BIO-key International, Inc. (NASDAQ:BKYI) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET

Company Participants

William Jones - Vice President, Catalyst Global LLC
Michael DePasquale - Chief Executive Officer
Alex Rocha - Managing Director, EMEA
Cecilia Welch - Chief Financial Officer

Conference Call Participants

Jack Vander Aarde - Maxim Group LLC

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to BIO-key International Second Quarter Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 12, 2022.

I would now like to turn the call over to Bill Jones, BIO-key’s Investor Relations. Please proceed, sir.

William Jones

Thank you. Thank you for joining our call. Presenting today are BIO-key’s Chairman and CEO, Mike DePasquale; as well as Alex Rocha, who is Managing Director of BIO-key EMEA; and BIO-key’s CFO, Ceci Welch. I will remind everyone that today’s conference call and webcast, and answers to questions include forward-looking statements, which are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected. Words such as anticipate, believe, estimate, expect and plan, or similar words typically identify and express forward-looking statements.

Such forward-looking statements are made based on management’s beliefs, and assumptions using information that’s currently available 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, please see risk factors in the company’s annual report filed on Form 10-K with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward-looking statements, which speak only as of today’s date. The company undertakes no obligation to revise or disclose revisions to forward-looking statements to reflect future events or circumstances after today.

And with that, I would like to turn the call over to Mike. Mike?

Michael DePasquale

Thank you, Bill, and thank you for reading our Safe Harbor this morning. Bill is from our IR firm Catalyst Global; Kim Biddings, who’s normally on the call, is on vacation. So again, thanks, Bill. Good morning and thank you for joining our call today. After my remarks this morning, I will turn the call over to Alex Rocha to review our efforts in Europe and the Middle East. Then Ceci will provide financial highlights for the quarter, and then we’ll open the call for investor questions.

The second quarter was the first full quarter of operating results from our Swivel Secure acquisition, which closed in March, and its integration into BIO-key is proceeding well and according to plan. Alex will discuss the business in more detail, but we expect it to make an important contribution to our 2022 performance as it significantly expands our international team, our operations, our customer base, and our growth potential.

Our revenue for the second quarter nearly doubled from 2021 driven by a 75% increase in software license revenue, reflecting growth in our installed base of customers, including the benefit of Swivel Secure. We continue to advance our core identity and access management business, both through inside sales efforts and our growing Channel Alliance Partner program or CAP program. Leveraging the CAP model, we expect 50% or more of new sales domestically going forward to be sourced through partners.

One of our key partners is Intelisys, where we have a master agent referral relationship with a very broad reach. We’ve had particular success with certain Intelisys agents. So we’re focused on developing those key relationships, as well as working to finding more successful agents within the Intelisys universe. We spoke on a panel at their channel partner events in Boston in Q2, and we continue to meet with their team to solidify joint marketing events and programs for the second half to continue to build on this relationship.

In the second quarter, we partnered with 3Eye Technologies, a value-added distributor of mobile, security and identity solutions with a network of value-added resellers and MSPs that expands the scope of our channel sales and marketing opportunities. This affiliation will enable BIO-key to introduce our complete IAM solution packages to customers in their network, particularly within the financial services and local government markets. Joint marketing programs developed in collaboration with 3Eye were launched in Q2.

Just last month, we announced that Darksteel Technologies, a managed security services provider or MSSP, in Orlando, had selected our PortalGuard identity-as-a-service platform to provide its customers with enterprise grade identity authentication security for access to desktops, critical business applications and data. Darksteel delivers enterprise class security, cybersecurity solutions to small- and medium-sized customers, expanding the reach of our solutions.

Also in Q2, BIO-key joined the Amazon Web Services Partner Network, a global community of partners who leverage AWS to build solutions and services for customers. BIO-key now also has access to the AWS ISV Accelerate Program, a co-sell program for companies that provide software solutions that run on or integrate with AWS. Co-selling not only provides BIO-key with more opportunities, but also can result in better customer outcomes given the mutual commitment from partners like AWS and BIO-key.

