BIO-key International, Inc. (BKYI) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International 2015 Third Quarter Conference Call. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, November 16, 2015. [Operator instructions] I would now like to turn the conference over to your host, Mr. Jay Meier, BIO-key’s Vice President, Corporate Development. Mr. Meier, the floor is yours sir.

Thank you. Good morning and thank you for joining us today for our third quarter conference call. With me are Mike DePasquale, BIO-key’s Chairman and CEO; and Ceci Welch, BIO-key’s Chief Financial Officer, who will review our results and milestones before opening up the call to questions. Before we begin, I must 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, please review Risk Factors in our Annual Report on Form 10-K and other SEC filings. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today’s date. BIO-key undertakes no obligations to revise any forward-looking statements to reflect future events or circumstances. I now turn it over to Mike.

Thank you, Jay. And welcome everyone and thank you for joining us. While today’s call is normally focused on our quarterly results, I would like to focus the bulk of my remarks on the financing and technology license transactions that BIO-Key concluded over the past two weeks, and discuss what they will mean for our company going forward. We really do believe that these agreements take BIO-key to a whole new level and put us in a stronger position to capitalize on our industry-leading biometric solutions and secure method for transporting biometric data to the cloud and back to enable secure authentication. These agreements were the product of roughly six months of work, and I believe they now provide BIO-key with the financial resources and expanded technology portfolio, a broader base of products, solutions and resources and a significantly enhanced global footprint, particularly in Asia where we had little representation, previously, a significant broadening of who we are and what we can provide to our partners and our customers. This new and expanded business platform enables BIO-key at a time when governments and enterprises around the world are grappling with the rapidly growing challenge of security their systems, data and verifying who is granted access and who is able to conduct transactions, not also to say protecting orders. To summarize, we completed the sale of $19.5 million in convertible preferred stock with a conversion price of $0.30 per share, roughly two times our average share price over recent weeks. We utilized $12 million of the proceeds to license a portfolio of mobile and online payment and security software technologies from affiliates of China Goldjoy Group, a Hong Kong based company that trades publically on the Hong Kong Stock Exchange. China Goldjoy is an investment holding company with a focus on high-tech products and of particular relevance to BIO-key, a focused on biometric security, high speed wireless data transmission technologies, including its FingerQ and PrivacQ biometric privacy protection platform and devices. Beyond the importance of the $7.5 million in new net capital raised, the strategic transactions substantially expand the breadth of our technology and new product development portfolio, while they also closely align us with a very strong partner and an entry into the Asian markets where we just have not been able to pursue business. The technology and intellectual property we secured gives us a competitive advantage by well positioning us, including China Goldjoy Group, to provide biometric identification for mobile and online payments, primarily in China but also in North America. Our initial go-to-market strategy focuses on Asia with the added support from our strategic partner who has extensive reach in that segment of the world. They have especially offered substantial support, as we work to establish our physical presence in Hong Kong and in the PRC, over the past few months. As you should already be aware, China Goldjoy Group was formerly known as World Wide Touch Technologies, and it’s been a strategic [audio gap] CGG supplies Bio-Key with a disruptive SideSwipe and EcoID USB fingerprint sensor devices we currently sell. These products along with our software have been optimized to work with Windows 10, specifically because of a significant infrastructure gap within the aggregate fleet of enterprise controlled personal computers, laptops and tablets. Microsoft designed Windows 10 to utilize biometric -- finger biometric enrollment, as well as facial recognition enrollment. This is to accommodate the new and common place hacking and breach of enterprise networks systems that is facilitated by traditional user authentication systems including passwords, pins and tokens. However, the vast majority of enterprise PCs, laptops and tablets don’t have built-in fingerprint sensors, leaving the Windows fingerprint drivers and the biometric -- and the Windows Biometric Framework effectively unusable. Over the last several months, we adapted our fingerprint software and our WEB-key platform to work flawlessly with Windows Biometric Framework, in anticipation of the Windows 10 release, plus our SideSwipe and EcoID the fingerprint sensors are plug-and-play on any USB enabled PC, laptop or tablet that uses Windows 10. Plus, we provide an instant solution to the enterprise to use fingerprint biometrics for user authentication purposes, without forcing them to upgrade their entire fleet of PCs, laptops and tablets. We believe this solution is disruptive for the following reasons. Because our relationships with NEXT Biometrics, IDEX and China Goldjoy Group, we estimate our fingerprint sensors and related software cost roughly 50% less than the nearest competing system. And this we believe is why our products have been so well-received at the Microsoft Windows 10 launch demonstrations with additional events still scheduled. We have compiled several hundred enterprise level sales leave opportunities for this platform. Importantly, while it’s obvious that we will not sale every lead, none of these opportunities are currently reflected in our pipeline data that we shared in this release. So, you could see why we are excited. Additionally, this relationship with CGG has already provided [audio gap] revenue during the current [audio gap]. While we are still in the early stages, we see this one opportunity as having the potential to be a multimillion dollar annual business for Bio-key. But we now have to go out and make this happen with strong technology and sales and service execution. In summary, we feel that having we have put in place new capital, technology breadth and our expansion into Asia, this positions BIO-key extremely well to fully leverage the strength of our portfolio. To this end, we will elevate the status of our public company profile and plan to submit for shareholder approval, a motion to approve a reverse split, indented to pave the way for our listing of common stock on third NASDAQ capital market. We believe this action will provide our investors with a far more visible and liquid market for our shares, and it will also better support our global brand and reputation, and support our sales and marketing efforts. There are no guarantees in this listing effort, but we feel confident today that we currently meet the aspects of the NASDAQ listing criteria other than share price. And we should be able to complete this effort within the next two quarters. We feel the timing is right as BIO-key is now far stronger company from a financial perspective and outlook, and expect that over time that our share price will begin to reflect our improved position. Finally, turning to our outlook for Q3 and -- Q4 and the full year outlook, I’d like to first turn the call over to Ceci, to summarize history and then I’ll provide some details around our Q4 guidance. Ceci?

