BIO-key International, Inc. (BKYI) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Incorporated Fiscal 2014 Fourth Quarter and Fiscal Year End Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today March 20, 2015. [Operator Instructions] I would now like to turn the call over to today’s host, Jay Meier, BIO-key’s Vice President-Corporate Development. Sir, you may begin.

Thank you. Good morning everyone and thank you for joining us today for our fiscal 2014 fourth quarter and fiscal year-end financial report conference call and webcast. With me this morning is Mike DePasquale, BIO-key’s Chairman and Chief Executive Officer; and Ceci Welch, BIO-key’s Chief Financial Officer. I’ll begin the call by reading our customary Safe Harbor statement, after which Mike and Ceci and I will review our results and milestones before opening up the call for questions. This morning BIO-key issued its fiscal 2014 fourth quarter and year-end financial results. The press release is available in the Press Release section of our website at www.bio-key.com. Additionally, the call is being webcast live on our website and a replay will be available for 30 days beginning one hour after completion of this call. A streaming audio replay of the webcast will be available shortly after the call on our website for a period of 30 days. You can also access the recorded call by dialing 1-877-344-7529 in the U.S. or 1-412-317-0088 internationally and using the access code 10055289. I’d like to remind everyone that today’s conference call and webcast may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. The words, estimate, project, intends, expects, believes, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are made based on management’s beliefs as well as assumptions made by and information currently available to management pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a more complete description of these and other risk factors that may affect the future performance of BIO-key International, see Risk Factors in the company’s Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The company also undertakes no obligations to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made. At this time, I’d like to turn the call over to Mike.