We continue to increase the penetration of our flagship PortalGuard solution within county and municipal government agencies, higher education institutions, and businesses and enterprises. PortalGuard resonates as a high value easy to deploy IAM solution that addresses increasing security threats of a hybrid workforce, and users that require access to critical data, applications and information from anywhere. Its feature set includes workforce and customer multi-factor authentication, Identity-Bound Biometrics, which is a big differentiator that BIO-key provides. Single sign-on and self-service password reset options that support complete enterprise grade IAM strategies.

Customers recognize PortalGuard’s flexibility and unique capabilities, including support for 16 different multifactor authentication methods, including, as I just mentioned, our industry leading Identity-Bound Biometric capability. New customers include a city in Texas that selected PortalGuard in Q2 to strengthen its overall security posture and effectively respond to evolving cyber threats.

As you may be aware, cyber attacks against municipalities have increased in the last year, not only in terms of ransomware for profit, but also to disrupt critical infrastructure with school districts, city halls, and police departments among the most vulnerable. Counties and other local government entities are choosing PortalGuard to provide strong multi-factor authentication, access management, and compliance with insurance requirements. This new customer relationship in Texas was secured by Dallas IT consulting firm Mejeticks through Intelisys.

In Africa, we have forged a new partnership with a company called eTranzact Nigeria PLC for equipping its mobile money agents that along with our Sterling Bank’s Specta relationship will accelerate the deployment of our solutions in the second half of the year. Separately, we are awaiting commencement of a voter registration project that is expected to require 2,000 of our Pocket10 devices. We also recently secured application programming interfaces or API’s for key access from the National Identity Management Commission or NIMC in Nigeria for verification of all national identity numbers.

In summary, we anticipate a rise in deployment of our hardware, transactional software and partner relationships in Africa. There’s an incredible demand for mobile security solutions across the continent. And we are front and center with the right technology and relationships to monetize this opportunity. It certainly has taken longer than we believed, but we remain very bullish on our prospects in Africa.

Switching the product development, BIO-key remains committed to continued innovation and new product development, such as our Q2 launch of important updates and enhancements to our MobileAuth solution. MobileAuth is currently the only multi-factor authentication mobile app that integrates the power of Identity-Bound Biometrics with other authentication modalities, allowing customers to build a more complete and secure multi-factor strategy.

MobileAuth supports palm scanning with our PalmPositive solution and facial recognition now with our FacePositive solution, empowering mobile devices to integrate with our PortalGuard offering. MobileAuth also supports Apple Face ID, Touch ID, and Android biometrics, as well as push token authentication. These enhancements make MobileAuth much more powerful and even easier for customers to meet their increasing authentication and security requirements.

I’m proud to say that BIO-key received further recognition in Q2 with a number of industry awards, including those for our PortalGuard solution mentioned in today’s press release. But there were a couple of individual leadership awards that I want to acknowledge. One is for our very own Mira LaCous, who received a Gold Globee CTO of the Year Award for security software in this year’s IT World Awards. And Kim Biddings was named as channel reseller network or CRNs, woman of the channel list for the second year in a row. Congratulations to both Mira and Kim, and to the entire BIO-key team, our employees and staff that play an integral role in our success and industry recognition.

BIO-key has built a strong base of product and service offerings, and an expanding base of partnerships to address the growing global demand for organizations to protect their data information systems with strong cybersecurity solutions. We continue to see expanding opportunities to grow our business globally, driven by compelling security solutions that are scalable, easy to use and deploy, and cost effective.

Protection begins with securing an organization’s digital borders with strong, but user friendly IAM solutions. Our PortalGuard platform meets this need, providing a strong customer value proposition with an expanding array of cutting edge authentication solutions. We will continue to build on our solution set both internally and be a value enhancing M&A opportunities that could also expand our customer base, or our sales and marketing reach as we have done successfully over the past 2 years.

Given the building momentum we are seeing in our business, including with the integration of Swivel Secure Europe, and further progress advancing opportunities in Africa. We are reiterating our full year 2022 revenue guidance of $10 million to $13 million, 70% of which we expect to come from recurring software license revenue.

