IMAGEWARE SYSTEMS INC - Annual Report: 2015 (Form 10-K)

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[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		33-0224167
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10815 Rancho Bernardo Road, Suite 310, San Diego, CA 92127 (Address of principal executive offices)
(858) 673-8600 (Registrant’s Telephone Number, Including Area Code)

 

 

Large accelerated filer	[   ]	Accelerated filer	[X]
Non-accelerated filer (Do not check if smaller reporting company)	[   ]	Smaller Reporting Company	[   ]

 

 

As of March 14, 2016, there were 94,070,895 shares of the registrant’s common stock outstanding.

 

 

 

 

			Page
PART I
Item 1.		Business	1
Item 1A.		Risk Factors	13
Item 1B.		Unresolved Staff Comments	20
Item 2.		Properties	20
Item 3.		Legal Proceedings	20
Item 4.		Mine Safety Disclosures	20
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.		Selected Financial Data	23
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.		Financial Statements and Supplementary Data	48
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.		Controls and Procedures	49
Item 9B.		Other Information	49
PART III
Item 10.		Directors, Executive Officers and Corporate Governance	50
Item 11.		Executive Compensation	54
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	65
Item 13.		Certain Relationships and Related Transactions, and Director Independence	69
Item 14.		Principal Accountant Fees and Services	71
PART IV
Item 15.		Exhibits and Financial Statement Schedules	72
EXHIBIT INDEX			72
SIGNATURES			74

 

 

ITEM 1.

BUSINESS

 

 

Our law enforcement solutions enable agencies to quickly capture, archive, search, retrieve, and share digital images, fingerprints and other biometrics as well as criminal history records on a stand-alone, networked, wireless or Web-based platform. We develop, sell and support a suite of modular software products used by law enforcement and public safety agencies to create and manage criminal history records and to investigate crime. Our IWS Law Enforcement solution consists of five software modules: Capture and Investigative modules, which provide a criminal booking system with related databases as well as the ability to create and print mug photo/SMT image lineups and electronic mugbooks; a Facial Recognition module, which uses biometric facial recognition to identify suspects; a Web module, which provides access to centrally stored records over the Internet in a connected or wireless fashion; and a LiveScan module, which incorporates LiveScan capabilities into IWS Law Enforcement providing integrated fingerprint and palm print biometric management for civil and law enforcement use.  The IWS Biometric Engine is also available to our law enforcement clients and allows them to capture and search using other biometrics such as iris or DNA.

As a result of HSPD-12, government organizations are required to adopt new processes for verifying the identity of employees and contractors as well as controlling access to secure facilities and information systems. In response to the strict requirements set forth by the Federal government, ImageWare enhanced its IWS Biometric Engine and secure credentialing product suite by adding card management and card printing modules which enable the offering of end-to-end support for PIV-I and PIV-II business processes, technical requirements, as well as the ability to partner with leading physical and logical access control vendors for logistics and deployment considerations.  We believe that the HSPD-12 standards as well as the product enhancements created to meet those standards will, in large part, be adopted by the commercial market and that the Company’s products will transition into those market spaces without significant customization.

 

 Identification systems have historically been sold based upon the cost-savings digital systems offer over traditional non-digital systems. We believe that the ability to easily capture images and data in a digital database and to enable immediate and widespread access to that database for remote identification/verification will be a functionality that both public and private sector customers will require in the future and that such functionality will be one of the primary drivers for future growth within this market. We are able to provide field-proven identification products with high quality reference accounts across the board in terms of size and complexity of systems and user requirements. When combined with our proven biometric, cloud and interactive mobile messaging capabilities, we believe we can provide a leading product offering into the biometrically enabled secure identity management market.

 

 

We categorize our identity management products and services into three basic markets: (i) Biometrics, (ii) Secure Credential, and (iii) Law Enforcement and Public Safety.  We offer a series of modular products that can be seamlessly integrated into an end-to-end solution or licensed as individual components.