Thank you Jay and welcome and thank you for joining us for the BIO-key fiscal 2014 fourth quarter and year end report conference call. We’re excited to present you today as we’ve accomplished much and have significant plans to share for 2015. On one hand, we arguably only hit the low end of our Q4 guidance. On the other hand, we doubled our annual sales year-over-year and reported an all-time record for the company. We have the opportunity to share some successes, but also to learn from our experiences last year to ensure stronger future outcomes. And so today, we’re going to discuss history both for the industry and the company, understanding that the history is an asset upon which we can grow and build. Finally, we will share more details of the plans to ensure that our shareholders understand what we’re doing and why. So part of our tradition I’ll share some industry events that have occurred recently and then show how they relate to BIO-key. We’ll then discuss the fourth quarter and fiscal 2014 financial details including CC summary of the specifics. We will then spend more time describing our plan for 2015 and why and we’ll give some guidance and finally we will open the call for your questions. If you recall, our fiscal 2000 report conference call, we described that we believe the company was at an inflection point. And we would emerge into the high growth phase of its development in 2014. We know that the business would remain variable quarter-to-quarter. We described how the commercial market for Biometrics was finally taking off as the iPhone 5s was released only a couple of months prior. We’ve reiterated our perception of various vulnerabilities of the on-device authentication model promoted by Apple, Samsung and the FIDO Alliance. We noted Apple was spoofed immediately as was Samsung on their device. We suggested that we would pursue on-device relationships as the market demanded, but reiterated our view that market pressures resulting from these vulnerabilities would force the market to consider both on-device and cloud authentication models. While we signed two OEM agreements with fingerprint sensor vendors that produced half of our revenue in 2014, we all watched as those on-device vulnerabilities continue to emerge and it continues today. Now with that I’d like to just take a side track moment to point out a couple of things about Apple and Apple Pay. First recall, Apple stated that they would never move biometrics data from their phones. While, within the last year, Apple filed a patent application demonstrating how they might move biometric data from their phones to their cloud, and back down to different devices. We’re watching that closely, but you must understand it would be sometime before that could be economically important to us, if it all. The point is that Apple has contradicted itself and appears to be considering a change in course. Apple is contemplating doing exactly what we do and what they said they’d never do, but for all the reasons we suggested, they will, interesting but not coincidentally, Gartner Data Analytics, the big IT consulting firm, published its Identity & Access Management Hype Cycle report last December. In that report, Gartner predicted that by 2017, 50% of corporate enterprise user authentications would be conducted through a cloud-based service. That’s music to our ears and that could tend to conflict with an on-device only mentality. Clearly along with on-device authentication, the cloud has a role in user authentication as well, both within the Apple ecosystem as well as the broader enterprise market. Not coincidently, we hired Gartner as part of our 2014 strategic plan, specifically to voice our view of the world. Jay and others in the company have spent many hours interviewing and collaborating with Gartner analysts over the course of the year. It’s not to say that we caused Gartner to believe one thing or another, but on the other hand it’s important that Gartner is covering Biometrics today, because its customers are starting to ask about it. Ensuing Gartner understands our side of the story, means Gartner is well educated and can describe our view to its enterprise customers when they ask. As those customers become more educated about cloud and on device security, they push back on Apple, Samsung and FIDO. We may just need to react by filming device to cloud patent applications. So we’re very encouraged by all of this movement, because the industry is moving according to the way we are thinking. Have you heard it without the Apple Pay fraud rates, this just happened and its very exciting news, you probably read that they are design in general has enabled significant fraud. According to lively publicized reports, Broadstairs are associating stolen identities and credit cards with their Apple Pay iPhone 6. It appears they’ve fraudulently purchased millions of dollars of product with the fraudulent Apple enrollment. According to reports, Apple paid fraud rates are running orders of magnitude higher than traditional credit card fraud rates. But it’s not because the fingerprint sensor is inaccurate or rather spoofing. It’s because no one has done anything to authenticate the person’s identity to conduct identity proofing, when they enroll in Apple Pay. So the frauds who are just simply enrolled on the iPhone 6, with someone else’s credit card number and neither the phone nor the retailer, nor the credit card issuing bank has anyway to know that the fraudster holding the phone, was with the credit card owner, in effect, the Apple Pay barriers [ph] for the fraudster by authenticating the fraudster at the transaction. And the fraudsters of course were smart enough to shop at Apple stores, knowing that Apple would never scrutinize its brand new flagship product. So they used in essence their own system to rip Apple off. Isn’t that incredible? Now I’m pleased to recall also one of our more important announcements from 2014, our strategic partnership with Experian. Experian does identity proving that could have helped prevent the type of fraud that the Apple Pay and other device authentication models are reported to enable. The point I’m trying to make is that these are the market pressures we discussed, followed by the result in actions to some of those in the space. So we think the market. But the market is moving towards us. And this is starting and has shown up in our 2014 numbers, our partnership agreements new conversations with very new reconcilable technology vendors who were just getting interested in Biometrics, along with our forecast for 2015 and beyond. During 2014, we signed a couple dozen partnerships with third party technology resellers. These companies sell products from IBM, CA and others that we work with. They work to generate deal flow that we could participate in. Throughout 2014, we saw our opportunity pipeline grow significantly both in terms in the number of deals and the gross value of those deals. And to make sure, we’re all clear, our opportunity pipeline is the value of all of the deals that we have qualified and chosen to pursue that could book over the next 12 months. The following 2014, our opportunity pipeline grew from $12.7 million to $25 million, to follow that we grew revenue significantly in 2014. And while we understand that $4 million is not a huge number, it doubled what we did in 2013, and represents a record for the company. So we enjoyed a high growth rate, a rate that we believe constitutes our ability to continue to do that in the following year. Now, what else did we do? One of our strategies for 2014 was to implement rigorous sales and budget forecasting techniques, so we could increase the predictability and potentially reduce the volatility in our business which represents risk. In this effort, we’re partly successful, but also experienced some challenges. If you recall, the historical seasonality of our annual revenue, Q1 and Q4, were typically the largest in terms of sales with Q2 and Q3 significantly lower. 2014, however, did not follow the trend as closely. In part, because of our planning strategies and tactics, but also because the business is starting to change and improve. In fact, Q1, Q3 and Q4 all enjoyed revenue of approximately $1 million or more. The delta of our volatility between those quarters was significantly reduced as part of our plan. Of course, we missed our Q2 forecast and we’re forced to react by raising money and work for working capital and reverse splitting the stock. Taking a step back, however, one might see the Q2 as a one off problem in 2014. Without minimizing it, excluding the Q2 frictions, we actually are very pleased with everything else that we accomplished in 2014. Despite the Q2 results, we still enjoy high growth and many other important accomplishments. 2014 was a productive year for the industry and BIO-key. And so as we look back at the year, we can use the experience to improve our business going forward. Before we discuss our plan and projections for 2015, I’d like to invite Ceci to provide the financial details for last year. Ceci?

