BIO-key International, Inc.

Good morning, everyone. Thank you for standing by and welcome to BioKey International's 2024 third quarter conference call. During management's prepared remarks, all participants will be in listen-only mode. Afterwards, listeners will be invited to participate in a question and answer session. As a reminder, this conference is being recorded today, Friday, November 15th, 2024. I'll now turn the call over to Bill Jones, Investor Relations. You may proceed.

Thank you, Wyatt. Our hosts today are BioKeys Chairman and CEO, Mike DiPasquale, and its CFO, C.C. Welsh. As a reminder, today's conference call and webcast and answers to investor questions include forward-looking statements, which are subject to certain risks and uncertainties that may cause actual realized results to differ materially from those currently expected. Words such as anticipate, believe, estimate, expect, plan, and project or similar words typically express and identify forward-looking statements. These statements are made based on management's beliefs and assumptions using information currently available as of today pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete description of these and other risks that may affect future performance of the company, please see risk factors in the company's annual report as filed on Form 10-K with the SEC. Listeners are also cautioned not to place undue reliance on forward-looking statements which speak only as of today. BioKey undertakes no obligation to revise or disclose any revisions to these statements to reflect circumstances or events that may occur after today. Now, I will hand the call over to Mike to begin. Mike?

Thanks, Bill. Good morning, and thank you all for joining today's call. After my prepared remarks, I will turn the call over to CeCe for a brief financial overview, and then we will open the call to investor questions. BioKey reported a solid Q3 performance, with revenue increasing 18% compared to Q3 last year to $2.1 million, which is a million-dollar improvement sequentially from last quarter. Importantly, high-margin license revenue rose 52%, to 1.4 million in Q3 24, which is a significant, significant improvement. We also received, subsequent to the close of the quarter, a number of large orders, one from a leading foreign defense ministry, as well as the province of British Columbia and Williamsburg, Virginia. Again, as I mentioned after the quarter end, we closed a large order from a long-time foreign banking and financial services customer for secure in-person identity, a portion of which will be reflected in this quarter or Q4 results and the balance in 2025. This customer has utilized BioKey technology to enroll the biometrics of more than 25 million of its banking customers in over the past few years as part of their know your customer KYC process and they have been using our fingerprint technology to verify customer identities against the bank card, account number or ID number prior to processing any transactions. They are now in the process of upgrading its system to BioKey's far more robust fingerprint only ID solution which allows them to positively identify the customer by matching solely their fingerprint against the biometric record securely stored in the cloud. This what we call one-to-many matching solution requires greater sophistication and IT resources than matching a biometric to a known account or ID number. As a result, the customer plans to host our solution entirely on the Amazon Web Services or AWS infrastructure to support the substantial technical demands of real-time one-to-many biometric ID. The customer is deploying our enhanced solution utilizing full benefit of our industry-leading biometric authentication technology to provide greater customer security, reduce fraudulent transactions, and enhance the customer experience as well as staff productivity by trimming transaction times by approximately 30 seconds. If you think about it, 30 seconds per transaction over millions of transactions is a lot of time savings. We believe this is a very exciting example of the power and efficiency of our biometric solutions to create transformational business and customer benefits. We plan to work with our customer and AWS, our partner, to develop a white paper or case study on this deployment and the significant value and benefits our advanced biometric solutions can bring to large-scale enterprise or government customers. We did have a few other large orders from existing customers recently, including a $500,000 follow-on order received in September from one of the world's most respected and tech-savvy defense ministries. The orders were pursuant to a three-year purchasing agreement under which the defense ministry has steadily expanded its deployment of BioKey solutions into new programs and user scenarios, allowing for secure phone lists, token lists, and passwordless authentication access to digital services. The deployment now encompasses over 33,000 users, and we expect additional awards as the Ministry expands the scope of our solutions to additional personnel. Likewise, as I mentioned, the province of British Columbia is adding 10,000 users to their existing deployment of our WebKey software, which is integrated with Broadcom's SiteMinder infrastructure to streamline and strengthen secure biometric access to applications via SAML2 federation standards. British Columbia is in the forefront of using biometric authentication for roving user scenarios that require advanced security. Delivered in a user-friendly way, which is where we really excel. Our biometric solutions also reduce the costs and risks of what you have solutions that only verify that a card, token, or even a password is present, but not necessarily with the authorized user. In terms of business development, I want to highlight the recent availability of our PortalGuard iDesk platform on Amazon Web Services or the AWS Marketplace. which enables Amazon customers around the world to purchase and deploy PortalGuard within their enterprise. Over 300,000 active customers find, test, buy, and deploy software solutions on the AWS marketplace. BioKey's position on AWS expands our visibility and reach into the community's substantial base of customer prospects. Though we are still in the early days and just starting to roll out marketing initiatives, we've been meeting with the Amazon sellers and partners to support this opportunity. We've already begun to source initial interest and product inquiries. The continued trend of remote work environments is likely a permanent fixture and additional regulatory requirements are increasing stringent cybersecurity underwriting standards. and they're mandating enhanced security solutions such as multi-factor authentication for employees, partners, and customers that access business systems and data, which are exactly the problems that BioKey solutions address. As with most small public companies, our performance varies on a quarter-to-quarter basis, mainly due to the timing and impact of larger customer contracts. Importantly, we are building a growing base of high-margin annual recovering revenues, or ARRs, with solid expansion potential. We will also continue to evaluate potential strategic opportunities to leverage our core expertise, products, and assets to create value for shareholders. We believe that the value of our technology, products, and our customer base with annual recovering revenues of approximately $6 million as a strategic value that significantly exceeds our current market cap. Today, millions of people use BioKey multi-factor authentication solutions on a daily basis for secure access to a variety of mobile and web applications, on-premise and in the cloud, from all of their devices. At BioKey, we go beyond just passwordless. We offer phoneless and tokenless authentication methods, which is a critical differentiator for retail, call centers, shop floor, and healthcare environments where roving workers use shared workstations. We remain very encouraged by the growing enterprise awareness of the importance of implementing secure, zero-trust identity and access management solutions, which is really the core of our business offerings. We remain focused on driving revenue growth and progressing our business to the point of profitability and positive cash flow over the coming quarters. We will support and leverage our channel alliance partners around the globe while also working to progress larger scale customer dialogues via our in-house direct sales efforts domestically. Turning to our balance sheet, we were successful in improving our cash position in Q3 with a approximately $1.9 million in gross proceeds from a warrant inducement agreement with an existing holder of BioKey warrants. The investor exercised warrants to purchase over 1 million shares of BioKey's common stock at an amended exercise price of $1.85 and received Series A and Series B warrants to purchase additional shares also at $1.85. With that, Let me turn the call to CeCe to review financials before we take questions.

