ImageWare Systems (IWSY) 10-Q 14 Aug 17 2017 Q2 Quarterly report Financial data

Document and Entity Information

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Aug. 14, 2017
Document And Entity Information
Entity Registrant Name	IMAGEWARE SYSTEMS INC
Entity Central Index Key	941,685
Document Type	10-Q
Document Period End Date	Jun. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		93,141,118
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2,017

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Current Assets:
Cash and cash equivalents	$ 104	$ 1,586
Accounts receivable, net of allowance for doubtful accounts of $16 at June 30, 2017 and $1 at December 31, 2016.	332	287
Inventory, net	53	23
Other current assets	148	135
Total Current Assets	637	2,031
Property and equipment, net	62	93
Other assets	35	34
Intangible assets, net of accumulated amortization	100	106
Goodwill	3,416	3,416
Total Assets	4,250	5,680
Current Liabilities:
Accounts payable	343	425
Deferred revenue	608	1,045
Accrued expenses	1,237	1,047
Convertible lines of credit to related parties, net of discount	0	2,528
Total Current Liabilities	2,188	5,045
Convertible lines of credit to related parties, net of discount	5,687	0
Pension obligation	1,955	1,895
Total Liabilities	9,830	6,940
Shareholders’ Equity (Deficit):
Common Stock, $0.01 par value, 150,000,000 shares authorized; 93,147,822 and 91,853,499 shares issued at June 30, 2017 and December 31, 2016, respectively, 93,141,118 and 91,846,795 shares outstanding at June 30, 2017 and December 31, 2016, respectively.	930	917
Additional paid in capital	158,236	156,195
Treasury stock, at cost 6,704 shares	(64)	(64)
Accumulated other comprehensive loss	(1,621)	(1,543)
Accumulated deficit	(163,063)	(156,767)
Total Shareholders' Deficit	(5,580)	(1,260)
Total Liabilities and Shareholders' Deficit	4,250	5,680
Series B Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	2	2
Series E Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	0	0
Series F Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	0	0
Series G Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	$ 0	$ 0

CONDENSED CONSOLIDATED BALANCE3

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Current Assets:
Accounts receivable, net of allowance for doubtful accounts	$ 16	$ 1
Shareholders' deficit:
Preferred stock, shares authorized	4,000,000	4,000,000
Common stock, par value	$ .01	$ 0.01
Common stock, shares authorised	150,000,000	150,000,000
Common stock, shares issued	93,147,822	91,853,499
Common stock, shares outstanding	93,141,118	91,846,795
Treasury stock, shares	6,704	6,704
Series B Preferred Stock [Member]
Shareholders' deficit:
Preferred stock, Par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	750,000	750,000
Preferred stock, shares issued	389,400	389,400
Preferred stock, shares outstanding	239,400	239,400
Preferred stock, liquidation preference	$ 607	$ 607
Series E Preferred Stock [Member]
Shareholders' deficit:
Preferred stock, Par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	12,000	12,000
Preferred stock, shares issued	12,000	12,000
Preferred stock, shares outstanding	12,000	12,000
Preferred stock, liquidation preference	$ 12,000	$ 12,000
Series F Preferred Stock [Member]
Shareholders' deficit:
Preferred stock, Par value	$ .01	$ 0.01
Preferred stock, shares authorized	2,000	2,000
Preferred stock, shares issued	2,000	2,000
Preferred stock, shares outstanding	2,000	2,000
Preferred stock, liquidation preference	$ 2,000	$ 2,000
Series G Preferred Stock [Member]
Shareholders' deficit:
Preferred stock, Par value	$ .01	$ 0.01
Preferred stock, shares authorized	6,120	6,120
Preferred stock, shares issued	6,021	6,021
Preferred stock, shares outstanding	6,021	6,021
Preferred stock, liquidation preference	$ 6,021	$ 6,021

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Revenue:
Product	$ 407	$ 356	$ 680	$ 759
Maintenance	653	640	1,309	1,280
Revenues	1,060	996	1,989	2,039
Cost of revenue:
Product	36	56	90	130
Maintenance	214	219	423	424
Gross profit	810	721	1,476	1,485
Operating expense:
General and administrative	1,042	899	2,087	1,905
Sales and marketing	702	743	1,463	1,416
Research and development	1,479	1,318	2,943	2,631
Depreciation and amortization	17	35	38	70
Total	3,240	2,995	6,531	6,022
Loss from operations	(2,430)	(2,274)	(5,055)	(4,537)
Interest expense, net	164	36	264	46
Other income, net	(50)	(200)	(50)	(200)
Loss before income taxes	(2,544)	(2,110)	(5,269)	(4,383)
Income tax expense	3	4	7	6
Net loss	(2,547)	(2,114)	(5,276)	(4,389)
Preferred dividends	(514)	(309)	(1,021)	(657)
Net loss available to common shareholders	$ (3,061)	$ (2,423)	$ (6,297)	$ (5,046)
Basic income and diluted loss per common share - see Note 3:
Net loss	$ (0.03)	$ (0.02)	$ (0.06)	$ (0.05)
Preferred dividends	0	(0.01)	(0.01)	0
Basic and diluted loss per share available to common shareholders	$ (0.03)	$ (0.03)	$ (0.07)	$ (0.05)
Basic and diluted weighted-average shares outstanding	92,539,230	94,298,567	92,203,567	94,185,967

CONDENSED CONSOLIDATED STATEME5

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Condensed Consolidated Statements Of Comprehensive Income Loss
Net loss	$ (2,547)	$ (2,114)	$ (5,276)	$ (4,389)
Other comprehensive income (loss):
Foreign currency translation adjustment	(61)	23	(78)	(31)
Comprehensive loss	$ (2,608)	$ (2,091)	$ (5,354)	$ (4,420)

CONDENSED CONSOLIDATED STATEME6

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Cash flows from operating activities
Net loss	$ (5,276)	$ (4,389)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	38	70
Amortization of debt issuance costs and beneficial conversion feature	97	37
Reduction in accrued expense from the expiration of statute of limitations	0	(200)
Provision for losses on accounts receivable	15	0
Stock-based compensation	550	565
Gain from sale of trademark	50	0
Change in assets and liabilities
Accounts receivable	(60)	75
Inventory	(30)	(28)
Other assets	(21)	(73)
Accounts payable	(82)	0
Deferred revenue	(438)	(434)
Accrued expense	192	(129)
Pension obligation	60	81
Total adjustments	271	(36)
Net cash used in operating activities	(5,005)	(4,425)
Cash flows from investing activities
Purchase of property and equipment	(1)	(44)
Proceeds received from sale of trademark	50	0
Net cash used in investing activities	49	(44)
Cash flows from financing activities
Proceeds from exercised stock options	227	0
Proceeds from lines of credit, net	3,350	1,500
Dividends paid	(25)	(25)
Net cash provided by financing activities	3,552	1,475
Effect of exchange rate changes on cash	(78)	(31)
Net decrease in cash	(1,482)	(3,025)
Cash at beginning of period	1,586	3,352
Cash at end of period	104	327
Supplemental disclosure of cash flow information:
Cash paid for interest	0	1
Cash paid for income taxes	0	0
Summary of non-cash investing and financing activities:
Beneficial conversion feature of convertible related party lines of credit	281	121
Stock dividend on Convertible Redeemable Preferred Stock	$ 996	$ 631