Thank you, Mike. For the three months of the fourth quarter, total revenue for the three months ended December 31, 2014 was $951,698 compared to $327,500 in Q4 of 2013, an increase of approximately 191%. Sales grew largely as a result of substantially higher license sales, hardware sales, and service sales, while maintenance sales were held firm. License and sales grew largely as a result of OEM partnerships with fingerprint sensor vendors. Q4 2014 gross margin was essentially unchanged at 76% as compared to 78% for Q4 of 2013. Operating expenses for Q2 2014 increased by 9%, to $1,272,024 from $1,163,961 in Q4 of 2013, while administrative expenses decreased marginally. Q4 2014 net loss decreased approximately 45% to $506,546 from $929,188 in the Q4 of 2013, and loss per share was $0.01 versus $0.02 in 2013. For the fiscal year 2014 total revenue increased 102% to $4,005,856 compared with $1,985,976 for the year ended December 31, 2013. Sales increased primarily as a result of higher license sales, service sales with our OEM fingerprint sensor manufacturers, offsetting a slight reduction in the maintenance revenue. We maintained gross margins at 81% in 2014 as compared to 80% in 2013. Operating expenses for the period increased 29% year-over-year to $5,296,226 from $4,120,629 in 2013. Operating expenses rose primarily due to increased variable selling expenses, higher R&D and marketing expenses, while administrative expense remained relatively constant. Net loss for the year of 2014 was $1,883,572, or $0.03 per share, which decreased from a net loss of $2,582,151, or $0.06 per share, for the year ended 2013. These are our post split numbers that we are using now for the share numbers. Liquidity and capital resources, the Company reported cash and cash equivalents, accounts receivable of $1,468,973 at the end of 2014 compared with $2,307,374 at the end of 2013. Net cash used for operations during the fiscal year of 2014 was $2.5 million, compared to approximately $2.7 million in 2013. And the Company issued common shares and warrants to raise approximately $1.1 million – $1.6 million in the FY 2014, as compared to approximately $5.6 million in the Q4 of 2013. Mike?

Thank you, Ceci. Now we should discuss our revenue and operating goals for 2015 along with our strategies and tactics to achieve them. And as you know Jay Meier is our VP of Corporate Development. He came from Wall Street, where he worked as a respected industry and financial analyst. This past year in conjunction with our executive team, Jay Meier [ph] headed our business plan process. I’d like to ask Jay to discuss our 2015 plan and also touch on our guidance and outlook going forward. Jay.

