Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Inc. Fourth Quarter and Full Fiscal Year 2015 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 30, 2016. I would now like to turn the conference call over to today's host, Scott Mahnken, BIO-key's Vice President of Marketing. Sir, you may begin.

Good morning everyone and thank you for joining us today for our 2015 year-end conference call and Webcast. With me this morning are Mike Depasquale, BIO-key's Chairman and Chief Executive Officer, and Ceci Welch, BIO-key's Chief Financial Officer. Mike and Ceci will review our fourth quarter and full year results and progress to-date in the business, and then we'll open up the call to your questions. 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 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 obligation 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 Depasquale.

Thanks, Scott, and thank you all for joining us today. We are proud of our accomplishments over the past year and very enthused about how BIO-key is positioned to solve the fundamental IT security challenges that are plaguing governments, enterprises and individuals as they seek to protect their data, networks, businesses and e-commerce activities, and the stakes are also growing rapidly as businesses evolve their key processes into the digital realm. As the world becomes increasingly interconnected via the Internet, Wi-Fi and other networks, and as the number of devices and platforms proliferate, today it's not unusual for a person to have multiple devices from which they access key data and/or execute transactions, making the job of security all more complex. The problem is enormous and growing and yet little has been done over the past decade to change the way we protect ourselves, and in fact most of the increased spending on security has been on services such as consulting, monitoring and responding to intrusions, not on preventing breaches or fraud in the first place. But we believe strongly, and our belief is supported by a growing base of anecdotal evidence including customer and partner interactions and our own revenue growth over the past two years, that enterprises can no longer neglect their security vulnerabilities and they are awakening to the fact that ease of use generally equates to ease of compromise by hackers. Our experience is that the market is being driven to biometric security because we can deliver far more secure authentication processes than the password, PIN and other methods such as tokens that dominate the market. The rollout of finger biometrics on hundreds of millions of mobile devices, as we've spoken in the past, is one such sign. Though in an effort to deliver a seamless…

Thank you, Mike. For our fourth quarter results, the Q4 2015 total revenue rose 75% to $1,669,749 compared to $951,698 in Q4 2014. This was principally driven by a growing base of software license agreements with new and existing customers and record hardware sales. The Q4 2015 gross margin declined to 63% as compared to 76% in Q4 2014, principally due to the increase in lower margin hardware sales as well as the impact of our large customer project that was completed at the end of 2014. Q4 2015 operating expenses increased 16% to $1,473,308 compared to $1,272,025 in Q4 2014, due to slight increases in variable marketing expense, sales commission associated with increased revenue and R&D and engineering costs. Reflecting higher revenues and the Company's expense management, our Q4 2015 net loss decreased to $423,000 compared with a net loss of $547,000 in Q4 2014. For our full year 2015 results, total revenue increased 31% in 2015 to $5,261,000 compared to $4,006,000 in 2014. The revenue improvements reflected increases in selling activity and expanded deployment of our software license and hardware products which more than offset a $558,000 decrease in service revenue principally related to the completion of the large service contract at the end of 2014. The 2015 net loss decreased slightly to $1,857,000 versus a net loss of $1,884,000 in 2014. At the end of 2015, BIO-key had a cash balance of approximately $4.3 million, compared to approximately $800,000 at the year-end 2014, principally reflecting proceeds from the strategic investment. The year-over-year increase in accounts receivable reflects the higher revenue in the Q4 2015 as well as bookings of revenue in Q2 2015 for the delivery of software to an international telecommunications customer. BIO-key expects to collect that receivable within a few months. Additionally, in Q4 we…

[Operator Instructions] Our first question today comes from Richard Pew from Richard Pew Investment Counsel. Please go ahead with your question.

Excellent quarter and year and it's exciting to see BIO-key making good progress now. I have a series of questions and I'll throw them all at you and if you need me to repeat any, I'll be happy to go back to them. I'm curious about the publicity which I talked about last time, if you would hope for the stock to get higher enough to exercise your reverse split, obviously more than just the stockholders and whatever other new interested parties who have seen the software in your various exhibits, you need to have some sort of outlet to get more general public knowledge of what's going on with the Company. Number two, I'm curious about, if you are well aware I'm sure, China has been very successful in stealing all sorts of technology and software from American companies and I'm wondering what BIO-key is doing to protect itself from that exposure. Number three, I'd like to know some color on why BIO-key is not being sought after to stop these hacking invasions of corporate security. It seems to me like it's an ideal solution, but maybe I'm missing something. And finally, will you be willing to venture a guesstimate as to whether or not BIO-key will be profitable in 2016 for the final year? Thank you.