ORGANIZATION AND DESCRIPTION OF

ORGANIZATION AND DESCRIPTION OF BUSINESS	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
ORGANIZATION AND DESCRIPTION OF BUSINESS	Overview As used in this Quarterly Report, “we,” “us,” “our,” “ImageWare,” “ImageWare Systems,” “Company” or “our Company” refers to ImageWare Systems, Inc. and all of its subsidiaries. ImageWare Systems, Inc. is incorporated in the state of Delaware. The Company is a pioneer and leader in the emerging market for biometrically enabled software-based identity management solutions. Using those human characteristics that are unique to us all, the Company creates software that provides a highly reliable indication of a person’s identity. The Company’s “flagship” product is the patented IWS Biometric Engine®. The Company’s products are used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials. The Company’s products also provide law enforcement with integrated mug shot, fingerprint LiveScan and investigative capabilities. The Company also provides comprehensive authentication security software using biometrics to secure physical and logical access to facilities or computer networks or internet sites. Biometric technology is now an integral part of all markets the Company addresses and all of the products are integrated into the IWS Biometric Engine. Liquidity, Going Concern and Management’s Plan Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt, including our Lines of Credit (defined below). Our principal uses of cash have included cash used in operations, product development, payments relating to purchases of property and equipment and repayments of borrowings. We expect that our principal uses of cash in the future will be for product development including customization of identity management products for enterprise and consumer applications, further development of intellectual property, development of Software-as-a-Service (“ SaaS Going Concern At June 30, 2017, we had a working capital deficit of approximately $1,551,000. Our principal sources of liquidity at June 30, 2017 consisted of approximately $104,000 of cash and $332,000 of trade accounts receivable. Considering our projected cash requirements, our available cash will be insufficient to satisfy our cash requirements for the next twelve months from the date of this filing. These factors raise substantial doubt about our ability to continue as a going concern. To address our working capital requirements, management will continue to seek additional equity and/or debt financing through the issuance of additional debt and/or equity securities prior to the end of the quarter ended September 30, 2017. There are currently no formal committed financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt and/or equity securities, and no assurances can be given that we will be successful in raising additional debt and/or equity securities. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and generate positive cash flows from operations. However, the Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will be able to obtain additional capital, operate at a profit or generate positive cash flows in the future. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

SIGNIFICANT ACCOUNTING POLICIES

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION	Basis of Presentation The accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“ GAAP SEC Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017, or any other future periods. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are XImage Corporation, a California Corporation, ImageWare Systems ID Group, Inc. a Delaware corporation (formerly Imaging Technology Corporation), I.W. Systems Canada Company, a Nova Scotia unlimited liability company, ImageWare Digital Photography Systems, Inc., LLC a Nevada limited liability company (formerly Castleworks LLC), Digital Imaging International GmbH, a company formed under German laws and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“ U.S. GAAP Accounts Receivable In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful. Inventories Finished goods inventories are stated at the lower of cost, determined using the average cost method, or market. See Note 4, “ Inventory Fair Value of Financial Instruments For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expenses, deferred revenues and lines of credit payable to related parties, the carrying amounts approximate fair value due to their relatively short maturities. Recognition The Company recognizes revenue from the following major revenue sources: ● Long-term fixed-price contracts involving significant customization ● Fixed-price contracts involving minimal customization ● Software licensing ● Sales of computer hardware and identification media ● Post-contract customer support (“ PCS The Company’s revenue recognition policies are consistent with GAAP including the Financial Accounting Standards Board (“ FASB ASC Software Revenue Recognition Revenue Recognition, Construction-Type and Production-Type Contracts Revenue Recognition, Multiple Element Arrangements The Company recognizes revenue and profit as work progresses on long-term, fixed-price contracts involving significant amounts of hardware and software customization using the percentage of completion method based on costs incurred to date, compared to total estimated costs upon completion. The primary components of costs incurred are third party software and direct labor cost including fringe benefits. Revenue recognized in excess of amounts billed are classified as current assets under “Costs and estimated earnings in excess of billings on uncompleted contracts”. Amounts billed to customers in excess of revenue recognized are classified as current liabilities under “Billings in excess of costs and estimated earnings on uncompleted contracts”. Revenue from contracts for which the Company cannot reliably estimate total costs, or there are not significant amounts of customization, are recognized upon completion. For contracts that require significant amounts of customization that the Company accounts for under the completed contract method of revenue recognition, the Company defers revenue recognition until customer acceptance is received. For contracts containing either extended or dependent payment terms, revenue recognition is deferred until such time as payment has been received by the Company. Customer Concentration For the three months ended June 30, 2017, one customer accounted for approximately 17% or $184,000 of our total revenue and had trade receivables at June 30, 2017of $0. For the six months ended June 30, 2017, one customer accounted for approximately 19% or $368,000 of our total revenue and had trade receivables at June 30, 2017of $0. For the three months ended June 30, 2016, two customers accounted for approximately 31% or $313,000 of our total revenue and had trade receivables at June 30, 2016 of $0. For the six months ended June 30, 2016, two customers accounted for approximately 32% or $644,000 of our total revenue and had trade receivables at June 30, 2016 of $53,000. Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “ FASB FASB ASU No. 2014-09. ASU Revenue from Contracts with Customers FASB ASU No. 2016-01 Financial Instruments—Overall - Recognition and Measurement of Financial Assets and Financial Liabilities”. FASB ASU No. 2016-02 Leases” FASB ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU 2016-08 FASB ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU 2016-10 FASB ASU No. 2016-13 inancial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. FASB ASU No. 2016-15. In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. FASB ASU No. 2017-04. Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments of this ASU eliminate step 2 from the goodwill impairment test. The annual, or interim test is performed by comparing the fair value of a reporting unit with its carrying amount. The amendments of this ASU also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and if it fails that qualitative test, to perform step 2 of the goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. FASB ASU No. 2017-09. In May 2017, the FASB issued ASU No. 2017-09, “ Scope of Modification Accounting Stock Compensation FASB ASU No. 2017-11. Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral” The Company is currently evaluating the potential impact of this updated guidance on its consolidated financial statements.