Thank you, Mike. Total revenue for Q3 ‘15, decreased to 669,846 compared to a strong year-ago performance of $1,283,847 based on the shipment of a few large non-recurring license order in Q3 2014. Q3 2015 license and other revenue decreased to $419,655 compared to $787,720 in Q3 ‘14, and service revenues decreased to $250,191 in Q3 2015 from $496,127 in Q3 2014. The non-recurring custom services decreased due to a custom project that was completed at year-end in 2014. Q3 2015 gross margin was 44% as compared to Q3 2014, principally due to the decrease in higher margin license sales and higher volume hardware sales. Q3 2015 operating expenses rose 5% to $1,382,566 from 1,314,513 in Q3 2014, reflecting both increases in SG&A and R&D expenses related to expanding scope of business, cost related to strategic transitions and R&D efforts focusing the product refresh updates and new product offerings along with the reclassification of roughly 100,000 of Q3 2014 service related R&D expenses to cost of goods sold. BIO-key reported Q3 2015 net loss of $1,079,584 or $0.02 per share compared with a net loss of $51,526 or less than a cent per share in Q3 2014. BIO-key had weighted average number of basic shares outstanding of 66,038,941 and 58,026,262 million in Q3 2015 and Q3 2014 respectively. Per share and per share figures have been adjusted to reflect a February 2015 20-for-1 reverse split. Net cash used for operations during Q3 2015 was 973,836 compared to 1,696,817 in Q4 -- Q3 2014. As of September 30, 2015, BIO-key reported current assets and working capital of $2,426,956 and a loss of $604,256 respectively. Reflecting the impact of the convertible preferred placements and strategic license agreement, as of November 12, 2015, current assets and working capital were approximately $12,800,000 and 11,400,000 respectively. I’ll hand the call back to Mike to review our financial guidance and sales outlook.

Thank you, Ceci. Turning to our pipeline, I would like to review our current outlook for the next 12 months and current fourth quarter. As we reported today, our opportunity pipeline for the next 12 months that is the aggregate total of all deal opportunities that could book as revenue, over the next 12 months ending September 30, 2016, includes 127 opportunities and it’s currently valued at $30 million, an increase over our Q2 pipeline of $25 million. Highly regulated industry, those that are most actively mandating two factor or other improved security authentication measures and is therefore a key area of opportunity, represents roughly 65% of our 12-month opportunity pipeline. Focusing solely on the fourth quarter, the opportunity pipelines stands at approximately $10 million, representing 43 aggregate opportunities that could book its revenue during the quarter. Based on our opportunity pipeline analysis and results to-date, we’ve narrowed our guidance for fiscal 2015 sales to range between $5 million and $6 million with gross margin of 75% to 80%. This implies that for the fourth quarter of 2015, we expect revenue in the range of $1.4 million to $2.2 million. We have also revised our cash breakeven level to annual revenues to an estimated $6.9 million to reflect the impact of our fund raising activity. Headcount currently stands at 19 employees and four contractors with four in administration, eight in sales and marketing, eight in R&D and three in support. We expect the hire and add sales support and R&D resources throughout the remainder of the year. And with that, operator, let’s open the call to questions.

