ImageWare Systems (IWSY) 10-Q 10 May 18 2018 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2018	May 06, 2018
Document And Entity Information
Entity Registrant Name	IMAGEWARE SYSTEMS INC
Entity Central Index Key	941,685
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
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		95,166,959
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2,018

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Current Assets:
Cash and cash equivalents	$ 4,558	$ 7,317
Accounts receivable, net of allowance for doubtful accounts of $15 at March 31, 2018 and December 31, 2017.	284	458
Inventory, net	89	79
Other current assets	217	163
Total Current Assets	5,148	8,017
Property and equipment, net	40	43
Other assets	35	35
Intangible assets, net of accumulated amortization	90	93
Goodwill	3,416	3,416
Total Assets	8,729	11,604
Current Liabilities:
Accounts payable	432	457
Deferred revenue	878	1,016
Accrued expenses	812	658
Accrued interest payable to related parties	657	527
Convertible lines of credit to related parties, net of discount	5,821	5,774
Total Current Liabilities	8,600	8,432
Pension obligation	2,060	2,024
Total Liabilities	10,660	10,456
Shareholders’ Equity (Deficit):
Common Stock, $0.01 par value, 175,000,000 shares authorized; 95,121,575 and 94,174,540 shares issued at March 31, 2018 and December 31, 2017, respectively, and 95,114,871 and 94,167,836 shares outstanding at March 31, 2018 and December 31, 2017, respectively.	950	941
Additional paid in capital	173,595	172,414
Treasury stock, at cost 6,704 shares	64	64
Accumulated other comprehensive loss	(1,692)	(1,664)
Accumulated deficit	(174,722)	(170,481)
Total Shareholders’ Equity (Deficit)	(1,931)	1,148
Total Liabilities and Shareholders’ Equity (Deficit)	8,729	11,604
Series A Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	0	0
Series B Preferred Stock [Member]
Shareholders’ Equity (Deficit):
Preferred stock authorized 4,000,000 shares	$ 2	$ 2

CONDENSED CONSOLIDATED BALANCE3

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Current Assets:
Accounts receivable, net of allowance for doubtful accounts	$ 15	$ 15
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	95,121,575	94,174,540
Common stock, shares outstanding	95,114,871	94,167,836
Treasury stock, shares	6,704	6,704
Series A Preferred Stock [Member]
Shareholders' deficit:
Preferred stock, Par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	31,021	31,021
Preferred stock, shares issued	30,571	31,021
Preferred stock, shares outstanding	30,571	31,021
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	239,400
Preferred stock, shares outstanding	389,400	239,400

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Revenue:
Product	$ 97	$ 273
Maintenance	619	655
Revenues	716	928
Cost of revenue:
Product	26	54
Maintenance	222	208
Gross profit	468	666
Operating expense:
General and administrative	1,206	967
Sales and marketing	861	761
Research and development	1,799	1,541
Depreciation and amortization	12	21
Total	3,878	3,290
Loss from operations	(3,410)	(2,624)
Interest expense, net	(173)	(100)
Other income, net	0	0
Loss before income taxes	(3,583)	(2,724)
Income tax expense	0	3
Net loss	(3,583)	(2,727)
Preferred dividends	769	507
Net loss available to common shareholders	$ (4,352)	$ (3,234)
Basic income and diluted loss per common share - see Note 3:
Net loss	$ (0.04)	$ (0.03)
Preferred dividends	0.01	0.01
Basic and diluted loss per share available to common shareholders	$ (0.05)	$ (0.04)
Basic and diluted weighted-average shares outstanding	94,333,663	91,864,174

CONDENSED CONSOLIDATED STATEME5

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Condensed Consolidated Statements Of Comprehensive Income Loss
Net loss	$ (3,583)	$ (2,727)
Other comprehensive income (loss):
Foreign currency translation adjustment	(27)	(17)
Comprehensive loss	$ (3,610)	$ (2,744)

