education message is received and understood by the CDW folks that they get what they need in terms of the marketing and sales support from us and that we can then turn that working together into sales to their long list of sometimes very large clients. They believe that there is an interesting focus -- market’s focus on which is the smaller community banks and credit unions who are typically first adopters of this kind of technology.

And so, we have been prioritizing that as a focus. But no means is that the only focus.

They are seeing a lot of interest in the product. Now that they understand how to sell it, now that we understand the internal process there and how to support that effort, so I think that we haven’t had to change pricing or do any of those things.

It has been more what I will call probably education based. A lot of that but that’s been primarily what it is at CDW and yes, we do look forward to see a lot more significant progress from the CDW side.

Last one from me. In addition to the CDW hire, what other personnel have you hired in terms of sales or operational hires over the last quarter or so?

Well a couple of things, we have brought David Somerville in to join us as our Senior VP of Sales and Marketing. David has a long background in security sales and products.

So, he fits that bill, he will head up all our sales and marketing efforts. Bob Brown who had that job with us prior has split over to the full-time job of strategic global partnering where we determined we needed a full time senior executive on that every day as well.

So, David would be one of the foremost of the hires. We have just -- has not started yet but we'll start in April.

We've also hired a very experienced Asia Pacific sales executive who will be based in Tokyo, Japan and handle our day to day requirements not only with Fujitsu but with other companies in the region, which we’re also very excited about. One of the things that we've seen is that as biometrics starts, it's finally roll out globally, the high amount of interest also attracts a very high caliber of sales executives.

So, we’ve taken advantage of that by picking up the gentlemen I think who will be just terrific in representing us in the Asia-Pacific market. And right now, that's where we are at for the moment.

Great guys. Thanks for taking my questions.

Jim, can we talk a little bit about -- I mean it sounds like Fujitsu has a massive pipeline here. Is this identity product or is that the largest that you think in the pipeline, right now?

Yeah. I mean they have a couple of strategic focuses around the world.

One of which is biometrics as a service that's their trade name for their product that they sell and of course that’s the GoVerifyID product that is embedded there. That is a true global focused market for them.

So, it is a getting a lot of time and attention and they've been looking at this very aggressively, they have been -- while they’ve been aggressive they've also been careful and deliberate because they understand as we do that when this gets stood up in large profile places there can be no hurdles. This has to -- when you go live, out you go and there can be no room for error there.

So, there has been a lot of time also spent making sure that we all get that right, they get it right and we get it right. But, yeah, it is a -- I think it's fair to say it is a priority corporate focus of theirs around the world and they are treating it accordingly.

Yeah and we’re very pleased with what we are seeing.

And then just federated identify product that they’re going to roll out this summer. How does - how do you encourage everybody to enroll in this?

What's the incentive?

Well, I think where we're at as education starts to take hold and you acquaint enterprises and consumers with the value of biometric education and product, not just the high-security, but also, it’s just that hey I don’t have to fool with pins and passwords anymore. This makes my life a whole lot easier.

We're getting a lot of acceptance that we don't -- people don't have to make those optional choices anymore, if you can introduce that as the new way you're going to do things and you will get people that are agreeing to roll the product out that way. The other issue is of course the front [ph] loss is enormous, every single thing you see and I see and all of our listeners see indicates the front loss sadly here to stay, even more sadly increases every year.

And finally, 82% of the data set last year was attributable according to Verizon to pins and password being stolen. So, all those things have combined so that people -- there is a shift in the mentality I think Mike, that now says if you can say to your customers in order to help me, A, make your life simple easier and more secure, but B, also cut down on the thought [ph] we're both experiencing.

Here are tools you are going to use as opposed to you can choose to use them or not. So, you are starting to see the beginning of the end of that popped in idea which people did when over the last couple of years because it was very new technology that not a lot of people understood.

So, the commercial folks particularly were very kind to the users and gave them choices. But if you give me a choice and you give me unlimited time to make it, there are lots of folks that will either just never make the choice or put it off to the very end.

And I think folks who buy the technology now understand that and they're prepared to take a more aggressive stance with the rollout.

And do you suffer a little bit from sort of that Chicken & Egg symptom where no one wants to sign up for this because my bank's not in that yet, but the banks don't want to sign up for because no one is in the database yet. I mean how do you break that cycle.

Yeah there has been a little bit of that. And I think really again, it goes back to that broad category of things called education.

There is a lot of people who didn't understand how the technology works, how to roll it out, how easy it is to work with. You don't really need any special tools, any special knowledge.

It is drop dead simple to use. And I think as while we've been out educating, happily the potential customers have all been willing and able and investing their own time to get educated.

So, we've seen a lot of folks for example, two major banks here in the U.S. who we talked to 2 full years ago.

I have now come back and said now that we understand how the biometric engine platform works, how go verify works, how we can just download this off a website and get going. We're interested in reengaging in those discussions.

So, it turns out that as we thought, that we didn't know now we know, those folks never went away, in terms of not being interested. They just didn't know enough to make a decision.

And again, you're replacing, I know folks sometimes listen and they will say 50 years of pins and password so what? That's a big deal.

And if you relate that to your life to get have it you have the 50 years that usually doesn't get broken in a short period of time. And this is now different.