Thanks Mike. First, I’d like to reiterate our view that our pipeline opportunities are often large and hard to predict. The opportunities we typically pursue can often exceed several hundred thousand dollars in value and we’re starting to see deal sizes exceeding $1 million. The timing of the recognition of such orders can materially impact quarterly results both negatively as well as positively. And so, we continue to recommend evaluating our progress over a longer period of time. This trend will continue for a while, but will smooth out over time and it will smooth out primarily as we increase the number of sales channels, penetrate them more deeply and grow such that the individual orders become relatively small compared to our overall size. Looking forward to 2015, our two primary initiative center around more focused strategic and tactical sales development as well as continuing to improve internal operating disciplines. Clearly developing short and medium-term revenue opportunities and closing them in a timely manner is our top priority. We have structured the company to focus on the strategic significant relationships that will generate recurring revenue, while building the core business in both healthcare and IAM through our partner network. We expect biometric and fingerprint enabled mobile devices to continue to expand rapidly in the marketplace and with the discussion of fingerprint viability including an appropriate balance between security and convenience in the public debate. We’ve gained significant credibility and exposure from our public discussions of such vulnerabilities. Our first strategic priority for 2015 and beyond, as mentioned above, is to drive revenue. Importantly, profitable revenue is critical to our success as resources are limited. We believe there are several tactics necessary to accomplish this in 2015. First, we’re targeting specific market verticals and opportunities. We believe highly regulated industries like the U.S. healthcare and global financial services markets, as well as technology OEM relationships, including mobility and identity and access management companies will provide the strongest revenue potential for several reasons. Highly regulated industry like U.S. healthcare is our primary market opportunity going forward. Highly regulated industry represents roughly 65% of our opportunity pipeline today and this is because U.S. healthcare vertical is substantial and well defined, enjoying mandates or standards compliant two factor authentication that both requires end user investment and such capabilities, but also create significant barriers to entry. The company enjoys favorable brand recognition, visibility and reputation, as well as significant marquee customer and partner relationships within the healthcare space. BIO-key solutions are currently certified to satisfy those standards in the mandates and further our relationships with major electronic medical record and electronic health record providers, like Epic, HealthCast and Allscripts, and a number of new EMR partners that we believe a disciplined and aggressive technical sales push will produce constructing revenue results in 2015. We similarly believe global financial services may offer significant large opportunities this year. Second, given various difficulties both Apple and Samsung experienced, we believe there is eminent demand for a more robust matching algorithm deployed at a device level. Thus we expect existing OEM relationships with IDEX and NEXT to produce design wins in 2015. We further expect to develop new OEM relationships with large stakeholder device manufacturers like semiconductor manufacturers and fingerprint sensor providers and other large technology stakeholders. We believe the large value added resellers and technology component and service providers could add incremental sales opportunities throughout the year. Given the successful channel development work in 2014, we believe our identity in access management relationships that are effectively OEM relationships, because they basically sell our products for us. We’ll produce deal flowing visibility which will generate contract awards in 2015. Finally, we’ll continue to invest in strategic and tactical marketing efforts to drive pipeline and order book growth, followed by routine analysis and appraisal. Our second priority for the year is to continue to develop and implement operating processes and business work flows within the company. For example, we’ve implemented a structure and are developing guidelines to analyze our sales pipeline; forecast revenue on a quarterly, annual and even by-annual basis; analyze, connect and forecast, both cost of goods sold and operating expenses, which will create true visibility and operating predictability. This reduces risk. This should enable more accurate guidance and reduce investor uncertainty about the company. We’ll also analyze our technology integrations and contract integrations, unify and standardize such integrations where possible and this will provide great efficiencies for the company. Our tactics to build presence, visibility and influence out in the market place require us to insert our opinions into the development of biometric and security related standards, as well as a broader industry discussion. This is exactly what we’ve been doing with Gartner and other companies throughout 2014. We believe that engaging recognized industry research organizations reporting organizations like Gartner, opening dialog and contributing educational and opinionated content can help shape biometric development and deployment trajectories in the market place, as well as create brand value for BIO-key. The U.S. social media and Internet marketing techniques has addressed some of what is discussed, but we’ll continue to create additional, innovative thought for leading content through our blogs and electronic outlets. As a publicly traded company our ultimate goal is to increase shareholder value and employee value. All other strategic and tactics fundamentally support this view, tactics to enhance shareholder and employee value include developing proper investor relations programs, completing any additional capital restructuring, achieving market listings and aligning the Board, management, employee and shareholder interests. These are all in process for 2015. A well-designed investor relations program enhances our credibility with the financial community, solicit sell-side sponsorship and research coverage to attract buy-side sponsorship. Contracting outside investors relations to facilitate non-dealer road shows and investor conference presentations will help. We recently hired Catalyst Global IR, as our outside investor relations counsel. You can find their contact information on our press release. Importantly, solid execution of our 2015 strategies along with disciplined and proper financial forecasting in the report presentation, meaningfully improves our credibility with the street, which in term facilitate sell-side sponsorship and buy-side sponsorship. All this should increase shareholder value and employee value in 2015. Now given all this I’d like to offer a guidance for 2015 including first quarter guidance. For the first quarter of 2015 the Company expects revenue between $0.5 million and $1 million in revenue, and gross margins of approximately 75% to 80%. For fiscal 2015, the Company expects revenue between $5 million and $7 million and gross margin of approximately 75% to 80%. Further, we believe that our break-even run rate is currently $6.5 million to $7 million in revenue for the year. So basically, we’re suggesting it’s possible for us to break-even this year, and we think that’s constructive. As of December 31, 2014, the Company’s opportunity pipeline was valued at $25 million, which effectively doubled year-over-year. And now, I’d like to turn the call back over to Mike to wrap up. Thanks.