CONDENSED CONSOLIDATED STATEME6

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Cash flows from operating activities
Net loss	$ (3,583)	$ (2,727)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	12	21
Amortization of debt issuance costs and beneficial conversion feature	59	40
Stock-based compensation	335	274
Provision for losses on accounts receivable	0	15
Change in assets and liabilities
Accounts receivable	(269)	32
Inventory	10	20
Other assets	56	12
Accounts payable	(22)	(25)
Deferred revenue	(138)	(86)
Accrued expense	285	(63)
Pension obligation	35	15
Total adjustments	769	127
Net cash used in operating activities	(2,814)	(2,600)
Cash flows from investing activities
Purchase of property and equipment	7	1
Net cash provided by (used in) in investing activities	7	1
Cash flows from financing activities
Proceeds from exercised stock options	88	7
Proceeds from lines of credit, net	0	1,500
Net cash provided by financing activities	88	1,507
Effect of exchange rate changes on cash	(26)	(17)
Net decrease in cash	(2,759)	(1,111)
Cash at beginning of period	7,317	1,586
Cash at end of period	4,558	475
Supplemental disclosure of cash flow information:
Cash paid for interest	0	0
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	10	125
Stock dividend on Convertible Preferred Stock	756	494
Preferred Stock Exchange	$ 4	$ 0

ORGANIZATION AND DESCRIPTION OF

ORGANIZATION AND DESCRIPTION OF BUSINESS	3 Months Ended
	Mar. 31, 2018
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 the products are integrated into the IWS Biometric Engine. Recent Developments On February 8, 2018, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation, as amended, to increase the authorized number of shares of its common stock, par value $0.01 per share (“ Common Stock 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. 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 March 31, 2018, we had a working capital deficit of approximately $3,452,000. Our principal sources of liquidity at March 31, 2018 consisted of approximately $4,558,000 of cash and $284,000 of trade accounts receivable. Considering our projected cash requirements, and assuming we are unable to generate incremental revenue, our available cash may 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 may seek additional equity and/or debt financing through the issuance of additional debt and/or equity securities or may seek strategic or other transactions intended to increase shareholder value. There are currently no formal committed financing arrangements to support our projected cash shortfall, including commitments to purchase additional debt and/or equity securities, or other agreements, and no assurances can be given that we will be successful in raising additional debt and/or equity securities, or entering into any other transaction that addresses our ability to continue as a going concern. 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	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION	Basis of Presentation The accompanying condensed consolidated balance sheet as of December 31, 2017, 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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018, or any other future periods. Certain prior period amounts have been reclassified to conform with current period presentation. These reclassifications have no impact on net loss. 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, 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, inventory carrying values, deferred tax asset valuation allowances, accounting for loss contingencies, recoverability of goodwill and acquired intangible assets and amortization periods, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of Exchanged Preferred (defined below), assumptions used in the application of revenue recognition policies and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates. 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 net realizable value. See Note 4, “ Inventory Fair Value of Financial Instruments For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, deferred revenue and lines of credit payable to related parties, the carrying amounts approximate fair value due to their relatively short maturities. Revenue Recognition Effective January 1, 2018, we adopted Accounting Standards Codification (“ ASC ASC 606 In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model: 1. Identify the contract with the customer; 2. Identify the performance obligation in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) each performance obligation is satisfied. At contract inception, we assess the goods and services promised in a contract with a customer and identify as a performance obligation each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct or (ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. We recognize revenue only when we satisfy a performance obligation by transferring a promised good or service to a customer. Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement. We disclose disaggregation of our customer revenue by classes of similar products and services as follows: ● Software licensing and royalties; ● Sales of computer hardware and identification media; ● Services; and ● Post-contract customer support. Software licensing and royalties Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met. Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied. Computer hardware and identification media We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met. Services Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met. Post-contract customer support (“PCS”) Post contract customer support consists of maintenance on software and hardware for our identity management solutions. Arrangements with multiple performance obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and post-contract customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service and (ii) the percent discount off of list price approach. Contract costs We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. Other items We do not offer rights of return for our products and services in the normal course of business. Sales tax collected from customers is excluded from revenue. The adoption of ASC 606 as of January 1, 2018 resulted in a cumulative positive adjustment to beginning accumulated deficit and accounts receivable of approximately $95,000. For the three months ended March 31, 2018, the adoption of ASC 606 resulted in a reduction in royalty revenue of approximately $28,000. The following table sets forth our disaggregated revenue for the three months ended March 31, 2018 and 2017: Three Months Ended March 31, Net Revenue 2018 2017 (dollars in thousands) Software and royalties $ 84 $ 189 Hardware and consumables 1 47 Services 12 37 Maintenance 619 655 Total revenue $ 716 $ 928 Customer Concentration For the three months ended March 31, 2018, two customers accounted for approximately 38% or $275,000 of our total revenue and had trade receivables at March 31, 2018 of $74,000. For the three months ended March 31, 2017, two customers accounted for approximately 32% or $299,000 of our total revenue and had trade receivables at March 31, 2017 of $67,000. Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“ FASB FASB ASU No. 2016-02 Leases ” FASB ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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. 2017-07. Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Periodic Pension Cost and Net Periodic Postretirement Benefit Cost 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	3 Months Ended
	Mar. 31, 2018
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 March 31, 2018 2017 Numerator for basic and diluted loss per share: Net loss $ (3,583 ) $ (2,727 ) Preferred dividends (769 ) (507 ) Net loss available to common shareholders $ (4,352 ) $ (3,234 ) Denominator for basic and dilutive loss per share — weighted-average shares outstanding 94,333,663 91,864,174 Net loss $ (0.04 ) $ (0.03 ) Preferred dividends (0.01 ) (0.01 ) Basic and diluted loss per share available to common shareholders $ (0.05 ) $ (0.04 ) 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 Months Ended March 31, 2018 2017 Related party lines of credit 5,325,651 3,450,940 Convertible redeemable preferred stock 26,630,458 11,710,102 Stock options 7,273,431 6,491,931 Warrants 230,000 175,000 Total potential dilutive securities 39,459,540 21,827,973