Thank you, Mike. As you know, we issued our earnings release and filed our 10-Q last evening. So let me review some of the highlights, keeping in mind that our year-over-year comparisons are to the restated 2023 results as filed in our Form 10-K. BioKeys revenues increased 18% to $2.1 million in Q3-24, from $1.8 million in Q3 23 and $1.1 million in Q2 24. The increase was driven by higher software license fees and hardware revenue as several long-term customers expanded their BioKey deployments, partially offsetting the gains or declines in recurring and non-recurring service revenues. For the nine months ended September 2024, Revenues were $5.5 million compared to $5.9 million for the first nine months of 2023, as license fees and hardware gains were more than offset with the loss of large recurring software agreement and one large customization customer from a prior year period. To provide more background, we agreed to exit our Civil Secure Services Agreement in Europe in Q2, as it had proved to be challenging and fairly low margin business, did not justify the resources required. While the termination of the agreement provides some revenue headwind in the near term, this action should substantially benefit our blended gross margin moving forward. Our overall gross profit and gross margin comparisons improved significantly in Q3 24, primarily due to a $1 million hardware reserve that was taken in Q3 23. a higher portion of license fee revenue in Q3-24, lower costs to support deployments, and lower license fees for third-party software included in BioKey's swivel secure offerings. We trimmed our operating expenses by $46,000 in Q3-24 versus Q3-23 due to reductions in headquarters expenses, sales personnel costs, marketing show expenses, partially offset by an increase in professional services primarily related to the company's financing activities. Also offsetting lower SG&A costs was a $122,000 increase in research, development, and engineering expense related to personnel to support product development. Reflecting higher revenue and gross profit and level operating costs, BioKey's net loss improved to $0.7 million or $0.39 per share in Q3-24, from a loss of $1.8 million, or $3.22 per share in Q3-23. For the first nine months of 2024, we reduced our net loss to $2.9 million, or $1.69 per share, versus a net loss of $6.1 million, or $10.79 per share, in the comparable 2023 period. which included a $2.5 million hardware reserve. We continue to focus on increasing revenue and controlling costs to support our path to cash flow breakeven and profitability. In terms of our balance sheet, the cash position as of September 30, 2024, IOKI had current assets of approximately $4.6 million, including $1.8 million of cash and cash equivalents, $2 million of accounts receivable and due from factor, 387 of inventory, net of reserves, and 383,000 of prepaid expenses and other current assets. Mike mentioned two large customer expansions we expect to benefit our Q4 results and future quarters, and I look forward to updating you on these and other items in our Q4 call. This concludes our prepared remarks, and I'll ask the operator to prepare for Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our rosters. And the first question comes from Jack Vendorard with Maxim Group. Please go ahead.