Thank you, Jay. As you can see at this point despite continued quarter-to-quarter volatility, our business appears to be ramping. We grow our business sharply in 2014 and have implemented a rigorous and thorough plan for 2015. We’re very encouraged and expect this trend to continue. We believe we are prepared for substantial growth that we hope may have begun in 2014 and will continue into the future. I’d like to personally thank our very patience shareholders and friends. And now I expect that you may have many questions for us. Operator, let’s start the Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Aaron Martin of AIGH Investment Partners. Please go ahead.

Hi, good morning everybody.

Good morning.

Good morning. Can you talk a little bit about Q4 of the different components of revenue, which verticals worked well, which verticals built in the [indiscernible] in Q4. Can you breakdown the $1 million roughly a revenue?

It was a good mix of business, healthcare, mobility, our OEM business, so it was really a combination of such. I would say the most significant component fell out of the mobility and OEM space.

That was a most significant – that was in there…

The majority of the revenue – in other words the most significant single piece was in the mobility and OEM space.

Okay. And now looking forward, in terms of the different verticals, which ones are going to be the more significant ones in Q1 2015?

I believe in 2015 we’ll see even a broader mix than we saw in 2014 because about half of our revenue, as we described before, came out of the mobility and OEM segment, so about $2 million and I believe we announced that early after the close of the year in a press release. In 2015, I think you’ll see the spread even out healthcare, Identity & Access Management, as well as continued revenue flow in Identity & Access Management and OEM. So…

What’s moving the need of finally in healthcare?

It really has always been the drive to compliance and the regulatory issues that all healthcare providers are facing today, mostly electronic prescribing of controlled substances, which is being mandated around the country state by state. So that’s been the primary driver for stronger authentication and more convenient strong authentication because it’s a very rigorous process.

Okay…

I think, this is – hi, Aaron, this is Jay. I think you also asked a little bit about a little bit of the breakdown in Q1. I think it’s worth noting that financial services is probably going to show up for us in Q1.

Okay. That’s going to be my next question about Q1, obviously looking at the guidance it’s a nice range of the revenue number with – sitting here with about a week of business days left to the quarter, help me to understand that.

Well, I think – and Jay can chime in after I make my comment, but it’s pretty clear that we are driving with a lot of discipline to be as predictable as is possible and to be as conservative as is possible, so we do not disappoint our investors. And as you could see, if you look at last year, in general other than Q2, we were reasonably tight in our predictability. And so coming into 2015, we’re going to be very, very conservative about our approach to guidance to ensure that we don’t disappoint our investors.

I mean does that mean that there is another deal or two that you think of closing in the next week or so that’s going to make that delta and then if it doesn’t it just looks into Q2 or…

Quarterly results are always back end loaded.

Okay, that just how it is the contracts typically don’t get signed until the last days of the quarter, there is always a push at the end of the quarter. So it’s entirely possible that we will sign – there will be additional deal flow that’s sign between now and the end of the quarter. But those aren’t signed yet, and so we haven’t included them all – we’ve discount those in the guidance. Understand?