Thank you, Richard. So let me start at the top, as it relates to the first question you asked, and that was centered around visibility, what are we doing to create greater visibility not only among [indiscernible] customers and partners and [indiscernible] groundswell for our Company in general. We are doing a lot. We now have, as you know, since we've raised the additional capital in the fourth quarter, we now have the resources available to us to begin working on programs to do all of that. We believe very strongly that we are going to create the greatest visibility as it relates to customers through some of the relationships that [indiscernible] Microsoft, for example [indiscernible], I can't tell you. We had generated well over 500, and that's a conservative number, of leads as a result of our participation in the Ignite your Business events that we held with Microsoft towards the end of last year. That kind of visibility is leading us to tactical engagement [indiscernible] which ultimately is going to lead to revenue in 2016 for the sale of our products and licenses and software and so forth. So we believe that's a very strong way for us to get visibility. Our hardware products are creating a whole new dynamic, as we mentioned before. So this is nothing new. We'd like to move them into the retail venue and we'd like to be able to find an outlet to fulfill them even for our smaller enterprise customers so that we don't have to do it directly. So [indiscernible] much greater visibility out in the [indiscernible] Amazon and Alibaba and all this will emerge over the next quarter. So I think we're going to do a lot there. We have also initiated through our investor relations firm, Catalyst Global,…

All right, thank you very much.

Our next question comes from Roland Perry, who is an institutional analyst. Please go ahead with your question.

The leads you are getting from the Microsoft summit, are they for the SideSwipe itself or other services that the company is offering? And a couple of related questions. With regards to the readers, are those replacement fingerprint readers or for initial deployment? And then lastly, I'm just curious, has anyone tallied up what the installed base of fingerprint readers are, like I'm just curious about the overall picture of something like that?

Mr. Mahnken or Mr. Depasquale, are you able to hear me? Ladies and gentlemen, it appears that we are having some technical difficulties with the speaker location. We do ask that you please remain on the line while we attempt to address the issue. Thank you. Ladies and gentlemen, I do believe we have the speaker location reconnected to the conference call. Gentlemen, are you connected?

Yes, can you hear me?

We can hear you just fine. [Operator Instructions] Gentlemen, we'll start the question-and-answer session again with Roland Perry, the institutional analyst. Mr. Perry, you may proceed with your question.

That was funny. The leads you are getting from the Microsoft summit, are they for the SideSwipe itself or other services that the company is offering? Then I've got a couple of related, which is, with regards to the readers, are these for replacement or initial deployment? And then lastly, I'm curious, if anybody has tallied up what the installed base of fingerprint readers is in the United States? I don't have a clue if it's 10,000 or 1 million, I have no idea.

Okay, let me start with the first question. The first one was the leads that we are getting from the Microsoft events and directly from them through other marketing initiatives including the CIO summits that we attended over the last couple of weeks, are they for SideSwipe and other software and services? Both. So, yes, for our hardware, and second, yes for other software including finger matching software and integration to active directory that we provide. So the answer to that question is, both. In relation to your second question which centered around hardware, what the opportunity is in the context of installed base of not only finger scanners but devices that can use it, there are billions of devices that could take advantage of a USB type finger sensor as an add-on for logon to the device or to applications. So the market is very significant, the addressable market, for our hardware technology and our software technology combined.

Our next question comes from Jeff Sheley from Northland. Please go ahead with your question.

I had a quick question for you, Ceci, on the breakeven revenue dollar amount that you mentioned, I think I heard you say $7 million should be approximately breakeven. And my question is that fourth quarter reported revenues are quite close to actually being on an annualized run rate of $7 million of revenue and yet there was still a loss of $424,000. So I'm just wondering how a quarterly run rate on average of $1.75 million would get you to breakeven this year. Are you going to be getting quite a bit more leverage on the gross margin line or on the operating margin line or both?

First of all, Ceci, I just want to make sure, I want to clarify one thing and then I'll turn it over to you, I believe I said $7.5 million, not $7 million, but go ahead Ceci.

I think I probably didn't say the $7.5 million, I think I said $7 million. And again, it really depends on, yes, we have a good margin on our own software that we resell. It also depends on some of these deployments where the hardware and the software mix that we were getting in the fourth quarter, we had really heavy hardware and did okay. So it's really a mixture question right now, and if it's all hardware, it obviously is going to be higher, if it's a good couple of software deployments in some of the places that Mike was talking about then $7 million will be good. So it's really a range that we have for a variety of things.

Also, one other item, we had, as you might have expected and have seen, a significant G&A expense as a result of the transactions that we consummated in the fourth quarter. We spent quite a bit on legal expense that is not recurring. So in that regard, our expenses should be a bit lower, especially on the administrative side, and I think that will help us on the bottom line as well.

Got you. A quick follow-on question. What kind of gross margins do you see on hardware?