Okay, great. Good morning, guys. I appreciate the third quarter update. Thanks for taking my questions. Mike, great to see the revenue pick up in the third quarter, which I believe is a typically seasonally soft quarter, at least in Europe. I guess it was the strength of the stronger third quarter. I guess some of it probably has to do with that large order that slipped into the third quarter. I think you announced last quarter that there's this large 450,000 order that may have slipped in there. But just give me your thoughts on where the upside was this quarter. And I do think it is typically a weaker quarter.

Yeah, thank you, Jack. Good morning. Yes, you're absolutely correct. Typically, the Q3 quarter, business is softer than any of the other three quarters in the year, mostly, again, as you say, because of the international business, right? Things are very, very slow in Europe in July and August. We did have a softer Q2 than expected because of some slips, so that's part of it. But we also saw some very strong business, as I described in my prepared remarks, for some existing customers. And so We're seeing a really, really positive trend in the adoption. I will call it the expansion of our solutions in some of our larger customer accounts. And, you know, that's a testament to the stickiness and the quality and the value of what we bring to the table. So this was a very productive and a really good quarter for us.

excellent well great to see that um you know one another question kind of follow-up is uh with regard to a specific order you press released it as well it was on september 10th uh it was a leading international defense ministry uh a 500 000 follow-on order uh that was announced september 10th so did that did that whole order get recognized in the third quarter or um just just curious there if you have that off the top of your head yes Okay, so that was recognized in the quarter. Okay, and then the much larger order from a long-time financial services customer for $910,000, that came subsequently after the quarter end. Will that all get recognized in the fourth quarter?

Yeah, as I mentioned, first of all, that was not in the third quarter. That was in the fourth quarter, as you're accurate with that. A portion of it, about $250,000, $50,000 or so will be recognized in the fourth quarter, and the balance will be in Q1. They are an annual subscription customer, and they doubled the size of their deployment. So their annual subscription, I believe, renews in February. So now that will be part of their newer and updated subscription. subscription starting next year. So about $250,000 this quarter and the $650,000 whatever in round numbers in Q1.

Okay, fantastic. Are you implying there's further orders related to that customer after the renewal in February or is this kind of a part of that?

No, there will be additional opportunities and expansion, but their annual now recurring revenue contract size will be in the $1.4 million range, so significant. That will be one of our larger subscription contracts.

Okay, great. I appreciate the color there. That's great to hear. And then questions, just a couple questions on the outlook, and then I'll hop back in the queue. So you expect 2024 revenue to meet or exceed 2023 revenue of $7.75 million. So this implies it looks like you expect at least a 4Q revenue of at least $2.3 million at a minimum, basically, which is above where I was. That's good to see. Do you expect the fourth quarter revenue to be mostly licensed revenue, similar to the third quarter? uh yes yes we do okay yes and and we expect to have a a good solid q4 yes okay great and um you know and maybe a question for cece as well if she wants to uh to chime in here um the the operating expenses in the third quarter it looks like uh All in almost 2.3 million. So a nice kind of reduction from the prior two quarters. So it looks like you have been pretty effective with cutting some costs here. Is this a good baseline looking at them? I can't quite recall. Is the fourth quarter, is there a seasonal uptick in OpEx at all? Or is this a good run rate going forward?