 

 

 

 

 

 

 

●	HSPD-12 Personal Identity Verification
●	Border Management
●	Applicant Identity Vetting
●	Mobile Acquisition
●	Physical Access Control
●	Single-Sign-On and Logical Access Control

 

 

 

 

●	Support for multiple authentication tools including Public Key Infrastructure (“PKI”) within a uniformed platform and Privilege Management Infrastructure (“PMI”) technology to provide more advanced access control services and assure authentication and data integrity;
●	Integration with IWS Biometric Engine for searching and match capabilities (1:1, 1:N and X:N);
●	Integration with IWS EPI Builder for the production and management of secure credentials;
●	Support for both BioAPI and BAPI standards;
●	Supports a single sign-on feature that securely manages Internet Explorer and Windows application ID and password information;
●	Supports file and folder encryption features; and
●	Supports various operating systems, including Microsoft Windows 2000, Windows XP, and Windows Server 2003.

 

 

 

 

 

 

●	Biometric enrollment and identity proofing with Smart Card encoding of biometrics;
●	Flexible models of central or distributed issuance of credentials;
●	Customizable card life-cycle workflow managed by the CMS; and
●	Integration of the CMS data with other enterprise solutions, such as physical access control and logical access control (i.e. Single-Sign-On, or SSO).

 

 

 

 

 

 

 

 

 

We intend to use our successful installations with customers such as the Arizona Department of Public Safety, New South Wales Police, and the San Bernardino County Sheriff’s Department as reference accounts and to market IWS Law Enforcement as a superior technological solution. Our recent addition of the LiveScan module and support for local AFIS to our IWS Law Enforcement will enhance its functionality and value to the law enforcement customer as well as increase the potential revenue the Company can generate from a system sale.  We primarily sell directly to the law enforcement community. Our sales strategy is to increase sales to new and existing customers including renewing supporting maintenance agreements. We have also established relationships with large systems integrators such as Sagem Morpho to OEM our law enforcement solution utilizing their worldwide sales force. We will focus our sales efforts in the near term to establish IWS Law Enforcement as the integrated mug shot and LiveScan system adopted in as many countries, states, large counties and municipalities as possible. Once we have a system installed in a region, we intend to then sell additional systems or retrieval seats to other agencies within the primary customer’s region and in neighboring regions. In addition, we plan to market our integrated investigative modules to the customer, including Facial Recognition, Web and WitnessView. As customer databases of digital mug shots grow, we expect that the perceived value of our investigative modules, and corresponding revenues from sales of those modules, will also grow.

 

 

 

 

 

 

 

●	the unique ability to integrate our modular products into a complete biometric, LiveScan, imaging and investigative system;
●	our reputation as a reliable systems supplier;
●	the usability and functionality of our products; and
●	the responsiveness, availability and reliability of our customer support.

 

 

 

●	our strong brand reputation with a customer base which includes small and medium-sized businesses, Fortune 500 corporations and large government agencies;
●	the ease of integrating our technology into other complex applications; and
●	the leveraged strength that comes from offering customers software tools, packaged solutions and Web-based service applications that support a wide range of hardware peripherals.

 

 

 

●	our ability to provide a system which enables the enrollment, management and authentication of multiple biometrics managing population databases of unlimited sizes;
●	searches can be 1:1 (verification), 1:N (identification), X:N (investigative), and N:N (database integrity);

 

●	the system is technology and biometric agnostic, enabling the use of biometric devices and algorithms from any vendor, and the support of the following biometric types: finger, face, iris, hand geometry, palm, DNA, signature, voice, and 3D face and retina; and
●	we hold five patents covering our core multi-modal biometric and fusion  technology, which we believe will give us a competitive advantage over our direct competitors who have little or no patent protection.