Yes, okay. Now looking…

We have a very high degree of confidence in the low end of the guidance range.

I would expect that at this point the quarter obviously. Looking at the full year guidance of $5 million to $7 million, obviously there I understand the range. And obviously this is very difficult, but can you talk about called confidence level, what gives you the confidence level in the range there and what are the driving pieces of that?

Well, I think you can extrapolate on your own from the press release that we articulated a pipeline of approximately $25 million. If you look at our guidance in the range of $5 million to $7 million even at the high end, it says that we’ve got drop about 20% or so, of our existing today current pipeline to achieve that number, which we think is discounted appropriately and conservatively. So we didn’t just…

I mean I will point out there. That is about if you look at last year’s book of business of $13 million [indiscernible] $4 million…

Yes.

You ended up with about 30% of your book of business going into the year.

Yes, I mean again and present here they are bottom line is that’s how we approach that. And again we had a business planning process that was put in place, reviewed with the board that I think within a lot of discipline gives us comfort that we can be in that range.

We analyze the pipeline with the lot more scrutiny and we’re looking at it deal by deal, okay. We’re not including lot of deal opportunities in the pipeline that we are choosing not pursue or that we just think there is no way we could possibly win, okay. So the qualification of the pipeline is important to understand the opportunities ahead of us. And then as we scrutinize each individual deal, we have an idea when they close or are expected to close and we are analyzing the probability of winning each one of those deals and then we are creating a matrix out of that and effectively producing a discount mechanism on the pipeline. So we think that the guidance is within our control to be very, very conservative and as you pointed out, it’s possible that our guidance is very conservative.

The other item to note is that that’s Jay began his portion of the prepared comments, he noted that a number of our opportunities in that pipeline are significant, they’re large, and so they’re binary. So we’ve got to use a discount mechanism in order to whittle the number down to something that we believe is achievable – aggressive, but yet achievable and so that’s where we’re at.

Okay. And then you talked about the pipeline of the opportunities you’re pursuing, what about the revenue that’s going to come in through some of your partners like NEXT and IDEX where you aren’t necessary involved in pursuing of that business, it depends upon whether or not they’re going to be getting their design wins. Is that included in the pipeline?

Yep, we’re…

No, to somewhat – let me answer that Jay because I want to be careful on that. We derived substantial license revenue in 2014 from those partnerships. And so they advance purchase some licenses, which would in the initial deploys for example of design wins would be covered. Now, it’s conservative and that’s not a lot, but more importantly we’re not in control. And even in the context of IDEX, which is an important partner for us, we’re really three steps removed because they sell to a module manufacturer or someone who incorporates their technology and then sells it to a handset player. They’re not selling directly to the handset player. So, it is very difficult to predict, but it appears – if you look at the space and then limited number of suppliers for that technology that they’re going to get some design wins and they will be successful in getting some business into the coming year and I’ve listened to their con call and presentations and it looks like they have considerable pipeline of opportunities that they’re pursuing.

It’s worth noting that neither the $25 million pipeline or our guidance for the year includes some assumption of a huge binary event from either of those OEM vendors. We think they’re going to show up, but our guidance does not depended on it.

Yes.

Okay, thanks a lot.

Yes, we’re not doing that.

[Operator Instructions] The next question comes from Dan Chemis, a private investor. Please go ahead.

Good morning.

Good morning, Dan.

Does the Apple patent indicate, you’ll be hitting [ph] competing directly with Apple in the future or is there a potential infringement?

I think again, it was a patent application that was filed, so there is no infringement at this point, but its pretty clear that if one where to look at our IP, the patents that we have issued, that there could be some potential crossover. So overtime and we’ll see what happens over time, they have not been issued or granted these patents, remember it was a patent application. It will be a significantly a long period of time, before there is any action on those. It could be the best case, but we’ll see going forward.