It's a fairly good run rate. We've done some, as we've said, some financing, so it's a little heavy right now. So we are looking long-term to just cut some of those types of expenses. But I would say, you know, the 2.3 is a good number or less, obviously.

Okay. That's very helpful. So that sets you guys up for – a fairly reasonable break-even revenue target, I imagine, as we move forward here in 2025. You know, Mike, with your license install base and subscription install base kind of ramping up here, it has been ramping up, Do you feel like you're at the point or getting close to the point where you have enough visibility to introduce formal guidance at some point? I'm just curious to get your thoughts when you might. What needs to happen for you to have that level of visibility and confidence? Thanks.

I think as we get into 2025, I think we will be able to do that. You can see that more and more of our business is subscription. We have really migrated especially the portal guard base. We're migrating that portal guard base to subscription. We have visibility into some larger opportunities, and I think we're getting close there. I think we're also, you know, look, our goal and objective, obviously, CC&I want to get this company to break even and to profitability. You know, we're moving very aggressively in that direction right now. So I hope that we'll be able to do that as we get into 2025, Jack.

Okay, great to hear. Well, I think that's all the questions I have for you. I appreciate the time, and good luck. Look forward to tracking the story.

Thank you.

Again, if you have a question, please press star, then 1. Our next question comes from Dan Comis as a private investor. Please go ahead.

Hey, guys. Good quarter. I'm wondering about do you have any kind of estimate for the recurring revenues you expect from the Defense Ministry going forward?

The Defense Ministry is not subscription revenue. They are still our, I'll call it one of our larger perpetual customers. We do have a subscription element in the agreement, but it's for support and maintenance. But the defense ministry is just continuing to expand. We're up to 33,000 or so users now. There's a long, long way to go and a lot of runway ahead there. So that business is going to continue to be significant over the coming two to three years, and it'll be in the ranges that we've seen in the past, where they've typically spent somewhere between a million or so, a million to a million and a half a year, sometimes more, sometimes a little bit less.

I see. What's the maintenance on that? Is that like 10% or something?

Well, it's for support. So it's for support.

Dollar-wise?

I can't say. It's dependent on the user count, right? So it's generally at 20% of of the typical contract value of the software.

Is there any recurring revenue on the British Columbia deal, or is that also?

No, that's a subscription.

Is there any estimate on the recurring revenue on that?

Yes, it's a subscription, yes. Yes, the answer to that question is yes.

No, no, but how much recurring revenue do you expect?

Oh, I don't. Dan, I don't know. I don't have that off the top of my head. I don't even know the size of that order, quite frankly, off the top of my head.

You mentioned that the gross margins were pretty high, and it was related to the hardware reserve. Does that mean that you sold some of the old hardware inventory that was reserved?

We have, and we continue to sell the hardware, and we expect to see more significant orders for that this quarter and beyond. So the answer to that question is yes. But also, we're very, very focused on higher margin licensed sales, and we're also, we've been razor focused on especially in our European operation, we had a large software maintenance agreement that was negligible in the context of margins. And we decided not to renew that agreement. So it's going to have a very positive impact on our overall blended gross margins. And more importantly, it's giving us an opportunity to focus more, especially with our resources, on the Bayuki products that are much higher gross margins, which, you know, are in the, our software's in the 80, 90% range. So that's another reason why you're seeing an increase in the gross margin. So overall, this is going to have a much, much better impact on our financials, and it's going to create a shorter pathway to getting to break even in profitability.

I see. Well, I think that's good news. Are you saying that that these kind of gross margins you expect to continue?

Yes. And we've been, you know, look, exclusive of the write-down, especially over the last year, year and a half on the hardware, our gross margins have been in that range. They've been in the 70s. We've been holding in that range, and we expect that to absolutely continue.

Thank you. Can you give some kind of number to how much hardware you sold in the third quarter?