So again, you have a situation now where you got education that is finally winning out. And as people see its simple and it's easy it's not expensive it's cost effective.

It actually can lower their costs. Then the buyers of that technology are willing to buy it and in turn send it to their customers but not as a choice.

But as they knew way we're going to be securing your transactions going forward. I think you're seeing now the start of that.

And who -- as we roll it out this summer, who pays for this?

The users -- excuse me I said users, to us the users would be the company. So well obviously our remittance of funds to us comes from our partners at Fujitsu because it is their deal.

But beyond that they are rolling it out to several large companies who will be the buyers of the technology and will be there for the payers for the use of this technology.

And do you think they are going to transfer that cost over to the consumer or do you think they are going to eat it?

I think it depends on the vertical market, you are talking about, some people might transfer it over. But I think a lot of folks will put this in terms of what I am saving to deliver this technology and at rates of $0.50 to $1.50 a month it is very, very low-cost protection.

Okay. And do you think once you win one of these large deals, are you going to announce this in an 8-K-able event, is that -- or just kind of layer into the numbers in every quarter we will hear about how bigger to that, I mean?

I will tell you and you will appreciate, we can’t wait to make the announcement, press release, 8-K and otherwise on any significant deal.

And then my last question just with regards to comment about cash flow positive. Are you -- what kind of revenue do you need to reach that goal?

We need somewhere between 4.5 million and 5 million on a quarterly basis. However, there is an interesting trend in this particular market, but we are up-signed to large customers or when Fujitsu or partners are out selling to large customers, we are finding that many of them are more interested in purchasing a block of identities for a period of time, be it one year, two years, maybe even three years.

This in turn allows us to bill for a one-year, two-year period in advance and gain acceleration on the cash flow, sometimes ahead of the revenue. If that customer is using our service, in other words, we are hosting the service, then that is a service we are providing.

Even if we get paid upfront we will have to recognize that revenue over the duration of that contract. If the customer is going to put this on their web service, they are basically licensing our product.

We will be able to recognize both the revenue and have the cash up front. So, it’s an interesting thing that’s going to impact our cash flow and we think favorably.

Hi, guys. I have a couple of business model, if you will.

So, I have a couple of business model questions as well Jim. You mentioned first of all that the base business accounted for much of the Q4 growth and you did expect some follow-on orders.

How should we think about the directional trend sequentially in the base business versus Q4?

I think the base business we can pretty much consider that it's going to stay fairly even. If you recall our base business has been lumpy because our old school contracts, mostly with government or large entities.

And therefore, we can have a quarter where we’ll get a million-dollar order and we can go three or four quarters without that order. So, it's going to be lumpy, but I think remains fairly steady.

Hope that answers your question.

Okay. With respect to operating expenses, you’re running just by the end of last year little over $13 million for the year, on an annualize, it’s roughly the same on the Q4 run rate you mentioned a couple of new hires.

Do you have most of what you need in place now for -- to support the new business or how should we think about the growth of expected?

I think we have largely the folks that are in place. As I said, we do what sort of we look at Rob as more tweaking than anything else.

There were -- and we budgeted forward internally here the acquisition of a couple of sales folks and we had to add a couple folks that we've done already to Dave Harding's group. But that’s it, there are a handful of folks not an army of thousands and we're comfortable that that's what we need to implement here.

Okay. So, a final question then is on the margin impact, you noted that the higher mix of licensing versus maintenance revenue accounted for the improved gross margins in the Q4.

As you start to get a higher percentage of the new biometric process revenue going forward, how is that going to influence your gross margin?

We fully expect the gross margins to improve. Right now, as you’ve seen, you’ve seen in the 70s to 80s, you’d expect the gross margins to improve to the mid to upper 80s.

And is there a meaningful difference on the ImageWare hosted versus customer hosted approach? How are you thinking about the mix there I guess if you're just getting revenue share of what’s hosted by the partner that should be higher margin right?

Yeah. Yeah.

That’s a little bit higher margin, but either way there is fairly significant margins. So, there's not a lot of difference between those margins.

The hosting is fairly fixed unless we get a huge customer that needs a lot of bandwidth but even then, the additional revenue will keep our margins high.

Okay. And last question was back to the revenue recognition versus cash flow that you mentioned, Wayne.

A number of my companies at least have had significant changes in commentary about how their business was going to look upfront to ASC 606. So, is this accounting you might recognizing the time-based agreements all upfront that's with application of ASC 606 or not?

Yes. That’s with the application.

If we were still pushing into that our historical business the application 606 606 could have some significant changes on our revenue recognition. But going forward with the shift in mix to the service revenue, we think that the comments I made are under the 606.

Well thanks Kyle. We've now reached the point where our partners can take advantage of their size and reach in a way we couldn't to penetrate this fast market.

A good example is just the announcement of few weeks ago to take us into the healthcare industry, a large new vertical market which by the way found immediate interest from several large companies in the healthcare space. We now have every reason to expect that going forward our top-line will be growing quarter-over-quarter and that our expectations and your expectations will finally to do that.

We're looking forward to our next call. We thank you for your time and attention this afternoon.

And wish you all good evening or afternoon wherever you maybe. Thank you.