SELECT BALANCE SHEET DETAILS

SELECT BALANCE SHEET DETAILS	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
SELECT BALANCE SHEET DETAILS	Inventory Inventories of $89,000 as of March 31, 2018 were comprised of work in process of $48,000 representing direct labor costs on in-process projects and finished goods of $41,000 net of reserves for obsolete and slow-moving items of $3,000. Inventories of $43,000 as of March 31, 2017 were comprised of work in process of $37,000 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. Intangible Assets The carrying amounts of the Company’s patent intangible assets were $90,000 and $93,000 as of March 31, 2018 and December 31, 2017, respectively, which includes accumulated amortization of $569,000 and $566,000 as of March 31, 2018 and December 31, 2017, respectively. Amortization expense for patent intangible assets was $3,000 for the three months ended March 31, 2018 and 2017. Patent intangible assets are being amortized on a straight-line basis over their remaining life of approximately 7.9 years. The estimated acquired intangible amortization expense for the next five fiscal years is as follows: Fiscal Year Ended December 31, Estimated Amortization Expense ($ in thousands) 2018 (nine months) $ 9 2019 12 2020 12 2021 12 2022 12 Thereafter 33 Totals $ 90 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 March 31, 2018 and December 31, 2017.

LINES OF CREDIT WITH RELATED PA

LINES OF CREDIT WITH RELATED PARTIES	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
LINES OF CREDIT WITH RELATED PARTIES	Outstanding lines of credit consist of the following: ($ in thousands) March 31, 2018 December 31, 2017 Lines of Credit with Related Parties 8% convertible lines of credit. Face value of advances under lines of credit $6,000 at March 31, 2018 and December 31, 2017. Discount on advances under lines of credit is $179 at March 31, 2018 and $226 at December 31, 2017. Maturity date is December 31, 2018. $ 5,821 $ 5,774 Total lines of credit to related parties 5,821 5,774 Less current portion (5,821 ) (5,774 ) Long-term lines of credit to related parties $ — $ — 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 of 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 months ended March 31, 2018, the Company recorded an aggregate of approximately $2,000 in deferred financing fee amortization expense. During the three months ended March 31, 2017, the Company recorded an aggregate of approximately $5,000 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 $500,000 line of credit with Crocker (the “ New Crocker LOC On December 27, 2016, in connection with the consummation of the Series G Financing, the Company and Goldman 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. On May 10, 2017, Goldman and Crocker agreed to further extend the maturity dates of the Goldman Line of Credit and the New Crocker Line of Credit (collectively, the “ Lines of Credit 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). The Company incurred no additional borrowings under the Lines of Credit during the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company incurred approximately $130,000 in accrued unpaid interest under the terms of the Lines of Credit. As a result of this interest accrual, the Company recorded an additional $10,000 in debt discount attributable to beneficial conversion feature and accreted approximately $59,000 of debt discount. During the three months ended March 31, 2017, the Company recorded approximately $125,000 in debt discount attributable to beneficial conversion feature and accreted approximately $35,000 of the note discount.