CC, I think you can.

We reduced the inventory by about $100,000 just last quarter. We expect at least double or a lot bigger based on the contract that we expect to come in this quarter.

Well, we've already sold some this quarter and we have again. And I think I've spoken to this openly. We've been waiting on a very large order for a significant project. And it appears that that is going to happen this quarter. So we're thinking this is pretty positive for us. As you know, we've written down the entire inventory. And so it's all cash and it's all goes to the bottom line. So it's a very positive impact on the financials.

Yeah, yeah, absolutely. This is in Africa, is it?

You mean, is the project in Africa? Yeah. It's an international project.

Okay. So... Oh, I think, yeah, at least $2.4 million in the fourth quarter. And you said that was mostly licensing, right? I think you answered that question already.

Yeah, and some of this hardware as well, which, again, carries even a higher margin than the software.

I see, yeah. Right?

Yes, yes, yes. It carries a higher margin, yeah.

How much in one-time financial – costs are you going to have in the fourth quarter, and will that be the end of it, or are they done already from the financings?

I'm not sure I understand that. I think what CeCe was saying is SG&A expense, meaning legal and interest, that kind of thing. Is that what you're referencing?

No, I'm talking about I think you did a – you raised capital with a loan, and then you had to warrant – I'm just wondering if there's the one-time cost there that you'll be taking the fourth quarter.

CC, I don't know if you can answer that question.

We're always working on things, so I expect it to continue, but not at the rate it's been.

I'm saying they're usually financing costs, right, associated with the warrants and the loans and I'm just wondering what those costs are, just the one-time costs for the financings.

Well, for the first three quarters, it's been close to probably $200,000 between auditors and legal folks.

Okay. Were there any costs to the – I think you did the warrants in the fourth quarter in October, right? So, were there any significant costs, financing costs for that warrant deal?

We had some associated costs to that, of course, yes.

Just trying to get a feel for how much, if you can.

Also, by the way, I think the warrant inducement was done in the third quarter, if I'm not mistaken. CeCe, wasn't that September?

Yeah, it was. Yeah.

So that was the third quarter, Dan, so it's already disclosed.

Oh, okay. My mistake.

Sorry. It's already disclosed. It's already there.

So then... There shouldn't be too much for the fourth quarter then.

Well, I think that's what CC is intimating.

I see. I got it. Okay, got it. Okay, so you exited the civil service market. You're talking about the European operations, right?

Yeah, when you say civil service, I didn't – Didn't you say civil service?

That's what I thought your – No, no, no.

I said services agreement. We had a services support agreement with Swivel Secure Limited. And that agreement, again, was – it was – we really put that in place to be able to support, have a little more control over the support of the product. But, again, with the amount of resources that were required and the margins on the contract, it just didn't make any sense for us to continue.

So did that change your relationship with Swivel or – I'm not quite sure. Is this BioKey personnel that were? No, no.

I mean, we always had to remember we have a reseller agreement. We had a reseller agreement in place with Swivel where the margins on what we sold out of that product in the European markets was 50%. Our own products obviously carry a higher gross margin. It was always our goal, right? Over time, we negotiated that contract about two years ago. to ultimately morph those customers into the portal guard solution, which is a much higher margin product. And so this is kind of the, I'll call it the evolution of that business arrangement. And, again, it just didn't make any sense anymore for the thin margins to continue to operate with that agreement. Just pretty straightforward.

All right. So your accounts receivable are at $1.9 million. I note that's pretty large. When do you expect to be able to collect those sums?

We've collected a majority of it. We just happened to ship a lot of things in September, but most of it's been collected already.

In the fourth quarter so far? Correct. Okay, good. All right. Well, it sounds good, guys. Thank you.

You're welcome. Thanks, Dan.

This time, showing no further questions, the Q&A session has ended. I'll ask Mike DiPasquale for closing remarks.

Thank you, everyone, and thank you for taking the time to join our call today. Look for us at the Gartner IAM conference in December. And as always, we'll continue to update you via regular press releases. Feel free to reach out to our IR team, whose contact information is listed in our press release, if you have any questions regarding this call or any other items. Thank you very much, and have a great day and a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.