It varies, it depends on the product and the solution, but I would expect because of our buying power and our relationship with our partner and manufacturer that the gross margins are going to be in the 60% range.

Okay, thank you.

Our next question comes from [Dan Kemos] [ph], who is a private investor. Please go ahead with your question.

I got a question on the non-cash interest expense. Does that mean, the $103,000, does that mean you paid the interest in kind?

Those were warrants that were issued, yes.

Okay, warrants, but did you pay the interest in cash or in kind can you say?

In kind.

Okay. How many shares were that then?

I don't remember off the top of my head. I want to say – I'm sorry, I don't have that figure off the top of my head. It is in the K that will be released today though.

Wait a minute. Can I clarify? I just want to clarify. Dan, may I ask you a question? Were you asking that question in relationship to the interest or the dividend on the Preferred Series A and B?

Yes.

That was paid in cash.

Okay, good. I got it. Thank you. On the hardware, is that a run rate we can expect to go forward? That was a pretty good bump. Is that the run rate or was that a one-off maybe a big sale or something?

We expect that to be a lot bigger.

Going forward?

Yes.

Okay. On that line, pricing I think is important advantage I think that you have [indiscernible] for the readers. With this I guess pretty good increase in sales here all of a sudden, what's your potential to maintain the pricing power or should we expect a typically rapid competitive drift-down to marginal cost?

I can't predict what our competitors will do a year or two years from now. We are also innovating and have some new technologies in the pipeline. One which we have announced called SideTouch which is a very, very powerful product and very, very price performance competitive in the market, and I think that we're going to stay on the leading edge because we have the ability to design and develop these innovative technologies. So I can't speak to where the competition will be a year or two from now, but we're not going to stand still.

Okay. Let me ask you about a couple of the specific readers. Qualcomm's Sense ID I think uses sound waves and provides hope for under-glass sensors. I'm wondering if BIO-key would be able to support that new technology, in particular the liveness detect?

Absolutely. One of the key advantages, as you know, as we have spoken about through the years, is our interoperability. We are if not the only vendor in the industry to be able to support some 40 to 50 fingerprint sensors across the board in an interoperable fashion. So the Qualcomm sensor, ultrasonic sensor, is one that absolutely we can and will support within our portfolio of hardware supported devices, as with others as well. We are seeing some nice innovative technology emerging in the finger sensor business that we will also be able to incorporate into our packages over time if we so choose to do so. As you know, the EcoID uses the NEXT sensor. Our SideSwipe uses a sensor from Validity Synaptics and our SideTouch as we've announced incorporates a sensor from IDEX. The beauty about what we're doing is we can pick any sensor and incorporate that into our packaging and make that available to our customer base, and they can use it interoperably. That's the beauty about basically buying BIO-key. You are future proofing your technology.

Got it. Speaking to the IDEX sensor, I know IDEX I think mentions multiple fingerprint software technology partners. Are there any niches that you believe are good fit for the IDEX reader and BIO-key software in particular?

I mean if you look in particular just what we were talking about today, our work with Microsoft, and fundamentally any device that has a Windows platform were just sort of the automatic go to in that regard. Some of the reason that IDEX has other technologies available is for some very small sensors, which by the way are beginning to kind of end of life themselves. I mean I think what's being recognized now by most mobile handset providers and tablet providers is that bigger is better, and we get more data off a little bit bigger sensor. It gives us tremendous advantage in the context of accuracy and scalability and interoperability. So for those really, really small sensors, our technology wasn't designed for that and nor are we going to go out and design technology to support that right now because it's moving in a different direction. So, in that regard, IDEX has other technologies to support that for some of the smaller handset work that they are doing, perhaps with some of the customers in China or around the globe.

Okay, thanks. I'll get back in the queue.

Our next question is a follow-up from Roland Perry, Institutional Analyst. Please go ahead with your follow-up.

Let's talk about this $485,000 order, because if I don't ask you, you won't tell us, who were the original care provider? And if you can't tell us the name, could you tell us what part of the country they are from? And could you give me a little background on the technology that they are using, like what problem does it solve, what were they doing before they came to you?

So, yes, it's a regional healthcare provider in the Northeast. It's a very, very large university-based teaching system. It will support – this initial deployment will be for 10,000 users. It will be for secure biometric access to patient records and to ePrescribe controlled substances. Before this, they were using a combination of passwords and PINs and proxi cards. And they will replace all of that with 3,500 touch points, meaning 3,500 fingerprint sensors located throughout their infrastructure that providers, physicians, nurses, assistants and administrators will use to access what I just described.

Was that 3,500 your devices?

Yes.

That's good news. All right, thank you.

Our next question comes from [Dan Kemos] [ph], who is a private investor. Please go ahead with your question.