EQUITY

EQUITY	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
EQUITY	The Company’s Certificate of Incorporation, as amended, authorizes 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 A Convertible Preferred Stock On September 15, 2017, the Company filed the Certificate of Designations of the Series A Preferred with the Delaware Secretary of State, designating 31,021 shares of the Company’s preferred stock, par value $0.01 per share, as Series A Preferred. Shares of Series A 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 A 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 $1.15 (“ Conversion Shares Holders of Series A Preferred may elect to convert shares of Series A Preferred into Conversion Shares at any time. In the event the volume-weighted average price (“ VWAP On September 18, 2017, the Company offered and sold a total of 11,000 shares of Series A Preferred at a purchase price of $1,000 per share. The total net proceeds to the Company from the Series A Financing were approximately $10.9 million. Concurrently with the Series A Financing, the Company entered into Exchange Agreements with holders of all outstanding shares of the Company’s Series E Convertible Preferred Stock, all outstanding shares of the Company’s Series F Convertible Preferred Stock and all outstanding shares of the Company's Series G Convertible Preferred Stock (collectively, the “ Exchanged Preferred Preferred Stock Exchange The Company evaluated the Preferred Stock Exchange and determined that the Preferred Stock Exchange was both an induced conversion and an extinguishment transaction. Using the guidance in ASC 260-10-S99-2, Earnings Per Share – SEC Materials – SEC Staff Announcement: The Effect on the Calculations of Earnings Per Share for a Period That Includes the Redemption or Induced Conversion of Preferred Stock and Debt – Modifications and Extinguishments, The Company had 30,571 shares and 31,021 shares of Series A Preferred outstanding as of March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, the Company had cumulative undeclared dividends of $0. During the three months ended March 31, 2018 certain holders of Series A Preferred converted 450 shares of Series A Preferred into 391,304 shares of the Company’s Common Stock. The Company issued the holders of Series A Preferred 472,562 shares of Common Stock on March 31, 2018 as payment of dividends due on that date. Series B Convertible Preferred Stock The Company had 239,400 shares of Series B Convertible Preferred Stock (“ Series B Preferred Common Stock On February 8, 2018, the Company filed with the Secretary of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation, as amended, to increase the authorized number of shares of its Common Stock to 175,000,000 from 150,000,000 shares. The following table summarizes Common Stock activity for the three months ended March 31, 2018: Common Stock Shares outstanding at December 31, 2017 94,167,836 Shares issued as payment of stock dividend on Series A Preferred 472,562 Shares issued pursuant to conversion of Series A Preferred 391,304 Shares issued pursuant to option exercises 83,169 Shares outstanding at March 31, 2018 95,114,871 Warrants The following table summarizes warrant activity for the following periods: Warrants Weighted- Average Exercise Price Balance at December 31, 2017 230,000 $ 0.91 Granted — — Expired/Canceled — — Exercised — — Balance at March 31, 2018 230,000 $ 0.91 As of March 31, 2018, warrants to purchase 230,000 shares of Common Stock at an exercise prices ranging from $0.80 to $1.17 were outstanding. All warrants are exercisable as of March 31, 2018 and expire as of September 11, 2019, except for an aggregate of 150,000 warrants, which become exercisable only upon the attainment of specified events. The intrinsic value of warrants outstanding at March 31, 2018 was approximately $158,000. 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. Subsequently, in February 2018, the Company amended and restated the 1999 Plan, whereby it increased the share reserve for issuance by an additional 2.0 million shares. 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. The number of authorized shares available for issuance under the plan at March 31, 2018 was 837,177. 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 three months ended March 31, 2018 and 2017 ranged from 58% to 64%. 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 three months ended March 30, 2018 and 2017 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 three months ended March 31, 2018 and 2017 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, 2017 6,093,512 $ 1.23 Granted 1,303,000 $ 1.76 Expired/Cancelled (39,912 ) $ 1.34 Exercised (83,169 ) $ 1.05 Balance at March 31, 2018 7,273,431 $ 1.32 The intrinsic value of options exercisable at March 31, 2018 was approximately $2,409,000. The aggregate intrinsic value for all options outstanding as of March 31, 2018 was approximately $2,577,000. The weighted-average grant-date per share fair value of options granted during the three months ended March 31, 2018 was $0.99. At March 31, 2018, the total remaining unrecognized compensation cost related to unvested stock options amounted to approximately $1,780,000 which will be recognized over a weighted-average period of 1.87 years. In January 2018, the Company issued an aggregate of 324,000 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 on the Board from January 1, 2018 through December 31, 2018. Such options vest at the rate of 27,000 options per month on the last day of each month during the 2018 year. The options have an exercise price of $1.75 per share and a term of 10 years. Pursuant to this issuance, the Company recorded compensation expense of $62,000 during the three months ended March 31, 2018 based on the grant-date fair value of the options determined using the Black-Scholes option-valuation model. 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 March 31, 2018 2017 Cost of revenue $ 5 $ 5 General and administrative 216 164 Sales and marketing 60 55 Research and development 54 50 Total $ 335 $ 274