[Operator instruction] Our first question comes from Richard Pew of Richard Pew Investment Counsel. Please go ahead.

Good morning, gentlemen. I have a basic question. As you probably know that Chinese are famous for stealing technology, they have a famous jet, the J20, which apparently is identical to our F-35. I am wondering if this arrangement that you have helps you protect yourself from having all your technologies stolen and then sold by the Chinese all over the world?

Well, two things. Certainly, Richard, you can’t -- we have to acknowledge the issues that not only our nation but enterprises in the United States have had to deal with because of Chinese hacking. It’s not only the Chinese, it’s Russians and the likes. So, it’s certainly an issue that we’re dealing with as a nation and as business leaders and as businesses. But our relationship is with a commercial entity. China Goldjoy Group is in a number of different businesses including technology. And they are in business obviously to make money and to proliferate, the use of their technology around the globe. So, we’re not dealing with a government owned or a partially government owned entity that could be looking for trade secrets or looking to hack or compromise technology; we’re dealing with a commercial entity that has a long standing reputation in the security markets. So, we’re pretty comfortable with that technology will be well-protected.

[Operator Instructions] Next with Matt Chambers, [ph] investor.

First question with this technology that you acquired the patents, what sort of payback period do you estimate for that?

First, we acquired a software license. Obviously we have and we’ll be protected by the patents that are related to the software license. But we see and believe that license arrangement will evolve over the next, let’s say, two to three years. So, we’ll begin using the technology, in fact part and parcel of some of what we will deliver this fourth quarter will include that technology, and then obviously that will grow and ramp over the next few years. So, that’s the timeframe that we’re looking at right now.

Okay. Can you give a little more color on how this deal works? They’re going to be trying to sell these products on their own, some of them; some of them will be in conjunction with BIO-key and some that you will be working on with them. I’m a little fussy on how that’s going to work.

Yes, really all of the above. We have set up a subsidiary in Hong Kong to service that side of the world. And they have resources that sit in the PRC and sit in Hong Kong. So, we’re going to collaborate; we’re going to work together. They have a sales footprint in Asia-Pac, and so we’re going to take advantage of that. And they’re also going to take advantage of our sales and marketing footprint in North America and in Europe. So by that I mean for example, they’re manufacturing our sites SideSwipe and EcoID reader. So, we’re selling them. But they’ll also be able to sell them now in the Asia-Pac market. And those are -- that’s only the beginning of the types of products and solutions that we have planned going forward. Our CTO was actually in China -- she is in China right now, returning tomorrow. So, we’ve begun to work very closely with them on technology integration. So, I think it’s going to be a bifurcated relationship that’s going to give us an opportunity to sell each other’s technology in markets where we have some strength. We have strength in the domestic North American enterprise market and they have strength in the Asia-Pac markets and even with consumers. So, the volumes could be significantly higher. So, it’s going to work both ways.

The payback period would be one to two years, just trying to…

We’re just getting engaged right now, right? we’ve consummated the transaction. We’ve worked on this over the last six months. So, all of these things are going to evolve. And I think as we get into 2016, we’ll be able to paint and project more color on revenue, on guidance, and projections for the integrated solution set, but we’re not prepared to do that today.

Okay. One last, your other partners like InterDigital, AMD and Experian, any -- are they still -- are dead in the water or anything happening there, is it that we’re going to see news from them soon or they will generate revenues?

We obviously continue to work with each of the partners that you just mentioned and our efforts continue to evolve.

Okay, but nothing on the near, next quarters or anything like that?

Well, we have nothing to announce today. And once we have something contractual or meaningful or material to announce, obviously we will do that.

The next question we have comes from John English, [ph] investor.

In the statement release today, there is a couple of statements that might be pertaining to the same company, but I wasn’t sure, so I was going to ask about it. So, it says significant cash infusion combined with the technology license agreement with an existing partner and provider of biometric and mobile payment technologies and the other statement is we have booked orders and completed an initial product shipment to a global payment company for a new mobile security application. Is that referring to the same company?

No. The former is relating to CGG, China Goldjoy Group. That’s the company or one of the affiliates that’s made an investment in BIO-key and obliviously it has licensed the software to us. So that’s China Goldjoy. The other opportunity that we mentioned is an opportunity that we are working with the global payments company that is not related to CGG but includes technology from both BIO-key and CGG.

[Operator instruction] Next we have a follow you from Richard Pew of Richard Pew Investment Counsel.