NET LOSS PER COMMON SHARE

NET LOSS PER COMMON SHARE	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
NET LOSS PER COMMON SHARE	Basic loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing net loss available to common shareholders for the period by the weighted-average number of common shares outstanding during the period, adjusted to include, if dilutive, potential dilutive shares consisting of convertible preferred stock, convertible related party lines of credit, stock options and warrants, calculated using the treasury stock and if-converted methods. For diluted loss per share calculation purposes, the net loss available to common shareholders is adjusted to add back any preferred stock dividends and any interest on convertible debt reflected in the condensed consolidated statement of operations for the respective periods. The table below presents the computation of basic and diluted loss per share: (Amounts in thousands except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2017 2016 2017 2016 Numerator for basic and diluted loss per share: Net loss $ (2,547 ) $ (2,114 ) $ (5,276 ) $ (4,389 ) Preferred dividends (514 ) (309 ) (1,021 ) (657 ) Net loss available to common shareholders $ (3,061 ) $ (2,423 ) $ (6,297 ) $ (5,046 ) Denominator for basic and dilutive loss per share – weighted-average shares outstanding 92,539,230 94,298,567 92,203,567 94,185,967 Net loss $ (0.03 ) $ (0.02 ) $ (0.06 ) $ (0.05 ) Preferred dividends (0.00 ) (0.01 ) (0.01 ) (0.00 ) Basic and diluted loss per share available to common shareholders $ (0.03 ) $ (0.03 ) $ (0.07 ) $ (0.05 ) The following potential dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as their effect would have been antidilutive: Potential Dilutive securities Three and Six Months Ended June 30, 2017 2016 Related party lines of credit 5,016,236 1,209,635 Convertible redeemable preferred stock 11,709,151 6,361,818 Stock options 6,171,555 5,582,136 Warrants 175,000 450,000 Total potential dilutive securities 23,071,942 13,603,589

SELECT BALANCE SHEET DETAILS

SELECT BALANCE SHEET DETAILS	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
SELECT BALANCE SHEET DETAILS	Inventory Inventories of $53,000 as of June 30, 2017 were comprised of work in process of $47,000 representing direct labor costs on in-process projects and finished goods of $6,000 net of reserves for obsolete and slow-moving items of $3,000. Inventories of $23,000 as of December 31, 2016 were comprised of work in process of $19,000 representing direct labor costs on in-process projects and finished goods of $4,000 net of reserves for obsolete and slow-moving items of $3,000. Intangible Assets The carrying amounts of the Company’s patent intangible assets were $100,000 and $106,000 as of June 30, 2017 and December 31, 2016, respectively, which includes accumulated amortization of $560,000 and $554,000 as of June 30, 2017 and December 31, 2016, respectively. Amortization expense for patent intangible assets was $3,000 and $6,000 for the three and six months ended June 30, 2017 and 2016, respectively. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 9.0 years. The estimated acquired intangible amortization expense for the next five fiscal years is as follows: Fiscal Year Ended December 31, Estimated Amortization Expense ($ in thousands) 2017 (six months) $ 6 2018 12 2019 12 2020 12 2021 12 Thereafter 46 Totals $ 100 Goodwill The Company annually, or more frequently if events or circumstances indicate a need, tests the carrying amount of goodwill for impairment. A two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of goodwill impairment loss, if any. The first step was conducted by determining and comparing the fair value, employing the market approach, of the Company’s reporting unit to the carrying value of the reporting unit. The Company continues to have only one reporting unit, Identity Management. Based on the results of this impairment test, the Company determined that its goodwill was not impaired as of June 30, 2017 and December 31, 2016.

LINES OF CREDIT WITH RELATED PA

LINES OF CREDIT WITH RELATED PARTIES	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
LINES OF CREDIT WITH RELATED PARTIES	Outstanding lines of credit consist of the following: ($ in thousands) June 30 2017 December 31, 2016 Lines of Credit 8% convertible lines of credit. Face value of advances under lines of credit $6,000 and $2,650 at June 30, 2017 and December 31, 2016, respectively. Discount on advances under lines of credit is $313 at June 30, 2017 and $122 at December 31, 2016. Maturity date is December 31, 2018. $ 5,687 $ 2,528 Total lines of credit to related parties 5,687 2,528 Less current portion (— ) (2,528 ) Long-term lines of credit to related parties $ 5,687 $ — Lines of Credit In March 2013, the Company and Neal Goldman, a member of the Company’s Board of Directors (“ Goldman Goldman Line of Credit Amendment As consideration for the initial Goldman Line of Credit, the Company issued a warrant to Goldman, exercisable for 1,052,632 shares of the Company’s Common Stock (the " Line of Credit Warrant Amendment Warrant The Company estimated the fair value of the Line of Credit Warrant using the Black-Scholes option pricing model using the following assumptions: term of two years, a risk-free interest rate of 2.58%, a dividend yield of 0%, and volatility of 79%. The Company recorded the fair value of the Line of Credit Warrant as a deferred financing fee of approximately $580,000 to be amortized over the life of the Goldman Line of Credit. The Company estimated the fair value of the Amendment Warrant using the Black-Scholes option pricing model using the following assumptions: term on one year, a risk-free interest rate of 2.58%, a dividend yield of 0% and volatility of 74%. The Company recorded the fair value of the Amendment Warrant as an additional deferred financing fee of approximately $127,000 to be amortized over the life of the Goldman Line of Credit. During the three and six months ended June 30, 2017, the Company recorded an aggregate of approximately $2,000 and $7,000, respectively in deferred financing fee amortization expense. During the three and six months ended June 30, 2016, the Company recorded an aggregate of approximately $12,000 and $24,000, respectively in deferred financing fee amortization expense. Such expense is recorded as a component of interest expense in the Company’s condensed consolidated statements of operations. In April 2014, the Company and Goldman entered into a further amendment to the Goldman Line of Credit to decrease the available borrowings to $3.0 million (the “ Second Amendment Crocker Crocker LOC In December 2014, the Company and Goldman entered into a further amendment to the Goldman Line of Credit to increase the available borrowing to $5.0 million and extend the maturity date of the Goldman Line of Credit to March 27, 2017 (the “ Third Amendment Outstanding Balance In February 2015, as a result of the Series E Financing, the Company issued 1,978 shares of Series E Preferred to Goldman to satisfy $1,950,000 in principal borrowings under the Goldman Line of Credit plus approximately $28,000 in accrued interest. As a result of the Series E Financing, the Company’s borrowing capacity under the Goldman Line of Credit was reduced to $3,050,000 with the maturity date unchanged and the Crocker LOC was terminated in accordance with its terms. In March 2016, the Company and Goldman entered into a fourth amendment to the Goldman Line of Credit (the “ Fourth Amendment Contemporaneous with the execution of the Fourth Amendment, the Company entered into a new $500K Line of Credit (the “ New Crocker LOC On December 27, 2016, in connection with the consummation of the Series G Financing, the Company and Holder agreed to enter into the Fifth Amendment (the “ Line of Credit Amendment In addition, on January 23, 2017, the Company and Crocker amended the New Crocker LOC to extend the maturity date thereof to December 31, 2017. No other amendments were made to the New Crocker LOC. On May 10, 2017, Goldman and Crocker agreed to further extend the maturity dates of Lines of Credit to December 31, 2018. As the aforementioned amendments to the Lines of Credit resulted in an increase to the borrowing capacity of the Lines of Credit, the Company adjusted the amortization period of any remaining unamortized deferred costs and note discounts to the term of the new arrangement. The Company evaluated the Lines of Credit and determined that the instruments contain a contingent beneficial conversion feature, i.e. an embedded conversion right that enables the holder to obtain the underlying Common Stock at a price below market value. The beneficial conversion feature is contingent as the terms of the conversion do not permit the Company to compute the number of shares that the holder would receive if the contingent event occurs (i.e. future borrowings under the Line of Credit). The Company has considered the accounting for this contingent beneficial conversion feature using the guidance in ASC 470, Debt. The guidance in ASC 470 states that a contingent beneficial conversion feature in an instrument shall not be recognized in earnings until the contingency is resolved. The beneficial conversion features of future borrowings under the Line of Credit will be measured using the intrinsic value calculated at the date the contingency is resolved using the conversion price and trading value of the Company’s Common Stock at the date the Lines of Credit were issued (commitment date). Pursuant to borrowings made during the 2015 year, the Company recognized approximately $146,000 in beneficial conversion feature as debt discount. As a result of the retirement of all amounts outstanding under the Lines of Credit in 2015, the Company recognized all remaining unamortized debt discount of approximately $385,000 as a component of interest expense during the three months ended March 31, 2015. The Company incurred borrowings of $2,650,000 during the year ended December 31, 2016 and incurred borrowings of $3,350,000 during the six months ended June 30, 2017. As a result of these borrowings under the Lines of Credit, the Company recorded approximately $220,000 in debt discount attributable to the beneficial conversion feature during the year ended December 31, 2016 and recorded approximately $281,000 in debt discount attributable to beneficial conversion feature during the six months ended June 30, 2017. During the three and six months ended June 30, 2017, the Company accreted approximately $55,000 and $90,000, respectively, of debt discount. During the three and six months ended June 30, 2016, the Company accreted approximately $12,000 of the note discount.