FAIR VALUE ACCOUNTING

FAIR VALUE ACCOUNTING	3 Months Ended
	Mar. 31, 2018
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 March 31, 2018 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,852 $ 1,852 $ — $ — Totals $ 1,852 $ 1,852 $ — $ — Fair Value at December 31, 2017 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,806 $ 1,806 $ — $ — Totals $ 1,806 $ 1,806 $ — $ —

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
RELATED PARTY TRANSACTIONS	Lines of Credit 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 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. Series A Financing Messrs. Miller and Goldman, Wayne Wetherell, the Company’s Chief Financial Officer, Robert T. Clutterbuck and Charles Frischer, two directors appointed as members of the Company’s Board of Directors in connection with the Series A Financing during 2017, purchased an aggregate of 1,450 Series A Preferred in connection with the Series A Financing resulting in gross proceeds of $1,450,000 to the Company. Messrs. Goldman, Clutterbuck and Frischer also exchanged an aggregate 11,364 shares of Series E Preferred, Series F Preferred and Series G Preferred for 11,364 shares of Series A Preferred in connection with the Series A Financing.

CONTINGENT LIABILITIES

CONTINGENT LIABILITIES	3 Months Ended
	Mar. 31, 2018
Notes to Financial Statements
CONTINGENT LIABILITIES	Employment Agreements The Company has employment agreements with its Chief Executive 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 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 September 15, 2017, the employment agreements for the Company’s Chief Executive Officer and Chief Technical Officer were amended to extend the term of each executive officer's employment agreement until December 31, 2018. 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’s lease was renewed in September 2017 through October 2018 at a cost of approximately $30,000 per month. In addition to our corporate headquarters, we also occupied the following spaces at March 31, 2018: ● 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; ● 9,720 square feet in Portland, Oregon, at a cost of approximately $21,000 per month until the expiration of the lease on December 31, 2021. This lease was renewed in September 2017 resulting in an additional 1,675 feet, an increase from approximately $18,000 to approximately $21,000 per month and the extension of the term from October 2018 to December 2021; and ● 304 square feet of office space in Mexico City, Mexico, at a cost of approximately $3,000 per month until November 30, 2017. At March 31, 2018, future minimum lease payments are as follows: ($ in thousands) 2018 (nine months) $ 444 2019 283 2020 290 2021 271 2022 271 Thereafter 46 Total $ 1,605 Rental expense incurred under operating leases for the three months ended March 31, 2018 and 2017 was approximately $171,000 and $125,000, respectively.

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS	3 Months Ended
	Mar. 31, 2018
Subsequent Events [Abstract]
SUBSEQUENT EVENTS	During April 2018, the Company issued 52,088 shares of its Common Stock pursuant to the exercise of 52,088 options resulting in cash proceeds to the Company of approximately $59,000.