All right.

Let’s not lose sight of the fact that they’re actually talking about and its talk at this point, because they haven’t implemented anything. Let’s not lose sight of the fact that they are talking about using a cloud-based system, at least some representation of a cloud-based system. And if Apple is the thought leadership juggernaut, and they are suggesting that moving biometric data up to a cloud is potentially a good idea. Well, we’ve been saying that for a long time. So that we’re feeling somewhat validated by all of that.

I understand.

And interestingly enough, they’re not the only mobile vendor that’s looking at that same topology and its really happening Dan, because most individuals today have multiple devices they don’t just have a phone, they may have a tablet or PC at home, or the likes. And enrolling on each of these devices individually is problematic and that is why moving that biometric around is so critical.

Okay. How much did the pipeline grow between Q3 and Q4? Or what was the change, if it didn’t grow?

I…

It was effectively flat.

Yes, I think it was flat at the end, quarter-over-quarter.

Okay. Any metrics, any sales metrics on leader sales which you can share, or is it too early?

Very good question by the way. It’s early, we’re early in the stage of our sensor business distribution channel development, but we are making progress and you will see an announcement from us on Monday we’re attending a trade event called Connect ID in Washington and we’re going to discuss our hardware business at more detailed level there. So you can stay tuned for that on Monday morning. But the bottom line is we think that the form factor and the price point that we’re offering these product set should give us a really nice opportunity. And again, we’re doing this to catalyze our software and we’re going to do it through a distribution medium that doesn’t constrict the company or require that we have to have significant piles of inventory or expense associated with that components of the business.

Okay, I’ll look for that. I see that – I read that New York is requiring e-prescribing now. Are you seeing any effects from New York mandate and again it might be early?

Another great question, interestingly enough the New York I-STOP, it was called I-STOP program, which mandated the electronic prescription of controlled substances was just delayed another year. Governor Cuomo signed the bill maybe about a week or a week and a half ago to extend that to – for one year. And it’s interesting why, the EMR, EHR providers, those who provide the full and complete software systems record management, health record systems are really not ready to handle all of that that component of the technology on a pervasive basis. Now, there are some vendors, who are like Epic. Epic is very, very well engaged in electronic prescribing. Allscripts is struggling to get to the point where they can introduce a system that’s full and complete and gives that capability across the country. So it is evolving and we know that in New Jersey here for example, it will be mandated in 2016. I believe in California, it will be mandated in 2016. So that is a really significant driver for us in the healthcare space.

Okay.

One of the things Dan that I think people need to appreciate about this is that these are capital expenditures for these hospitals and they take a long – there is long planning process, okay. These aren’t – they don’t go to the store and by fingerprint sensors and just attach them to computers. And so, there is a long lead time on this. If you think about that in relation to our pipeline, all right, we’ve seen the pipeline grow – opportunity pipeline and healthcare grow and it’s been largely because of those healthcare mandates like I-STOP in New York. There is going – and there’s only two states that have mandated this yet: New York and Ohio. So we think there is lot of Greenfields ahead of us there and we’re one of only a handful of companies that can satisfy the requirements.

Okay. Just another thing here, what expenses are increasing that is driving up your guidance [ph] expenses?

Well, there is several, first of all, its worth noting that our administrative expenses are not, they’ve been flat and those are things like salaries, right. But our commission structure is variable. We pay our sales people commissions and so selling expenses increases as our revenue expenses increase, excuse me, as our revenue increases. We’ve also made a strategic decision to invest in marketing, so our marketing expense has increased and demand is on our research and development team to build new products and new integrations, demands for our services and products are growing, so our R&D expenses are growing. Make sense?

Yes, yes, good answer. Last question here, with the potential $500,000 quarter in Q1 and potential $2 million loss for the year in the guidance increasing expenses although as explained I guess with the revenues going up. It appears that unless everything goes perfect to result in breakeven year capital have to be raised. Is that a fair analysis?

[Indiscernible]

Well go ahead Welch.