EQUITY

EQUITY	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
EQUITY	The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”. The Preferred Stock may be divided into such number of series and with the rights, preferences, privileges and restrictions as the Board of Directors may determine. Series B Convertible Redeemable Preferred Stock The Company had 239,400 shares of Series B Convertible Redeemable Preferred Stock (“ Series B Preferred Series E Convertible Redeemable Preferred Stock On January 29, 2015, the Company filed the Certificate of Designations of the Series E Preferred Stock with the Delaware Secretary of State, designating 12,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series E Preferred. Shares of Series E Preferred accrue dividends at a rate of 8% per annum if the Company chooses to pay accrued dividends in cash, and 10% per annum if the Company chooses to pay accrued dividends in shares of Common Stock. Each share of Series E Preferred has a liquidation preference of $1,000 per share and is convertible, at the option of the holder, into that number of shares of the Company’s Common Stock equal to the Liquidation Preference, divided by $1.90. The Series E Preferred shall be subordinate to and rank junior to the Company's Series B Preferred and all indebtedness of the Company. Each holder of the Series E Preferred is entitled to vote on all matters, together with the holders of Common Stock, on an as converted basis. Any time after the six-month period following the issuance date, in the event the arithmetic average of the closing sales price of the Company’s Common Stock is or was at least $2.85 for twenty (20) consecutive trading days, the Company may redeem all or a portion of the Series E Preferred outstanding upon thirty (30) calendar day's prior written notice (the “ Company's Redemption Notice In February 2015, the Company consummated a registered direct offering conducted without an underwriter or placement agent. In connection therewith, the Company issued 12,000 shares of Series E Preferred to certain investors at a price of $1,000 per share, with each share convertible into 526.32 shares of the Company’s Common Stock at $1.90 per share. On December 29, 2016, the Company filed Amendment No. 1 to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (the “ Series E Amendment Director Appointment Provision The Company had 12,000 shares of Series E Preferred outstanding as of June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, the Company had cumulative undeclared dividends of $0. There were no conversions of Series E Preferred into Common Stock during the six months ended June 30, 2017 and 2016. The Company issued the holders of Series E Preferred 301,720 shares of Common Stock on June 30, 2017 as payment of dividends due on that date. Series F Convertible Redeemable Preferred Stock In September 2016, we filed the Certificate of Designations, Preferences, and Rights of the Series F Convertible Preferred Stock (the “ Certificate of Designations Series F Preferred Each share of Series F Preferred has a liquidation preference of $1,000 per share (“ Liquidation Preferenc Series F Conversion Shares Any time after the six-month period following the issuance date, in the event the arithmetic average of the closing sales price of the Company’s Common Stock is or was at least $2.50 for twenty (20) consecutive trading days, the Company may redeem all or a portion of the Series F Preferred outstanding upon thirty (30) calendar days prior written notice in cash at a price per share of Series F Preferred equal to 110% of the Series F Liquidation Preference, plus all accrued and unpaid dividends. Also, simultaneous with the occurrence of a Change of Control transaction (as defined in the Certificate of Designations), the Company, at its option, shall have the right to redeem all or a portion of the outstanding Series F Preferred in cash at a price per share of Series F Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends. In September 2016, the Company offered and sold 2,000 shares of Series F Preferred for $1,000 per share (the “ Series F Financing The Company had 2,000 shares of Series F Preferred outstanding as of June 30, 2017 and December 31, 2016 Series G Convertible Redeemable Preferred Stock In December 27, 2016, the Company filed the Certificate of Designations, Preferences, and Rights of the Series G Convertible Preferred Stock with the Delaware Division of Corporations, designating 6,120 shares of the Company’s preferred stock, par value $0.01 per share, as Series G Convertible Preferred Stock (“ Series G Preferred Series G Liquidation Preferenc Any time after the six-month period following the issuance date, in the event the arithmetic average of the closing sales price of the Company’s Common Stock is or was at least $2.50 for twenty (20) consecutive trading days, the Company may redeem all or a portion of the Series G Preferred outstanding upon thirty (30) calendar days prior written notice in cash at a price per share of Series G Preferred equal to 110% of the Series G Liquidation Preference, plus all accrued and unpaid dividends. Also, simultaneous with the occurrence of a Change of Control transaction (as defined in the Certificate of Designations), the Company, at its option, shall have the right to redeem all or a portion of the outstanding Series G Preferred in cash at a price per share of Series G Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends. On December 29, 2016, the Company accepted subscription forms from certain accredited investors to purchase a total of 1,625 shares of Series G Preferred for $1,000 per share (the “ Series G Financing The Company had 6,021 shares of Series G Preferred outstanding as of June 30, 2017 and December 31, 2016. At June 30, 2017 and December 31, 2016, the Company had cumulative undeclared dividends of $0. There were no conversions of Series G Preferred into Common Stock during the six months ended June 30, 2017 and 2016. The Company issued the holders of Series G Preferred 149,773 shares of Common Stock on June 30, 2017 as payment of dividends due on that date. For the six months ended June 30, 2017, the Company has issued the holders of Series G Preferred 291,170 shares of Common Stock as payment of dividends due. Common Stock The following table summarizes Common Stock activity for the six months ended June 30, 2017: Common Stock Shares outstanding at December 31, 2016 91,846,795 Shares issued as payment of stock dividend on Series E Preferred 584,437 Shares issued as payment of stock dividend on Series F Preferred 96,716 Shares issued as payment of stock dividend on Series G Preferred 291,170 Shares issued pursuant to option exercises 322,000 Shares outstanding at June 30, 2017 93,141,118 Warrants The following table summarizes warrant activity for the following periods: Warrants Weighted- Average Exercise Price Balance at December 31, 2016 175,000 $ 0.84 Granted — — Expired / Canceled — — Exercised — Balance at June 30, 2017 175,000 $ 0.84 As of June 30, 2017, warrants to purchase 175,000 shares of Common Stock at prices ranging from $0.80 to $1.10 were outstanding. There were 25,000 warrants exercisable as of June 30, 2017 which expire on September 1, 2017. There are 150,000 warrants which will become exercisable only upon the attainment of specified events. The intrinsic value