 

 

 

 

 

 

 

 

●	varying demand for and market acceptance of our technology and products;
●	changes in our product or customer mix;
●	the gain or loss of one or more key customers or their key customers, or significant changes in the financial condition of one or more of our key customers or their key customers;
●	our ability to introduce, certify and deliver new products and technologies on a timely basis;
●	the announcement or introduction of products and technologies by our competitors;
●	competitive pressures on selling prices;

 

●	costs associated with acquisitions and the integration of acquired companies, products and technologies;
●	our ability to successfully integrate acquired companies, products and technologies;
●	our accounting and legal expenses; and
●	general economic conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	increase the cost of our products;
●	be expensive and time consuming to defend;
●	result in us being required to pay significant damages to third parties;
●	force us to cease making or selling products that incorporate the challenged intellectual property;
●	require us to redesign, reengineer or rebrand our products;
●	require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property, the terms of which may not be acceptable to us;
●	require us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification to such parties for intellectual property infringement claims;
●	divert the attention of our management; and
●	result in our customers or potential customers deferring or limiting their purchase or use of the affected products until the litigation is resolved.

 

 

 

 

 

Our Common Stock is subject to “penny stock” rules.
 

Our Common Stock is currently defined as a “penny stock” under Rule 3a51-1 promulgated under the Exchange Act. “Penny stocks” are subject to Rules 15g-2 through 15g-7 and Rule 15g-9, which impose additional sales practice requirements on broker-dealers that sell penny stocks to persons other than established customers and institutional accredited investors. Among other things, for transactions covered by these rules, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell our Common Stock and affect the ability of holders to sell their shares of our Common Stock in the secondary market. To the extent our Common Stock is subject to the penny stock regulations, the market liquidity for our shares will be adversely affected.

●	actual or anticipated fluctuations in our operating results or future prospects;
●	our announcements or our competitors’ announcements of new products;
●	the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission (the “SEC”);
●	strategic actions by us or our competitors, such as acquisitions or restructurings;
●	new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
●	changes in accounting standards, policies, guidance, interpretations or principles;
●	changes in our growth rates or our competitors’ growth rates;
●	developments regarding our patents or proprietary rights or those of our competitors;
●	our inability to raise additional capital as needed;
●	substantial sales of Common Stock underlying warrants and preferred stock;
●	concern as to the efficacy of our products;
●	changes in financial markets or general economic conditions;
●	sales of Common Stock by us or members of our management team; and
●	changes in stock market analyst recommendations or earnings estimates regarding our Common Stock, other comparable companies or our industry generally.

 

 

 

 

 Certain large shareholders may have certain personal interests that may affect the Company.

 

 

 

 

 

 

●	1,508 square feet in Ottawa, Province of Ontario, Canada, at a cost of approximately $3,000 per month until the expiration of the lease on March 31, 2016;

●	8,045 square feet in Portland, Oregon, at a cost of approximately $16,000 per month until the expiration of the lease on October 31, 2018; and

●	425 square feet of office space in Mexico City, Mexico, at a cost of approximately $3,000 per month until terminated by either party.

PART II
 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

2015 Fiscal Quarters		High			Low
First Quarter		$	2.36			$	1.50
Second Quarter		$	1.89			$	1.39
Third Quarter		$	2.04			$	1.41
Fourth Quarter		$	1.64			$	.90
2014 Fiscal Quarters		High			Low
First Quarter		$	2.44			$	1.76
Second Quarter		$	2.42			$	1.60
Third Quarter		$	3.07			$	1.86
Fourth Quarter		$	2.61			$	1.60

Holders
 

 

 

 

 

 

 

 

Securities Authorized for Issuance under Equity Compensation Plans
 

 