No go ahead.

We – at this time, we don’t have plans to rise more capital. There is no discussions about that at this time, but the balance sheet is not particularly flush with cash. We had to rise a little bit of money, [indiscernible] we had to do several raises over the last couple of years. And we have working capital requirements. If the revenues show up, the way we think they could, those revenues can fund operations. And if they don’t, then we have a decision to make.

Yes, and that’s what I was going to say. In my tenure here at BIO-key virtually every quarter, quarter-to-quarter, cash is obviously an issue. We don’t have a cash reserve we’ve never really gone out and raised significant sums of money at one point in time. And so cash reserves have never been available to the company. So it is absolutely critical that our revenue flow is solid and more consistent and if it’s not, obviously we’ll have to do what we need to do to make sure that we can operate the company. But this is not something new for BIO-key this has been going on for a long time.

One of the advantages of implementing the processes and systems that we’re describing is enhanced predictability and forecasting. And so we think we’re going to give ourselves a lot more lead time in order to put ourselves in a position to prepare and take actions should we need to.

The next question comes from Bob Schnell of Dougherty. Please go ahead.

Good morning, gentlemen.

Good morning, Bob.

Hi Bob.

I think, to start of I think, I really appreciate the increased granularity you’re providing here today in terms of the pipeline and your revenue and cost projections from the year, I think it’s very helpful. I’d also like to just something I noticed in your prepared remarks around some goals for the year one of which included I believe aligning the board with shareholder interest, a frustration of investors in the past had been that management and the board owns very little if any common stock in the company. So I guess I just liked question or ask what you guys mean by in terms of aligning the board and management with shareholder interest and what you have planned to be that part of the company in 2015?

Well I think we’ve stated a number of times before that, and we’re asked this question all this time, so it’s not a new one. Clearly board and management are not advised to purchase shares in the company, but certainly can do that. And we’ll do that through and under their own fruition. So we could see a potential insider buying not only again from the directors, but management, but that remaining is again in and independent decision that each individual has to make. We’ve been in unfortunately, now we’ve been kind of consecutive dark periods as you know insiders are not allowed to purchase or trade their shares two weeks before, the end of our reporting period until three days after the report is issued. And so the window to purchase for insiders is very, very narrow and especially in the beginning of the year, it’s almost non-existent because we filed our annual report, so late in the first quarter. So we’re kind of overlapping now in dark periods. But that Bob is certainly something that is up to the individual and you may or may not see that going forward.

[Operator Instructions] The next question comes from Edward Schwartz of Schwartz Investments. Please go ahead.

Good morning, gentlemen.

Good morning.

Hi Ed.

Hey, Jay and hey Mike. In your efforts to improve credibility to both shareholders and potential future investors, I’d like to talk a little bit about corporate governance. What do you think where a lot of public companies are now showing the way from the Chairman of the company and the CEO being the same person do you think that it would be beneficial for your company to make those changes?

I’ll take that.

Alright, go ahead Jay. And then I’ll make a comment, go ahead.

Ed, we all wear a lot of hats in this company, okay. We have a lot everybody and we have a small set of employees and resources that we can allocate and we need to stretch our resources as far as possible. This board is respected. They’ve demonstrated in interest, in observing and interacting with the management team. And they’ve installed policies and made recommendations that are making the company better. Does that make sense?

Okay well thank you for your, – yes, no, that’s fine and thank you very much.

And at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Mike DePasquale, Chairman and Chief Executive Officer for any closing remarks.

Thank you again for participating in today’s call. We hope you will join us again for our next conference call to discuss our first quarter of 2015 results. Jay?

Thank you for participating BIO-key International’s 2014 fourth quarter conference call and fiscal year-end report. As a reminder, a streaming audio replay of the webcast will be available shortly after the call concludes on our website for a period of about 30 days. You can also access the recorded call by dialing 1-877-344-7529 in the United States or 1-412-317-0088 internationally. Use the access code 10055289. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.