of warrants outstanding at June 30, 2017 was approximately $30,000. Stock-Based Compensation The 1999 Plan was adopted by the Company’s Board of Directors on December 17, 1999. Under the terms of the 1999 Plan, the Company could, originally, issue up to 350,000 non-qualified or incentive stock options to purchase Common Stock of the Company. During the year ended December 31, 2014, the Company subsequently amended and restated the 1999 Plan whereby it increased the share reserve for issuance to approximately 7.0 million shares of the Company’s Common Stock. The 1999 Plan prohibits the grant of stock option or stock appreciation right awards with an exercise price less than fair market value of Common Stock on the date of grant. The 1999 Plan also generally prohibits the “re-pricing” of stock options or stock appreciation rights, although awards may be bought-out for a payment in cash or the Company’s stock. The 1999 Plan permits the grant of stock based awards other than stock options, including the grant of “full value” awards such as restricted stock, stock units and performance shares. The 1999 Plan permits the qualification of awards under the plan (payable in either stock or cash) as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code. The number of options issued and outstanding and the number of options remaining available for future issuance are shown in the table below. On July 1, 2014, the Company began soliciting written consents from its shareholders to approve an amendment to the Company’s 1999 Stock Option Plan to increase the number of shares authorized for issuance thereunder from approximately 4.0 million to approximately 7.0 million (the “ Amendment The Company estimates the fair value of its stock options using a Black-Scholes option-valuation model, consistent with the provisions of ASC No. 718 , Compensation – Stock Compensation ASC No. 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option-valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The Company is required to make various assumptions in the application of the Black-Scholes option-valuation model. The Company has determined that the best measure of expected volatility is based on the historical weekly volatility of the Company’s Common Stock. Historical volatility factors utilized in the Company’s Black-Scholes computations for the six months ended June 30, 2017 and 2016 ranged from 58% to 121%. The Company has elected to estimate the expected life of an award based upon the SEC approved “simplified method” noted under the provisions of Staff Accounting Bulletin No. 110. The expected term used by the Company during the six months ended June 30, 2017 and 2016 was 5.17 years. The difference between the actual historical expected life and the simplified method was immaterial. The interest rate used is the risk-free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Company’s Black-Scholes calculations for the six months ended June 30, 2017 and 2016 was 2.6%. Dividend yield is zero, as the Company does not expect to declare any dividends on the Company’s Common Stock in the foreseeable future. In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a critical assumption. The Company has estimated an annualized forfeiture rate of approximately 0% for corporate officers, 4.1% for members of the Board of Directors and 6.0% for all other employees. The Company reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience. A summary of the activity under the Company’s stock option plans is as follows: Options Weighted-Average Exercise Price Balance at December 31, 2016 6,506,843 $ 1.21 Granted 35,000 $ 1.05 Expired/Cancelled (48,288 ) $ 2.01 Exercised (322,000 ) $ 0.71 Balance at June 30, 2017 6,171,555 $ 1.22 The intrinsic value of options exercisable at June 30, 2017 was approximately $568,000. The aggregate intrinsic value for all options outstanding as of June 30, 2017 was approximately $568,000. The weighted-average grant-date per share fair value of options granted during the six months ended June 30, 2017 was $0.53. At June 30, 2017, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $1,328,000 which will be recognized over a weighted-average period of 1.9 years. In September 2016, the Company issued an aggregate of 168,000 options to purchase shares of the Company’s Common Stock to certain members of the Company’s Board of Directors in return for their service from January 1, 2017 through December 31, 2017. Such options will vest at the rate of 14,000 options per month on the last day of each month during the 2017 year. The options have an exercise price of $1.37 per share and a term of 10 years. The Company began recognition of compensation based on the grant-date fair value ratably over the 2017 requisite service period. In May 2016, the Company issued an aggregate of 16,000 options to purchase shares of the Company’s Common Stock to a new member of the Company’s Board of Directors in return for their service from May 2016 through December 31, 2016. Such options vest at the rate of 2,000 options per month on the last day of each month during the 2016 year. The options have an exercise price of $1.29 per share and a term of 10 years. Pursuant to this issuance, the Company recorded compensation based on the grant-date fair value ratably over the 2016 requisite service period. In September 2015, the Company issued an aggregate of 144,000 options to purchase shares of the Company’s Common Stock to certain members of the Company’s Board of Directors in return for their service from January 1, 2016 through December 31, 2016. Such options vest at the rate of 12,000 options per month on the last day of each month during the 2016 year. The options have an exercise price of $1.73 per share and a term of 10 years. Pursuant to this issuance, the Company recorded compensation based on the grant-date fair value ratably over the 2016 requisite service period. Stock-based compensation related to equity options, including options granted to certain members of the Company’s Board of Directors, has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2017 2016 2017 2016 Cost of revenue $ 5 $ 5 $ 10 $ 10 General and administrative 165 172 329 346 Sales and marketing 55 54 110 109 Research and development 50 49 101 100 Total $ 275 $ 280 $ 550 $ 565

FAIR VALUE ACCOUNTING

FAIR VALUE ACCOUNTING	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
FAIR VALUE ACCOUNTING	The Company accounts for fair value measurements in accordance with ASC 820, “ Fair Value Measurements and Disclosures ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Fair Value at June 30, 2017 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,789 $ 1,789 $ — $ — Totals $ 1,789 $ 1,789 $ — $ — Fair Value at December 31, 2016 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,645 $ 1,645 $ — $ — Totals $ 1,645 $ 1,645 $ — $ —

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
RELATED PARTY TRANSACTIONS	The Company has certain Lines of Credit extended by certain members of the Company’s Board of Directors. For a more detailed discussion of the Company’s Lines of Credit, see Note 5 - Lines of Credit. As of June 30, 2017, the Company had borrowed $5,500,000 under the terms of the Goldman LOC and $500,000 under the terms of the New Crocker LOC. Each of Messrs. Goldman and Crocker are members of the Board of Directors of the Company.