SIGNIFICANT ACCOUNTING POLICI17

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Policies)	3 Months Ended
	Mar. 31, 2018
Significant Accounting Policies And Basis Of Presentation Policies
Basis of Presentation	The accompanying condensed consolidated balance sheet as of December 31, 2017, 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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018, or any other future periods. Certain prior period amounts have been reclassified to conform with current period presentation. These reclassifications have no impact on net loss.
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, 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include the evaluation of our ability to continue as a going concern, the allowance for doubtful accounts receivable, inventory carrying values, deferred tax asset valuation allowances, accounting for loss contingencies, recoverability of goodwill and acquired intangible assets and amortization periods, assumptions used in the Black-Scholes model to calculate the fair value of share based payments, fair value of Exchanged Preferred (defined below), assumptions used in the application of revenue recognition policies and assumptions used in the application of fair value methodologies to calculate the fair value of pension assets and obligations. Actual results could differ from estimates.
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 net realizable value. See Note 4, “ Inventory
Fair Value of Financial Instruments	For certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expense, deferred revenue and lines of credit payable to related parties, the carrying amounts approximate fair value due to their relatively short maturities.
Revenue recognition	Effective January 1, 2018, we adopted Accounting Standards Codification (“ ASC ASC 606 In accordance with ASC 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The core principle of the standard is that we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we apply the following five step model: 1. Identify the contract with the customer; 2. Identify the performance obligation in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) each performance obligation is satisfied. At contract inception, we assess the goods and services promised in a contract with a customer and identify as a performance obligation each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) that is distinct or (ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. We recognize revenue only when we satisfy a performance obligation by transferring a promised good or service to a customer. Determining the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations requires judgement. We disclose disaggregation of our customer revenue by classes of similar products and services as follows: ● Software licensing and royalties; ● Sales of computer hardware and identification media; ● Services; and ● Post-contract customer support. Software licensing and royalties Software licenses consist of revenue from the sale of software for identity management applications. Our software licenses are functional intellectual property and typically provide customers with the right to use our software in perpetuity as it exists when made available to the customer. We recognize revenue from software licensing at a point in time upon delivery, provided all other revenue recognition criteria are met. Royalties consist of revenue from usage-based arrangements and guaranteed minimum-based arrangements. We recognize revenue for royalty arrangements at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied. Computer hardware and identification media We generate revenue from the sale of computer hardware and identification media. Revenue for these items is recognized upon delivery of these products to the customer, provided all other revenue recognition criteria are met. Services Services revenue is comprised primarily of software customization services, software integration services, system installation services and customer training. Revenue is generally recognized upon completion of services and customer acceptance provided all other revenue recognition criteria are met. Post-contract customer support (“PCS”) Post contract customer support consists of maintenance on software and hardware for our identity management solutions. Arrangements with multiple performance obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In addition to selling software licenses, hardware and identification media, services and post-contract customer support on a standalone basis, certain contracts include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on our best estimate of the relative standalone selling price. The standalone selling price for a performance obligation is the price at which we would sell a promised good or service separately to a customer. The primary methods used to estimate standalone selling price are as follows: (i) the expected cost-plus margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service and (ii) the percent discount off of list price approach. Contract costs We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period is one year or less. Other items We do not offer rights of return for our products and services in the normal course of business. Sales tax collected from customers is excluded from revenue. The adoption of ASC 606 as of January 1, 2018 resulted in a cumulative positive adjustment to beginning accumulated deficit and accounts receivable of approximately $95,000. For the three months ended March 31, 2018, the adoption of ASC 606 resulted in a reduction in royalty revenue of approximately $28,000. The following table sets forth our disaggregated revenue for the three months ended March 31, 2018 and 2017: Three Months Ended March 31, Net Revenue 2018 2017 (dollars in thousands) Software and royalties $ 84 $ 189 Hardware and consumables 1 47 Services 12 37 Maintenance 619 655 Total revenue $ 716 $ 928
Customer Concentration	For the three months ended March 31, 2018, two customers accounted for approximately 38% or $275,000 of our total revenue and had trade receivables at March 31, 2018 of $74,000. For the three months ended March 31, 2017, two customers accounted for approximately 32% or $299,000 of our total revenue and had trade receivables at March 31, 2017 of $67,000.
Recently Issued Accounting Standards	From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“ FASB FASB ASU No. 2016-02 Leases ” FASB ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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. 2017-07. Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Periodic Pension Cost and Net Periodic Postretirement Benefit Cost 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)	3 Months Ended
	Mar. 31, 2018
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 March 31, 2018 2017 Numerator for basic and diluted loss per share: Net loss $ (3,583 ) $ (2,727 ) Preferred dividends (769 ) (507 ) Net loss available to common shareholders $ (4,352 ) $ (3,234 ) Denominator for basic and dilutive loss per share — weighted-average shares outstanding 94,333,663 91,864,174 Net loss $ (0.04 ) $ (0.03 ) Preferred dividends (0.01 ) (0.01 ) Basic and diluted loss per share available to common shareholders $ (0.05 ) $ (0.04 )
Antidilutive securities excluded from earnings per share	Potential Dilutive Securities Three Months Ended March 31, 2018 2017 Related party lines of credit 5,325,651 3,450,940 Convertible redeemable preferred stock 26,630,458 11,710,102 Stock options 7,273,431 6,491,931 Warrants 230,000 175,000 Total potential dilutive securities 39,459,540 21,827,973

SELECT BALANCE SHEET DETAILS (T

SELECT BALANCE SHEET DETAILS (Tables)	3 Months Ended
	Mar. 31, 2018
Select Balance Sheet Details Tables
Estimated acquired intangible amortization expense	Fiscal Year Ended December 31, Estimated Amortization Expense ($ in thousands) 2018 (nine months) $ 9 2019 12 2020 12 2021 12 2022 12 Thereafter 33 Totals $ 90