Perhaps I missed it, but what is the level of the reverse split you’re contemplating, if you have even come to any conclusion or even have an estimate?

Richard, this is Mike. No. When we -- we are now beginning obviously this week to pull the proxy together. We will file our quarterly statement at the end of the day today. And that’s the basis for the proxy that we will use going forward. What you’ll likely see is a range in the proxy. So, we will see how our shares trade over the next 30 to 45 days and then we will make that determination at the appropriate time. So, no, we have no idea today what the final range will be, or the final price will be.

Okay. And a follow up -- another question altogether, have you done any or considered any advertising now with your new infusion of capital; do you have enough money to consider that kind of thing? When I worked for a bank in Philadelphia years ago, they had a hot stock picker and they got him written up in the Wall Street Journal and I later learned that they had to pay somebody a substantial sum to get that write up, which of course looked to the average reader to be an objective observation. Do you -- have you considered such an arrangement or do you not think that’s worthwhile?

Well, it’s only because it’s my Vice President of Marketing, Scott Mahnken is sitting right next to me now and he is smiling, the answer to that yes. Obviously we are going to promote ourselves in a much more significant way. Partial sum of user proceeds from our capital raise will be used to heighten awareness of our solutions and products, raise our awareness in the market and obviously promote what we believe are disruptive products that can change the pace of finger biometrics going forward. Just this event, the series of events that we’re doing with Microsoft, have created just an amazing amount of visibility for us, real tangible visibility and real tangible leads with fortune global 1000 customers. And so, we think that plus some of the promotional activities that we have planned are going to raise the awareness of our company in a significant way. And you may notice, if you log on to the Internet and you’ve recently did a search around BIO-key or any one of our products that you will start to see bannerage show up, when you log on and even do a Google or search for another product or unrelated search, maybe for clothing versus biometric technology. So, our SEO or our Internet based marketing is ramping up as we speak. And we’re going to go well beyond that over the next six months.

[Operator Instructions] Next we have a follow-up from John English, [ph] investor.

On this Windows event showcase that you’ve done across the country, does Windows in any way promote BIO-key when they do this as their preferred fingerprint technology? And does s BIO-key have some advantage over other fingerprint companies in getting business with enterprises because of this events and showcase that you do?

I can answer that question two ways. First, if you saw the initial announcement that we made with Microsoft, and it was with Microsoft about a week and half or two weeks ago, you could see that they were promoting us as the exclusive vendor, partnering with them for these events. So, the answer is yes, they’re promoting us and we’re promoting them. In the context of advantages, we, as I described in my prepared remarks, we believe we have a very distinct competitive advantage that Microsoft is really enamored with right now, and that is the quality and the cost of our fingerprint devices are dramatically lower than what is currently available on the market. And so we’re providing ergonomically designed devices. Our SideSwipe is perfect for tablets like the Surface. In fact, we’re doing a little bit of a redesign to make the device fit even better on a Surface tablet than it does today. So, they look at us as a vendor, as a company that can move very quickly plus our algorithms, our science, our technology is NIST evaluated and NIST rated is bulletproof. And so therefore that’s another competitive advantage that we bring to the table, stronger, higher quality software, ergonomically designed, high quality, low cost hardware, fully complete solution that’s plug-and-play with their platform. So they see that as very positive and we do as well.

So, if another biometric company wanted to compete with you from an enterprise company to an endurance [ph] company, could you say to them that your software installs quicker and easier and faster than theirs or it is Microsoft, we’re operating system pretty well compatible of all fingerprint technologies?

I can only answer the question as it relates to our software and technology, and I can tell you it operates and installs fundamentally automatically, and it operates very, very quickly. So, I can’t compare to other competitors. I’d have to know what competitors and so forth and so on. So, I’m not going to go there but suffice to say that we operate and function very, very well within their framework.

[Operator Instructions] At this time, it looks like we have no further questions. We’ll go ahead and conclude today’s Q&A session. At this time, I’ll handle the conference back over to management for any closing remarks.

Thank you. And thank you again for joining us today. We’re confident in the demand trends that have supported our growth over the past year and a half, and expect this trend to continue. We believe we’re well-positioned in the marketplace, both with industry-leading technology and solutions as well as a strong base of partners, resellers and long-term customers. I’d like to personally thank our shareholders and friends for their support and patience. We look forward to updating you again in January. Have a good day.

And we thank you sir and to the rest of your management team for your time also today. The conference call now concluded. At this time, you may disconnect your lines. Thank you again everyone, and have a great day.