CONTINGENT LIABILITIES

CONTINGENT LIABILITIES	6 Months Ended
	Jun. 30, 2017
Notes to Financial Statements
CONTINGENT LIABILITIES	Employment Agreements The Company has employment agreements with its Chief Executive Officer, its Senior Vice President of Administration and Chief Financial Officer, and its Chief Technical Officer. The Company may terminate the agreements with or without cause. Subject to the conditions and other limitations set forth in each respective employment agreement, each executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination (as defined in the employment agreements) by the Company or by the executive: Under the terms of the agreement, the Chief Executive Officer will be entitled to the following severance benefits if we terminate his employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to twenty-four months’ base salary; (ii) continuation of fringe benefits and medical insurance for a period of three years; and (iii) immediate vesting of 50% of outstanding stock options and restricted stock awards. In the event that the Chief Executive Officer’s employment is terminated within six months prior to or thirteen months following a change of control (as defined in the employment agreements), the Chief Executive Officer is entitled to the severance benefits described above, except that 100% of the Chief Executive Officer’s outstanding stock options and restricted stock awards will immediately vest. Under the terms of the employment agreements with our Senior Vice President of Administration and Chief Financial Officer, this executive will be entitled to the following severance benefits if we terminate their employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to six months of base salary; (ii) continuation of their fringe benefits and medical insurance for a period of six months; and (iii) immediate vesting of 50% of their outstanding stock options and restricted stock awards. In the event that their employment is terminated within six months prior to or thirteen months following a change of control (as defined in the employment agreements), they are entitled to the severance benefits described above, except that 100% of their outstanding stock options and restricted stock awards will immediately vest. Under the terms of the employment agreement with our Chief Technical Officer, this executive will be entitled to the following severance benefits if we terminate his employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to six months of base salary; and (ii) continuation of their fringe benefits and medical insurance for a period of six months. In the event that his employment is terminated within six months prior to or thirteen months following a change of control (as defined in the employment agreements), he is entitled to the severance benefits described above, except that 100% of his outstanding stock options and restricted stock awards will immediately vest. Effective October 20, 2016, the employment agreements for the Company's Chief Executive Officer, Chief Financial Officer and Chief Technical Officer were amended to extend the term of each executive officer's employment agreement until December 31, 2017. Litigation There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. Leases The Company’s corporate headquarters are located in San Diego, California where we occupy 9,927 square feet of office space. This facility is leased through October 2017 at a cost of approximately $18,000 per month. In addition to our corporate headquarters, we also occupied the following spaces at June 30, 2017: ● 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, 2021. This lease was renewed in April 2016 for a five-year period ending on March 31, 2021. Renewal terms were substantially unchanged from the existing lease; ● 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 ● 304 square feet of office space in Mexico City, Mexico, at a cost of approximately $3,000 per month until November 30, 2017. At June 30, 2017, future minimum lease payments are as follows: ($ in thousands) 2017 (six months) $ 208 2018 203 2019 35 2020 35 2021 9 Total $ 490 Rental expense incurred under operating leases for the six months ended June 30, 2017 and 2016 was approximately $256,000 and $242,000, respectively.

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS	6 Months Ended
	Jun. 30, 2017
Subsequent Events [Abstract]
SUBSEQUENT EVENTS	Subsequent to June 30, 2017, the Company received an aggregate of $875,000 from Goldman and S. James Miller, the Company’s Chief Executive Officer, to provide for the Company’s short-term working capital requirements.

SIGNIFICANT ACCOUNTING POLICI17

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Policies)	6 Months Ended
	Jun. 30, 2017
Significant Accounting Policies And Basis Of Presentation Policies
Basis of Presentation	The accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“ GAAP SEC Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017, or any other future periods.
Principles of Consolidation	The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s wholly-owned subsidiaries are XImage Corporation, a California Corporation, ImageWare Systems ID Group, Inc. a Delaware corporation (formerly Imaging Technology Corporation), I.W. Systems Canada Company, a Nova Scotia unlimited liability company, ImageWare Digital Photography Systems, Inc., LLC a Nevada limited liability company (formerly Castleworks LLC), Digital Imaging International GmbH, a company formed under German laws and Image Ware Mexico S de RL de CV, a company formed under Mexican laws. All significant intercompany transactions and balances have been eliminated.
Use of Estimates	The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“ U.S. GAAP
Accounts receivable	In the normal course of business, the Company extends credit without collateral requirements to its customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful.
Inventories	Finished goods inventories are stated at the lower of cost, determined using the average cost method, or market. See Note 4, “ Inventory
Fair Value of Financial Instruments	For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expenses, deferred revenues and lines of credit payable to related parties, the carrying amounts approximate fair value due to their relatively short maturities.
Revenue recognition	The Company recognizes revenue from the following major revenue sources: ● Long-term fixed-price contracts involving significant customization ● Fixed-price contracts involving minimal customization ● Software licensing ● Sales of computer hardware and identification media ● Post-contract customer support (“ PCS The Company’s revenue recognition policies are consistent with GAAP including the Financial Accounting Standards Board (“ FASB ASC Software Revenue Recognition Revenue Recognition, Construction-Type and Production-Type Contracts Revenue Recognition, Multiple Element Arrangements The Company recognizes revenue and profit as work progresses on long-term, fixed-price contracts involving significant amounts of hardware and software customization using the percentage of completion method based on costs incurred to date, compared to total estimated costs upon completion. The primary components of costs incurred are third party software and direct labor cost including fringe benefits. Revenue recognized in excess of amounts billed are classified as current assets under “Costs and estimated earnings in excess of billings on uncompleted contracts”. Amounts billed to customers in excess of revenue recognized are classified as current liabilities under “Billings in excess of costs and estimated earnings on uncompleted contracts”. Revenue from contracts for which the Company cannot reliably estimate total costs, or there are not significant amounts of customization, are recognized upon completion. For contracts that require significant amounts of customization that the Company accounts for under the completed contract method of revenue recognition, the Company defers revenue recognition until customer acceptance is received. For contracts containing either extended or dependent payment terms, revenue recognition is deferred until such time as payment has been received by the Company.
Customer Concentration	For the three months ended June 30, 2017, one customer accounted for approximately 17% or $184,000 of our total revenue and had trade receivables at June 30, 2017of $0. For the six months ended June 30, 2017, one customer accounted for approximately 19% or $368,000 of our total revenue and had trade receivables at June 30, 2017of $0. For the three months ended June 30, 2016, two customers accounted for approximately 31% or $313,000 of our total revenue and had trade receivables at June 30, 2016 of $0. For the six months ended June 30, 2016, two customers accounted for approximately 32% or $644,000 of our total revenue and had trade receivables at June 30, 2016 of $53,000.
Recently Issued Accounting Standards	From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “ FASB FASB ASU No. 2014-09. ASU Revenue from Contracts with Customers FASB ASU No. 2016-01 Financial Instruments—Overall - Recognition and Measurement of Financial Assets and Financial Liabilities”. FASB ASU No. 2016-02 Leases” FASB ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU 2016-08 FASB ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU 2016-10 FASB ASU No. 2016-13 inancial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. FASB ASU No. 2016-15. In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. FASB ASU No. 2017-04. Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments of this ASU eliminate step 2 from the goodwill impairment test. The annual, or interim test is performed by comparing the fair value of a reporting unit with its carrying amount. The amendments of this ASU also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and if it fails that qualitative test, to perform step 2 of the goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. FASB ASU No. 2017-09. In May 2017, the FASB issued ASU No. 2017-09, “ Scope of Modification Accounting Stock Compensation FASB ASU No. 2017-11. Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral” The Company is currently evaluating the potential impact of this updated guidance on its consolidated financial statements.