LINES OF CREDIT WITH RELATED 20

LINES OF CREDIT WITH RELATED PARTIES (Tables)	3 Months Ended
	Mar. 31, 2018
Line Of Credit Tables
Line of Credit	($ in thousands) March 31, 2018 December 31, 2017 Lines of Credit with Related Parties 8% convertible lines of credit. Face value of advances under lines of credit $6,000 at March 31, 2018 and December 31, 2017. Discount on advances under lines of credit is $179 at March 31, 2018 and $226 at December 31, 2017. Maturity date is December 31, 2018. $ 5,821 $ 5,774 Total lines of credit to related parties 5,821 5,774 Less current portion (5,821 ) (5,774 ) Long-term lines of credit to related parties $ — $ —

EQUITY (Tables)

EQUITY (Tables)	3 Months Ended
	Mar. 31, 2018
Equity Tables
Summary of common stock activity	Common Stock Shares outstanding at December 31, 2017 94,167,836 Shares issued as payment of stock dividend on Series A Preferred 472,562 Shares issued pursuant to conversion of Series A Preferred 391,304 Shares issued pursuant to option exercises 83,169 Shares outstanding at March 31, 2018 95,114,871
Summary of warrant activity	Warrants Weighted- Average Exercise Price Balance at December 31, 2017 230,000 $ 0.91 Granted — — Expired/Canceled — — Exercised — — Balance at March 31, 2018 230,000 $ 0.91
Summary of stock option plans activity	Options Weighted-Average Exercise Price Balance at December 31, 2017 6,093,512 $ 1.23 Granted 1,303,000 $ 1.76 Expired/Cancelled (39,912 ) $ 1.34 Exercised (83,169 ) $ 1.05 Balance at March 31, 2018 7,273,431 $ 1.32
Stock based compensation expense allocation	Three Months Ended March 31, 2018 2017 Cost of revenue $ 5 $ 5 General and administrative 216 164 Sales and marketing 60 55 Research and development 54 50 Total $ 335 $ 274

FAIR VALUE ACCOUNTING (Tables)

FAIR VALUE ACCOUNTING (Tables)	3 Months Ended
	Mar. 31, 2018
Fair Value Accounting Tables
Fair value measurement of Assets and liability	Fair Value at March 31, 2018 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,852 $ 1,852 $ — $ — Totals $ 1,852 $ 1,852 $ — $ — Fair Value at December 31, 2017 ($ in thousands) Total Level 1 Level 2 Level 3 Assets: Pension assets $ 1,806 $ 1,806 $ — $ — Totals $ 1,806 $ 1,806 $ — $ —

CONTINGENT LIABILITIES (Tables)

CONTINGENT LIABILITIES (Tables)	3 Months Ended
	Mar. 31, 2018
Contingent Liabilities Tables
Future minimum lease payments	($ in thousands) 2018 (nine months) $ 444 2019 283 2020 290 2021 271 2022 271 Thereafter 46 Total $ 1,605

ORGANIZATION AND DESCRIPTION 24

ORGANIZATION AND DESCRIPTION OF BUSINESS (Details Narrative) $ in Thousands	3 Months Ended
	Mar. 31, 2018USD ($)
Organization And Description Of Business Details Narrative
State of incorporation	Delaware
Working capital deficit	$ (3,452)

SIGNIFICANT ACCOUNTING POLICI25

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Total revenues	$ 716	$ 928

NET LOSS PER COMMON SHARE (Deta

NET LOSS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Numerator for basic and diluted loss per share:
Net loss	$ (3,583)	$ (2,727)
Preferred dividends	(769)	(507)
Net loss available to common shareholders	$ (4,352)	$ (3,234)
Net loss	$ (0.04)	$ (0.03)
Preferred dividends	(0.01)	(0.01)
Net loss available to common shareholders	$ (0.05)	$ (0.04)

NET LOSS PER COMMON SHARE (De27

NET LOSS PER COMMON SHARE (Details 1) - shares	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Dilutive securities
Total dilutive securities	39,459,540	21,827,973
Related party lines of credit [Member]
Dilutive securities
Total dilutive securities	5,325,651	3,450,940
Stock Option [Member]
Dilutive securities
Total dilutive securities	7,273,431	6,491,931
Warrants [Member]
Dilutive securities
Total dilutive securities	230,000	175,000
Convertible Preferred Stock [Member]
Dilutive securities
Total dilutive securities	26,630,458	11,710,102