Our guidance represents growth of approximately 100% or more, over 2021 sales. This outlook is supported by our solid capital position, talented global management and product development teams, as well as our expanding global sales, marketing and channel partner footprint. We’re focused on building on our positive Q2 momentum for the balance of 2022 and the company is positioned to breakeven operations or operating cash flow within this revenue guidance range subject obviously to our mix of software and hardware revenues.

With that, I’ll now turn the conference call to Alex Rocha to discuss our European and Middle East business. Alex?

Alex Rocha

Thank you, Mike. I’m very exciting by the progress we have made so far in integrating into BIO-key organization and maintain solid sales momentum. We are proud to announce that our sales team is already full operational with many years of knowledge and experience in identity solutions and projects. [Eric Nottingham] [ph] is covering Europe. [Nadine Mohamed] [ph] focusing Middle East and APAC; and [Joseph Francis] [ph] will use his expertise on Africa.

In September, a new member will join this team with the responsibility of selling our products in Spain and Latin America. To support the sales strategy, we both and high recognized sales engineer in EMEA with more than 10 years of experience only in identity. Regarding support our EMEA stock [ph] offered 24/7 with 2 hours SLA and as became the leader in the sector. BIO-key University will be available in Q3 to train our channel. We will offer an innovative online training solution that helps the channel knowing our product, even approve an exam and receive a PortalGuard certification.

Our international office are in Madrid and Dubai. And we’re going to expand soon to London, Frankfurt, Tokyo, and South Africa. All these combined with our strategy will make us a reference in the international market. Results are there and we have several new customers in the second sector – in the second quarter, 5 in Spain, 1 of which also operate in Germany, and several new Middle East clients including 2 in Saudi Arabia, 1 in Dubai and national – international organizations in the country that we cannot disclose.

Our priority is to build the channel engagement program with partner levels from reseller to plotting [ph], where our strategy is a 100% channel. And technologic partnership is another subject that is part of our strategy. And we are working close with SAP, SailPoint Okta and Microsoft on these methods. Our Identity-Bound Biometrics add value to their product.

PortalGuard family will receive PortalGuard MSP and PortalGuard CIM to feel the demand of our customers and the market and we are already counting on opportunities. PortalGuard MSP which will present innovative unique features request by the market is expecting to be released first then PortalGuard CIM will focus on e-shopping and online banking authentication needs.

The products are being development with garner expertise and guidance, who have been working closely with us in other subjects to improve our product and the company. All our products have been modified to be ready for the international market with high relevance for EU, where we have the concern of GDPR compliance.

Last note, we overachieved our revenue projected for Q2 by more than 50%. All good signs are that we are following the right strategy.

Allow me now to turn the conference calls to Ceci.

Cecilia Welch

Thank you, Alex. I believe briefly review the financials which were released this morning and will be filed with the 10-Q on Monday. BIO-key’s Q2 2022 revenue nearly doubled to $1.9 million from $1 million in Q2 2021. The period included $725,000 of revenue related to the Swivel Secure business that we acquired in Q1 2022. Our annually recurring revenue from software licenses increased 75% to $1.2 million in Q2 22 versus Q2 2021 due to new customers and migrating PortalGuard customers from on premises to cloud-based SaaS solutions, particularly in the higher education segment.

Service revenue increased 52% to $435,000 in Q2 2022 with 74% representing recurring maintenance and support. Non-recurring services increased 82% to $111,000 in Q2 2022 versus Q2 2021 due to new customer customizations and upgrades from on prem to cloud deployments. Hardware sales increased to $350,000 in Q2 2022, from $43,000 in Q2 2021, largely due to add-on orders from existing customers in Asia, and one order from our Pocket10 product from a new customer.

For the first half of the year, revenue increased 35% primarily related to the addition of Swivel Secure partially offset by lower hardware revenue. Gross profit grew to $1.2 million in Q2 2022 from $750,000 in Q2 2021 due to increased revenues. Gross profit margin declined from 76% [ph] in Q2 2021 to 63% in Q2 2022, due to growth in lower margin, hardware sales growth, and a decline in overall gross margin on license fees due to third party software required for the Swivel Secure licenses.

Operating expenses increased to $2.8 million in Q2 2022 from $1.9 million in Q2 2021 reflecting the consolidation of the Swivel Secure expenses, as well as new employees and related benefits. We also encourage higher research and development, and engineering expenses attributable to the costs associated with the development of the significant enhancements and upgrades in our MobileAuth application.