NET LOSS PER COMMON SHARE (Tabl

NET LOSS PER COMMON SHARE (Tables)	6 Months Ended
	Jun. 30, 2017
Net Loss Per Common Share Tables
Computation of basic and diluted loss per share	(Amounts in thousands except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2017 2016 2017 2016 Numerator for basic and diluted loss per share: Net loss $ (2,547 ) $ (2,114 ) $ (5,276 ) $ (4,389 ) Preferred dividends (514 ) (309 ) (1,021 ) (657 ) Net loss available to common shareholders $ (3,061 ) $ (2,423 ) $ (6,297 ) $ (5,046 ) Denominator for basic and dilutive loss per share – weighted-average shares outstanding 92,539,230 94,298,567 92,203,567 94,185,967 Net loss $ (0.03 ) $ (0.02 ) $ (0.06 ) $ (0.05 ) Preferred dividends (0.00 ) (0.01 ) (0.01 ) (0.00 ) Basic and diluted loss per share available to common shareholders $ (0.03 ) $ (0.03 ) $ (0.07 ) $ (0.05 )
Weighted-average securities from calculation of diluted loss per share	Potential Dilutive securities Three and Six Months Ended June 30, 2017 2016 Related party lines of credit 5,016,236 1,209,635 Convertible redeemable preferred stock 11,709,151 6,361,818 Stock options 6,171,555 5,582,136 Warrants 175,000 450,000 Total potential dilutive securities 23,071,942 13,603,589

SELECT BALANCE SHEET DETAILS (T

SELECT BALANCE SHEET DETAILS (Tables)	6 Months Ended
	Jun. 30, 2017
Select Balance Sheet Details Tables
Estimated acquired intangible amortization expense	Fiscal Year Ended December 31, Estimated Amortization Expense ($ in thousands) 2017 (six months) $ 6 2018 12 2019 12 2020 12 2021 12 Thereafter 46 Totals $ 100

LINES OF CREDIT WITH RELATED 20

LINES OF CREDIT WITH RELATED PARTIES (Tables)	6 Months Ended
	Jun. 30, 2017
Line Of Credit Tables
Line of Credit	($ in thousands) June 30 2017 December 31, 2016 Lines of Credit 8% convertible lines of credit. Face value of advances under lines of credit $6,000 and $2,650 at June 30, 2017 and December 31, 2016, respectively. Discount on advances under lines of credit is $313 at June 30, 2017 and $122 at December 31, 2016. Maturity date is December 31, 2018. $ 5,687 $ 2,528 Total lines of credit to related parties 5,687 2,528 Less current portion (— ) (2,528 ) Long-term lines of credit to related parties $ 5,687 $ —

EQUITY (Tables)

EQUITY (Tables)	6 Months Ended
	Jun. 30, 2017
Equity Tables
Summary of common stock activity	Common Stock Shares outstanding at December 31, 2016 91,846,795 Shares issued as payment of stock dividend on Series E Preferred 584,437 Shares issued as payment of stock dividend on Series F Preferred 96,716 Shares issued as payment of stock dividend on Series G Preferred 291,170 Shares issued pursuant to option exercises 322,000 Shares outstanding at June 30, 2017 93,141,118
Summary of warrant activity	Warrants Weighted- Average Exercise Price Balance at December 31, 2016 175,000 $ 0.84 Granted — — Expired / Canceled — — Exercised — Balance at June 30, 2017 175,000 $ 0.84
Summary of stock option plans activity	Options Weighted-Average Exercise Price Balance at December 31, 2016 6,506,843 $ 1.21 Granted 35,000 $ 1.05 Expired/Cancelled (48,288 ) $ 2.01 Exercised (322,000 ) $ 0.71 Balance at June 30, 2017 6,171,555 $ 1.22
Stock based compensation expense allocation	Three Months Ended June 30, Six Months Ended June 30, 2017 2016 2017 2016 Cost of revenue $ 5 $ 5 $ 10 $ 10 General and administrative 165 172 329 346 Sales and marketing 55 54 110 109 Research and development 50 49 101 100 Total $ 275 $ 280 $ 550 $ 565

FAIR VALUE ACCOUNTING (Tables)

FAIR VALUE ACCOUNTING (Tables)	6 Months Ended
	Jun. 30, 2017
Fair Value Accounting Tables
Fair value measurement of Assets and liability	Fair Value at June 30, 2017 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,789 $ 1,789 $ — $ — Totals $ 1,789 $ 1,789 $ — $ — Fair Value at December 31, 2016 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,645 $ 1,645 $ — $ — Totals $ 1,645 $ 1,645 $ — $ —

CONTINGENT LIABILITIES (Tables)

CONTINGENT LIABILITIES (Tables)	6 Months Ended
	Jun. 30, 2017
Contingent Liabilities Tables
Future minimum lease payments	($ in thousands) 2017 (six months) $ 208 2018 203 2019 35 2020 35 2021 9 Total $ 490

ORGANIZATION AND DESCRIPTION 24

ORGANIZATION AND DESCRIPTION OF BUSINESS (Details Narrative) $ in Thousands	6 Months Ended
	Jun. 30, 2017USD ($)
Organization And Description Of Business Details Narrative
State of incorporation	Delaware
Working capital deficit	$ 1,551

SIGNIFICANT ACCOUNTING POLICI25

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Total revenues	$ 1,060	$ 996	$ 1,989	$ 2,039

NET LOSS PER COMMON SHARE (Deta

NET LOSS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Numerator for basic and diluted loss per share:
Net loss	$ (2,547)	$ (2,114)	$ (5,276)	$ (4,389)
Preferred dividends	(514)	(309)	(1,021)	(657)
Net loss available to common shareholders	$ (3,061)	$ (2,423)	$ (6,297)	$ (5,046)
Denominator for basic and dilutive loss per share weighted-average shares outstanding	92,539,230	94,298,567	92,203,567	94,185,967
Net loss	$ (0.03)	$ (0.02)	$ (0.06)	$ (0.05)
Preferred dividends	0	(0.01)	(0.01)	0
Net loss available to common shareholders	$ (0.03)	$ (0.03)	$ (0.07)	$ (0.05)