I don't know Ceci may have answer to this or of course Mike, I'm wondering what's the general methodology used to determine the annual guidance, just some color on that, and along the same line, any color on how you did the financial evaluation, what techniques were used I guess to arrive at the $12 million purchase price for the GoldJoy offer?

Two basic answers. Number one, we take a look at our pipeline, we take a look at our run rate, we take a look at the probabilities that we have against our pipeline and where we are in the sales cycle and that's how we come up with our guidance. It's a very disciplined process but also one that's made much easier because we use a CRM, we use sales force to enter every single opportunity that we have ahead of us. So, basically we take some science and there is also some art as you know to sales forecasting, and that's how we come up with the numbers. We've been pretty good over the last two years at predicting our numbers. The business is still very variable and thus we are moving away from quarterly guidance because of that. It's a definition of insanity. Look at last year, look at the year before, an up quarter, a down quarter, an up quarter, a down quarter. We can't predict that. That's very difficult for us to predict. And it got harder for us to predict now because the deals got bigger and we've got a new, an entirely new pipeline opportunity in our Asia-Pacific Hong Kong subsidiary. So we just decided to look at the year and to predict the year and show our investors what we see initially as we enter the year, where we expect to be at the end of the year. So that's the way we do it. Your second question was, how did we value the license arrangement that we entered into with the folks at China GoldJoy? Basically we took a look at the market opportunity for that technology and the potential as we integrated into our WEB-key platform. We took a look at the number of users that we could address given that we are looking at even though it's a B2B, it's also a B2C type opportunity for us, right. Mobile payments reach out to consumers. We took a look at the numbers of potential licenses that we could sell and that's how we arrived at that number. So, as Ceci mentioned, I don't know if it was breaking up for you but it was breaking up for me when she was discussing the financial treatment for the licenses that we purchased. We expect to deploy a significant number of those in 2016 and certainly more beyond to 2017.

Okay. Last question, maybe I missed it, but what is the pipeline now and was there any growth in the quarter?

Our pipeline is growing dramatically and that's really attributable to two things. Number one, as I've described in my prepared comments, we are starting to see more opportunities as a result of the Microsoft events and they are much bigger companies, they are large enterprises. The second is our new entity in Hong Kong which is servicing the Asia-Pacific region is creating many more new and bigger opportunities as well, similar in nature to what we described on the payment side, and we've already done some business in Q4 as a result with that payment company. So our pipeline is getting much, much bigger and it's going to continue to grow. We believe it will continue to grow. But the real value in a large pipeline is the conversion into revenue. And so again, I think we just decided to stop providing those numbers because it doesn't make sense. We can't correlate them together yet in an efficient and a consistent manner, so we are going to predict the year, which is what we did, and we're going to stick to that and we're going to update you as the quarters evolve, and our goal and objective again as I mentioned is to be profitable at the number we described and that's what we're going to focus on.

Okay, sounds good. Thank you.

We do have a follow-up from Roland Perry, Institutional Analyst. Please go ahead with your follow-up.

Don't mean to be hogging the airtime. Back to $485,000 order, I would imagine it's over a couple of buildings as opposed to being a one facility. So I'm trying to get an idea of what deployment was like, meaning how many individuals did you have to go there, did you have to teach them how to use it, was there a special class, just that basic information I'd like to know.

Yes, you are right about the fact that this is installed in a campus. So, it's multiple buildings, it's clinics and offices and annexes. So it is definitely deployed over or in a campus style. The major process that we go through in installing a solution and deploying a solution like this, which is what we are in process of doing in this regional healthcare institution, is enrolling the users. So simply put, each of the 10,000 users will enrol in this system, and there is a process to do that, and that will replace their requirement to utilize a PIN or a password or a card when they approach one of these kiosks for nurses stations or user stations to access the information that they may want to access. So it's a pretty straightforward process, and usually the institution who is very accustomed to deploying this kind of technology, hardware/software out to the user base, has a really effective way of doing it. So we just integrate into their processes to proliferate and deploy our solution.

I got a final question. 3,500 devices, that's actually quite a lot. Can you give me a little hindsight or insight into the manufacturing? I mean 3,500, how did you get it made so fast?

We deal with manufacturers and companies that turn these things around very, very quickly and actually inventory these devices. So these are BIO-key branded devices that we purchased from a manufacturer in Asia who turns them very quickly for us. We actually delivered all of these devices before the end of last year, before the end of December, and we took the order I believe late November. So we turned this in about 30 days.

Ladies and gentlemen, we have reached the end of today's question and answer session. At this time, I'd like to turn the conference call back over to management for any closing remarks.

I'd like to thank everyone for joining us for the call today and we look forward to sharing some additional information for you as we hold our first quarter's conference call sometime in May. Thank you very much, everyone.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.