The company reported a Q2 2022 operating loss of $1.6 million versus an operating loss of $1.1 million in Q2 2021 due to operating costs increasing more than gross profit. BIO-key recorded a Q2 2022 net loss of $1.7 million or $0.21 a share as compared to a net loss of $1.2 million or $0.15 per share in Q2 2021. For the first 6 months is 2022 BIO-key reported a net loss of $2.7 million, or $0.34 per share, versus a net loss of $2 million or $0.26 per share for the first 6 months of 2021.

BIO-key ended the quarter with $12.3 million of current assets, including $4.9 million in cash and cash equivalents, $2 million of accounts receivables, and $4.9 million in inventory. Net working capital excluding deferred revenue was $9.4 million, and book value of total stockholders’ equity was $13.6 million, or $1.61 per share. So far, the first 6 months of 2022, we used $2.2 million of cash and operating activities as compared to $5.2 million in the year ago period when we invested in inventory to support our opportunities in Africa.

And with that, we can turn the call back over to the operator for investor questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde

Okay, great. Good morning, guys. I appreciate the update. I’ll start with a few questions. But Ceci, I will finish with a couple of questions. Just, I mean, you didn’t touched the Swivel Secure revenue and also what stock comp was in the quarter? And I’ll come back to that. Michael, thanks for the added color. Just a question on the 2Q license result looks like it is a big year-over-year, but it was down, I think, Q-over-Q. Just to understand why that was a bit more?

Michael DePasquale

License – We had a very large renewal from a customer in Africa in the first quarter that was valued over $600,000. And so – that was just kind of a timing scenario. That’s the reason that, that was – it was one big single order that really drove the Q1 license revenue. So we are still – excluding that we’re growing significantly, but the overall growth year-over-year is really significant. Part of that is growth in our base, as I mentioned in my prepared comments, and also adding the Swivel Secure business now is also significant for us. And that will continue to grow as we go through the year. As you know, in Europe, and Alex will probably comment on this later. Seasonality is significant, obviously, in the third quarter in the summer, things are slower, but they have a very big Q4.

So, overall, we expect our license revenue to grow significantly year-over-year. And as I mentioned, approximately 70% of our business is contracted meaning its ARR right now. We have moved now exclusively to a subscription model and are not selling any perpetual license anymore to new customers, only fulfilling against our existing relationships with older customers.

Jack Vander Aarde

Okay. That makes a lot of sense. I appreciate the color there. And then on that point, it’s good to hear the guidance is maintained. This is clearly implies a strong back half of the year, I think, your comments is now regarding Europe and strength in the fourth quarter. As a whole, would you expect revenue to be much stronger in the fourth quarter relative to the third quarter then, as for all of the revenue segments?

Michael DePasquale

Well, I think that’s always the case, right? So we would expect the fourth quarter just because – it’s the close of the year, because, again, the scenario in Europe that I just described, we’d expect Q4 to be certainly stronger than Q3. But we do also expect Q3 to be a good strong quarter for us. So if you look at – saying that the year will be back end loaded, we’ve done approximately, let’s say, $4 million in revenue in the first half. And to hit the minimum of our guidance range of $10 million, we’d have to do $6 million. Again, 70% of that contracted. I think we’re in a pretty good position to be able to achieve or overachieved those numbers.

Jack Vander Aarde

Okay, great. And then just maybe one more, I guess, like you have some more activity going on and positive developments with Africa? Can you just remind me – maybe how your guidance incorporates your 2 – the 2 existing African contracts? And, I think, it was pretty minimal, but just an update there. And maybe looking into 2023, what are your thoughts on these African contracts ramping up? Thanks.

Michael DePasquale

I think, first of all, you’re correct. We have, as you consider my comments, around 70% of our revenue being contracted, especially on the licensing services side. We have very little in our guidance for Africa in 2022. I did that intentionally, because it’s taken us quite some time right to get productive. That’s really happening right now. And it’s ramping significantly, because of the relationships that we’re building, in particular, with the financial institutions that are backing the procurement of all of this hardware that – we ultimately will sell in the beginning, and then creating an ARR, or recurring revenue stream for transactional fees that will start this quarter.