NET LOSS PER COMMON SHARE (De27

NET LOSS PER COMMON SHARE (Details 1) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Dilutive securities
Total dilutive securities	23,071,942	13,603,589	23,071,942	13,603,589
Related party lines of credit [Member]
Dilutive securities
Total dilutive securities	5,016,236	1,209,635	5,016,236	1,209,635
Convertible Preferred Stock [Member]
Dilutive securities
Total dilutive securities	11,709,151	6,361,818	11,709,151	6,361,818
Stock Option [Member]
Dilutive securities
Total dilutive securities	6,171,555	5,582,136	6,171,555	5,582,136
Warrants [Member]
Dilutive securities
Total dilutive securities	175,000	450,000	175,000	450,000

SELECT BALANCE SHEET DETAILS (D

SELECT BALANCE SHEET DETAILS (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Select Balance Sheet Details Details
2017 (6 months)	$ 6
2,018	12
2,019	12
2,020	12
2,021	12
Thereafter	46
Totals	$ 100	$ 106

SELECT BALANCE SHEET DETAILS 29

SELECT BALANCE SHEET DETAILS (Details Narrative) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Inventory	$ 53	$ 23
Work in process	47	19
Finished goods	6	4
Reserves for obsolete and slow-moving items	3	3
Accumulated amortization	560	554
Patents [Member]
Carrying amounts of patent assets	$ 100	$ 106

LINES OF CREDIT WITH RELATED 30

LINES OF CREDIT WITH RELATED PARTIES (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Total Line of Credit	$ 5,687	$ 2,528
Less current portion	0	(2,528)
Total lines of credit to related parties	(5,687)	0
LOC Outstanding	$ 6,000	$ 2,650
Line of credit interest rate	8.00%	8.00%
Line of credit discount	$ 313	$ 122
Line of Credit 1 [Member]
Total Line of Credit	$ 5,687	$ 2,528

LINES OF CREDIT WITH RELATED 31

LINES OF CREDIT WITH RELATED PARTIES (Details Narratives) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Lines Of Credit With Related Parties Details Narratives
Deferred Financing Fee Accumulated Amortization	$ 2	$ 12	$ 7	$ 24
Beneficial conversion feature debt discount			281		$ 220
Amortization of debt discount	$ 55	$ 12	$ 90	$ 12

EQUITY (Details)

EQUITY (Details)	6 Months Ended
	Jun. 30, 2017shares
Equity Details
At beginning of period	91,846,795
Shares issued as payment of stock dividend on Series E Preferred	584,437
Shares issued as payment of stock dividend on Series F Preferred	96,716
Shares issued as payment of stock dividend on Series G Preferred	291,170
Share issued pursuant to option exercises	322,000
At end of period	93,141,118

EQUITY (Details 1)

EQUITY (Details 1) - Warrants [Member]	6 Months Ended
	Jun. 30, 2017$ / sharesshares
Begining Balance	175,000
Granted	0
Expired/Cancelled	0
Exercised	0
Ending Balance	175,000
Begining Balance, Weighted-Average Exercise Price | $ / shares	$ 0.84
Granted, Weighted-Average Exercise Price | $ / shares	0
Expired/Cancelled, Weighted-Average Exercise Price | $ / shares	0
Ending Balance, Weighted-Average Exercise Price | $ / shares	$ 0.84

EQUITY (Details 2)

EQUITY (Details 2) - Stock Option Plan [Member]	6 Months Ended
	Jun. 30, 2017$ / sharesshares
Begining Balance | shares	6,506,843
Granted | shares	35,000
Expired/Cancelled | shares	(48,288)
Exercised | shares	(322,000)
Ending Balance | shares	6,171,555
Begining Balance, Weighted-Average Exercise Price | $ / shares	$ 1.21
Granted, Weighted-Average Exercise Price | $ / shares	1.05
Expired/Cancelled, Weighted-Average Exercise Price | $ / shares	2.01
Exercised, Weighted-Average Exercise Price | $ / shares	0.71
Ending Balance, Weighted-Average Exercise Price | $ / shares	$ 1.22

EQUITY (Details 3)

EQUITY (Details 3) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Stock based compensation, expense	$ 275	$ 280	$ 550	$ 565
Cost of Revenue [Member]
Stock based compensation, expense	5	5	10	10
General and Administrative Expense [Member]
Stock based compensation, expense	165	172	329	346
Sales and marketing [Member]
Stock based compensation, expense	55	54	110	109
Research and Development Expense [Member]
Stock based compensation, expense	$ 50	$ 49	$ 101	$ 100

EQUITY (Details Narrative)

EQUITY (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Dividend payment			584,437
Share issued pursuant to option exercises for cash			322,000
Compensation expense	$ 240	$ 480	$ 233	$ 475
Intrinsic value, options exercisable	568		568
Intrinsic value, options outstanding	$ 568		$ 568
Series B Preferred Stock [Member]
Preferred stock, shares outstanding	239,400		239,400		239,400
Undeclared dividends	$ 8		$ 8		$ 8
Series E Preferred Stock [Member]
Preferred stock, shares outstanding	12,000		12,000		12,000
Undeclared dividends					$ 0
Series F Preferred Stock [Member]
Preferred stock, shares outstanding	2,000		2,000		2,000
Undeclared dividends					$ 0
Series G Preferred Stock [Member]
Preferred stock, shares outstanding	6,021		6,021		6,021
Undeclared dividends					$ 0

FAIR VALUE ACCOUNTING (Details)

FAIR VALUE ACCOUNTING (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Assets:
Pension assets	$ 1,789	$ 1,645
Totals	1,789	1,645
Fair Value, Inputs, Level 1 [Member]
Assets:
Pension assets	1,789	1,645
Totals	1,789	1,645
Fair Value, Inputs, Level 2 [Member]
Assets:
Pension assets	0	0
Totals	0	0
Fair Value, Inputs, Level 3 [Member]
Assets:
Pension assets	0	0
Totals	$ 0	$ 0

RELATED PARTY TRANSACTIONS (Det

RELATED PARTY TRANSACTIONS (Details Narrative) $ in Thousands	6 Months Ended
	Jun. 30, 2017USD ($)
Goldman [Member]
LOC borrowings during period	$ 5,500
Crocker [Member]
LOC borrowings during period	$ 500

CONTINGENT LIABILITIES (Details

CONTINGENT LIABILITIES (Details) $ in Thousands	Jun. 30, 2017USD ($)
Contingent Liabilities Details
2017 (6 months)	$ 208
2,018	203
2,019	35
2,020	35
2,021	9
Total	$ 490

CONTINGENT LIABILITIES (Detai40

CONTINGENT LIABILITIES (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Rental expense	$ 256	$ 242	$ 256	$ 242
Portland [Member]
Future lease payment	16		16
Ontario Canada [Member]
Future lease payment	3		3
Mexico City [Member]
Future lease payment	3		3
Headquarters [Member]
Future lease payment	$ 18		$ 18