Lou Basenese

About the Author Lou Basenese

Founder and Chief Analyst at Disruptive Tech Research – a technology research and advisory firm, focused on pinpointing the most promising disruptive technology investments. Early. I'm 100% independent. That means absolutely no pay-to-play arrangements, no hidden agendas and no hype. Just solid research. I employ a primary, bottom-up fundamental research approach to uncover investment ideas that are underfollowed, underappreciated and undervalued by the broader investment community. For the last decade, I have been providing independent economic and equity research for individual and institutional clients. I started my investment career at Morgan Stanley, where I helped direct over $1 billion in in institutional capital. After growing bored with the monotony of asset allocation studies, investment policy statements, manager searches and evaluations, and Retirement Plan Service Provider RFPs (among other things), I left and co-founded Wall Street Daily, which quickly became one of the web’s largest financial publishers with a daily circulation of more than 700,000 readers. I have been fortunate to appear regularly on CNBC’s Closing Bell, as well as be mentioned in other media outlets, including in The Wall Street Journal, The New York Times, Morningstar and MarketWatch. I earned my MBA from the Crummer Graduate School of Business at Rollins College, which is also were I met my beautiful wife.

Refuting The Short Thesis On Imageware (That I Predicted)

Just like I predicted would happen in my September 4 article, a short attack on Imageware Systems (OTCQB:IWSY) hit right before the closing bell yesterday.

Remember, I told you the short thesis would focus on valuation, incompetent management, dilution risks and sub-par technology. And it did just that, while throwing in a few more for good measure.

In an effort to get this published before the opening bell, at which point all the lemmings that don’t do their own due diligence will rush for the exits, I’m going to respond to the items that warrant a response.

1. Insiders didn’t “scramble” to sell their stock at $1.05.

The S-1 filing that The Pump Stopper (NYSEARCA:TPS) cited was required as a result of the PIPE. It’s a simple registration of securities. TPS conveniently left out that part of the press release he shared, though.

Here it is (emphasis mine):

The Company entered into a Registration Rights Agreement with each of the Purchasers pursuant to which the Company agreed to register for resale, (NYSE:I) the Shares, (ii) the Shares issuable upon exercise of the Warrants, (NASDAQ:III) the Exchange Shares; and (iv) certain other Shares held by third parties entitled to registration rights, including Shares issuable upon exercise of certain warrants held by such third parties. The Company agreed to file a registration statement no later than sixty days from the Closing. (Source: SEC)

Sure enough, the registration statement was filed within 60 days (50, to be exact).

Trying to characterize February 2012 as “recently” is more than a stretch, too.

Most important of all, the price on the original filing (and revisions) hasnothing to do with what insiders wanted. It’s an arbitrary price, based on the last closing price of the stock at the time of the registration.

Please don’t fall for these scare tactics.

2. The argument that the technology is “second tier” – and that Apple (NASDAQ:AAPL) “certainly looked at IWSY and passed” in 2012 – reveals a lack of understanding of the biometric space.

Apple needed biometric hardware in 2012. That’s why it bought AuthenTec, which was a company I recommended to readers for just under $3. (Yes, they still held it when the $8 per share takeover offer hit.) IWSY is a software solution, so Apple would not have been interested at the time.

Trying to suggest Aware is superior is likewise laughable. It’s majority controlled by a single family (Stafford), completely opaque (no quarterly calls or conference participation) and heavily weighted to government business.

What’s more, management liquidated the company’s most valuable patents and returned the proceeds to shareholders via special dividends.

The first sale came in April 2012, when Aware sold patents related to Wi-Fi, LTE and Wireline Home Networking technologies to Intel (NASDAQ:INTC) for $75 million.

I know because, once again, I’ve been following biometrics stocks for years and my readers were positioned in the stock and received the special dividend.

Long story short, trying to paint IWSY as the ugly duckling or the last kid picked in gym class because its technology is inferior just isn’t accurate.

Notice that TPS didn’t focus on IWSY’s tech at all. All he did was name other companies that might have similar tech. And since they do, IWSY’s tech must not be that great. That’s flimsy logic at best.

3. You can’t nullify partnerships by labeling them as “non-exclusive.”

The partnerships are legit. (More word games here.) Fujitsu has a dedicated sales force out selling Imageware’s solutions. I’m pretty sure other small cap, tech companies would take that kind of “non-exclusive” kind of relationship all day long.

IBM doesn’t list any other biometric service providers on its BlueMix Cloud Platform platform, which it’s spending billions on, by the way. Pretty sure if there was a better solution out there, IBM would have them on the platform, too.

4. Insiders and institutions aren’t scrambling to get out.

TPS tried to suggest Gruber & Mcbaine Capital Management, LLC liquidated its position. Not true.

The filing TPS links to shows shareholders as of June 20, 2014 and states it only reflects “each person known by us [IWSY] to beneficially own [shares].” Gruber is missing. But the second quarter 13F filing here reveals Gruber still owns 5,863,158 shares as of June 30.

There’s no way Gruber liquidated all that stock since the end of the quarter, either. It would have accounted for 66% of total trading volume and put serious downward pressure on shares. But IWSY’s traded sideways ever since.

As for Neal Goldman, if he’s “stuck” in the stock, why is he exercising warrants early (see here)? Likewise, why were insiders buying more shares around $2 (see here and here)?

5. Management criticism is warranted.

I can accept the argument that Jim Miller is well paid. Maybe too well. And kudos on the list of broken promises, TPS. You’ll recall, though, I said talk is cheap from here on out. It’s all about execution. The Wal-Mart (NYSE:WMT) contract “won’t be enough.” Miller needs to land more.

6. Dilution is likely.

I agree here, too, and said as much already. Lake Street initiating coverage is a “tell” that some type of offering is coming.

Add it all up and my conclusion remains the same – expect volatility ahead. Especially now that the short is official and many investors are destined to blindly head for the exits, instead of doing their own due diligence.

I stand by my call for prudence, too. Even though more upside potential exists, long-term holders should look to protect their profits.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Lou Basenese has a total average return of -4.7% and a 48% success rate. Lou Basenese is ranked #3429 out of 3877 bloggers.

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