SELECT BALANCE SHEET DETAILS (D

SELECT BALANCE SHEET DETAILS (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Select Balance Sheet Details Details
2018 (9 months)	$ 9
2,019	12
2,020	12
2,021	12
2,022	12
Thereafter	33
Totals	$ 90	$ 93

SELECT BALANCE SHEET DETAILS 29

SELECT BALANCE SHEET DETAILS (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Inventory	$ 89		$ 79
Work in process	48		37
Finished goods	41		6
Reserves for obsolete and slow-moving items	3		3
Amortization expense	$ 569	$ 566
Weighted-average remaining life of intangible assets	7 years 10 months 24 days
Patents [Member]
Carrying amounts of patent assets	$ 90		$ 93

LINES OF CREDIT WITH RELATED 30

LINES OF CREDIT WITH RELATED PARTIES (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Total Line of Credit	$ 5,821	$ 5,774
Less current portion	(5,821)	(5,774)
Total lines of credit to related parties	0	0
Line of Credit 1 [Member]
Total Line of Credit	$ 5,821	$ 5,774

EQUITY (Details)

EQUITY (Details)	3 Months Ended
	Mar. 31, 2018shares
Equity Details
At beginning of period	94,167,836
Shares issued as payment of stock dividend on Series A Preferred	472,562
Shares issued pursuant to conversion of Series A Preferred	391,304
Share issued pursuant to option exercises	83,169
At end of period	95,114,871

EQUITY (Details 1)

EQUITY (Details 1) - Warrants [Member]	3 Months Ended
	Mar. 31, 2018$ / sharesshares
Begining Balance | shares	230,000
Granted | shares	0
Expired/Cancelled | shares	0
Exercised | shares	0
Ending Balance | shares	230,000
Begining Balance, Weighted-Average Exercise Price | $ / shares	$ 0.91
Granted, Weighted-Average Exercise Price | $ / shares	0
Expired/Cancelled, Weighted-Average Exercise Price | $ / shares	0
Exercised, Weighted-Average Exercise Price | $ / shares	0
Ending Balance, Weighted-Average Exercise Price | $ / shares	$ 0.91

EQUITY (Details 2)

EQUITY (Details 2) - Stock Option Plan [Member]	3 Months Ended
	Mar. 31, 2018$ / sharesshares
Begining Balance | shares	6,093,512
Granted | shares	1,303,000
Expired/Cancelled | shares	(39,912)
Exercised | shares	(83,169)
Ending Balance | shares	7,273,431
Begining Balance, Weighted-Average Exercise Price | $ / shares	$ 1.23
Granted, Weighted-Average Exercise Price | $ / shares	1.76
Expired/Cancelled, Weighted-Average Exercise Price | $ / shares	1.34
Exercised, Weighted-Average Exercise Price | $ / shares	1.05
Ending Balance, Weighted-Average Exercise Price | $ / shares	$ 1.32

EQUITY (Details 3)

EQUITY (Details 3) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Stock based compensation, expense	$ 335	$ 274
Cost of Revenue [Member]
Stock based compensation, expense	5	5
General and Administrative Expense [Member]
Stock based compensation, expense	216	164
Sales and marketing [Member]
Stock based compensation, expense	60	55
Research and Development Expense [Member]
Stock based compensation, expense	$ 54	$ 50

EQUITY (Details Narrative)

EQUITY (Details Narrative) - shares	3 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Share issued pursuant to option exercises for cash	83,169
Series A Preferred Stock [Member]
Preferred stock, shares outstanding	30,571	31,021
Series B Preferred Stock [Member]
Preferred stock, shares outstanding	389,400	239,400

FAIR VALUE ACCOUNTING (Details)

FAIR VALUE ACCOUNTING (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Assets:
Pension assets	$ 1,852	$ 1,806
Totals	1,852	1,806
Fair Value, Inputs, Level 1 [Member]
Assets:
Pension assets	1,852	1,806
Totals	1,852	1,806
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	3 Months Ended
	Mar. 31, 2018USD ($)
Goldman [Member]
LOC borrowings during period	$ 5,500
Crocker [Member]
LOC borrowings during period	$ 500

CONTINGENT LIABILITIES (Details

CONTINGENT LIABILITIES (Details) $ in Thousands	Mar. 31, 2018USD ($)
Contingent Liabilities Details
2018 (9 months)	$ 444
2,019	283
2,020	290
2,021	271
2,022	271
Thereafter	46
Total	$ 1,605

CONTINGENT LIABILITIES (Detai39

CONTINGENT LIABILITIES (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Rental expense	$ 171	$ 125