Statement of Operations Data: (In thousands, except share and per share data)	Year Ended December 31,
	2015				2014				2013				2012				2011
Revenues:
Product	$	2,192			$	1,634			$	2,686			$	1,145			$	2,596
Maintenance		2,577				2,525				2,618				2,806				2,878
		4,769				4,159				5,304				3,951				5,474
Cost of revenues:
Product		1,117				257				319				227				459
Maintenance		827				735				771				975				935
Gross profit		2,825				3,167				4,214				2,749				4,080
Operating expenses:
General and administrative		3,437				3,818				3,378				3,430				2,327
Sales and marketing		2,791				2,471				2,129				1,830				1,404
Research and development		4,643				4,495				3,869				3,180				2,664
Depreciation and amortization		164				179				125				69				28
		11,035				10,963				9,501				8,509				6,423
Loss from operations		(8,210	)			(7,796	)			(5,287	)			(5,760	)			(2,343	)
Interest expense		447				416				221				18				4,851
Change in fair value of derivative liabilities		—				—				4,776				4,712				(3,970	)
Other income, net		(145	)			(297	)			(443	)			(322	)			(25	)
Loss before income taxes		(8,512	)			(7,915	)			(9,841	)			(10,168	)			(3,199	)
Income tax (benefit) expense		22				25				8				22				(19	)
Net loss	$	(8,534	)		$	(7,940	)		$	(9,849	)		$	(10,190	)		$	(3,180	)
Preferred dividends		(1,065	)			(51	)			(51	)			(51	)			(383	)
Net loss available to common shareholders	$	(9,599	)		$	(7,991	)		$	(9,900	)		$	(10,241	)		$	(3,563	)
Basic and diluted loss per common share
Net loss	$	(0.09	)		$	(0.09	)		$	(0.12	)		$	(0.14	)		$	(0.12	)
Preferred dividends		(0.01	)			(—	)			(—	)			(—	)			(0.01	)
Basic and diluted loss per share available to common shareholders	$	(0.10	)		$	(0.09	)		$	(0.12	)		$	(0.14	)		$	(0.13	)
Basic and diluted weighted-average shares outstanding		93,786,079				91,795,971				81,231,962				70,894,916				27,316,475

 

 

Balance Sheet Data: (In thousands, except share and per share amounts)	December 31,
	2015				2014				2013				2012				2011
ASSETS
Current Assets:
Cash and cash equivalents	$	3,352			$	218			$	2,363			$	4,225			$	6,773
Accounts receivable, net of allowance for doubtful accounts		349				266				302				328				348
Inventory, net		46				916				505				262				45
Other current assets		69				86				148				86				66
Total Current Assets		3,816				1,486				3,318				4,901				7,232
Property and equipment, net		162				211				245				150				18
Other assets		98				153				395				44				58
Intangible assets, net of accumulated amortization		117				144				172				200				63
Goodwill		3,416				3,416				3,416				3,416				3,416
Total Assets	$	7,609			$	5,410			$	7,546			$	8,711			$	10,787
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable	$	198			$	459			$	486			$	759			$	1,103
Deferred revenue		1,059				1,827				1,662				1,561				1,066
Accrued expenses		1,149				1,013				924				1,266				2,005
Derivative liabilities		—				—				57				—				—
Notes payable to related parties		—				—				55				65				110
Total Current Liabilities		2,406				3,299				3,184				3,651				4,284
Convertible secured notes payable, net of discount		—				1,311				—				—				—
Derivative liabilities		—				—				—				2,244				11,824
Pension obligation		1,511				1,834				1,031				401				—
Other long-term liabilities		—				—				—				72				391
Total Liabilities		3,917				6,444				4,215				6,368				16,499
Shareholders’ Equity (Deficit):
Preferred stock, authorized 4,000,000 shares:
Series B Convertible Redeemable Preferred Stock, $0.01 par value		2				2				2				2				2
Series E Convertible Redeemable Preferred stock, $0.01 par value		—				—				—				—				—
Common Stock, $0.01 par value		940				934				874				765				679
Additional paid-in capital		149,902				135,982				131,652				120,182				101,720
Treasury stock, at cost		(64	)			(64	)			(64	)			(64	)			(64	)
Accumulated other comprehensive loss		(1,195	)			(1,594	)			(830	)			(139	)			(65	)
Accumulated deficit		(145,893	)			(136,294	)			(128,303	)			(118,403	)			(107,984	)
Total Shareholders’ Equity (Deficit)		3,692				( 1,034	)			3,331				2,343				(5,712	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	7,609			$	5,410			$	7,546			$	8,711			$	10,787