Earlier today I announced a re-initiation of our position in IWSY on Twitter. I've had a more than two year history with this name, originally profiling the company during the first half of 2013 when the stock was trading below $1. The original research report from March 2013 is available here.
The biggest frustration for investors in IWSY has been the lack of tangible earnings coming to fruition despite numerous announcements of partnerships and test pilots with major corporations and government sponsored entities. What investors don't realize are the inner-workings of the software business as it pertains to biometrics. In speaking with two software engineers over the past few months, they told me that product testing cycles for major corporations and especially government organizations is a multi-year endeavor. This becomes all the more stretched out when you are dealing with a new technology, such as biometrics. And add to that the fact that the technology IWSY is developing will protect sensitive personal and government information, you start getting the picture of why any organization involved in a test pilot of their technology would want to make sure everything is 100% effective before launching an actual program.
Once the programs launch, whether in the case of Deutsche Bahn, the major retailer in Mexico (rumored to be Wal-Mart), or the newly announced partnership with Lockheed Martin, the SaaS model that has been implemented flows almost purely to the bottom line. The monthly user fees from just a single major contract instantly transforms the company into a substantial producer of cash flow. CEO Jim Miller has said the company will be cash flow positive by year end.
The partnerships the company has assembled over the past few years deserve to be noted: Fujitsu, IBM, Deutsche Telecom, CA, General Dynamics, Lockheed, HP, Microsoft, United Technologies to name a handful.
The issues of capitalization to achieve full realization of the company's potential were resolved earlier this year, as the company raised $12 million in a direct convertible preferred offering with largest shareholder Neal Goldman of Goldman Capital Management. Avoiding Wall Street institutions to act as a middle man for the transaction caused a bit of a rebellion by these institutions as they summarily downgraded IWSY following the capital raise.
The recent announcement of the Lockheed Martin contract is a substantial development for the company, acting as a conduit for adapting IWSY's technology into Federal Government projects. Here is the key line from that press release: " Lockheed Martin will offer the identity service to the federal government and other customers through its FedRAMP approved government community cloud – SolaS®."
There is also the issue of the new investor Charles Frischer of LF Family Partnership making a $10 million investment in IWSY during the first half of this year. Adding another substantial investor to the already impressive roster backing IWSY's technology.
Lastly, there is a tremendous margin of safety in this investment as there is an inherent "eject button" built into the current valuation. The "eject button" in case of widespread disappointment in bringing any of the current partnerships to fruition has to do with the core value of the technology and the patents associated with. The current valuation is giving little premium to match future projections for the practical utility of IWSY's unique multi-modal biometric technology.
T11 Capital has taken a mid-sized position in IWSY in the 1.70 range.