So, I think, we’re going to see that business ramp into the second half, we do not have a lot built into our guidance for 2022. In 2023, I think, you’re going to see a significant increase in revenue against the 2 big contracts that we have as well as some newer relationships that we’re building. But, what we’re really after, we’ve always said this, the hardware’s episode [ph]. So you sell the hardware to facilitate the transactional business, that’s really what we’re after. And being able to secure transactions across the agency model in Africa, and not just in Nigeria, but in other countries as well, is really important for us. Also, we have – we continue to build on our partner network in Africa. And you’re going to hear a lot more about that in the coming weeks and months.

But, in particular, we have a partner that has a contract for a large voting registration program in a country in Africa. And so there’s quite a bit of hardware associated with that particular contract that will come through BIO-key, as well as software to support it. So we remain really bullish on that market. It’s probably the most significant emerging market on the globe, and for the next few years. Also securing – all kinds of transactions, banking, healthcare, insurance, there’s government type access, that’s just going to continue to grow and grow and grow.

Also, on the other side of the business, Alex, given that we now have an office in Dubai, and are serving the Middle East out of that office. We will begin to proliferate the sale of PortalGuard across many of the countries in Africa through the initiatives and efforts that Alex will be kicking off in the next quarter as well.

Jack Vander Aarde

Okay, great. Lots of helpful color there. I appreciate that. And then maybe just lastly, Ceci, if you have it on hand, could you please remind me of the Swivel Secure revenue? And then what stock comp was in the quarter?

Cecilia Welch

Sure. So the Swivel was $725,000 probably 85% software and the web services. And the share-based comp was $84,000 for the 3 months, and $193,000 for the 6 months.

Jack Vander Aarde

Great. I appreciate that. All right, guys. That’s it for me. Thanks a lot.

Michael DePasquale

Thank you. Thank you, Jack.

Operator

[Operator Instructions] Your next question comes from [Dan Kenny] [ph] a private investor. Please go ahead.

Unidentified Analyst

Hi, guys. How much of the $350,000 in hardware sales was for Nigeria, if any?

Michael DePasquale

About $100 – or so $120,000 off the top of my head.

Unidentified Analyst

Got it. And did that come off the original sale from last year the $680,000? Or is that – no, because you already took that revenue? So is that original hardware sale? Has that been moved into a different way to account for that where the consultants have to get work and make income before you get paid on that? I don’t quite understand what happened to that revenue?

Michael DePasquale

I’ll defer to Ceci, but no, that was new revenue, Dan, that $120,000 or so that I just mentioned is new sales and new revenue to new partner customers.

Cecilia Welch

Right. So, yeah, it was $105,000 new customer for African product, but it was sold domestically, and it had been paid for already. So fully recognize that revenue.

Unidentified Analyst

Okay. But what happened – what’s happening with that $680,000 revenue sale or sale you took in revenues? I don’t know must be a year ago now.

Cecilia Welch

Yeah, so we are recognizing – I mean, sorry, we are receiving cash monthly on that. It’s smaller on the smaller side now, but it’s ramping up every month. So…

Unidentified Analyst

I think, you paid on it. Okay. I just noticed there was $150,000 reserve, I was just wondering what that was for whether that hardware or something that?

Cecilia Welch

No. That’s actually for a bond that we have in Hong Kong. Will it be fully disclosed in the 10-Q.

Unidentified Analyst

I noticed $122,000 in new debt was that for Swivel?

Cecilia Welch

Yes. That’s a loan that they have it was like we got for during the pandemic, they received the same thing government loan, and we are splitting it into current and long term. It’s getting paid over the next 2026 basically so.

Unidentified Analyst

Maybe a question for Mr. Rocha. What’s the percentage of Swivel customers that have converted PortalGuard at this point?

Alex Rocha

We continue to operate us 2 independent companies. That mean has not been converted yet and we expected that conversion going to be only see in the next year.

Unidentified Analyst

I see. And what’s your headcount at Swivel now after any reorganization?

Alex Rocha

Right now in Swivel Secure Europe, we are 12 persons. That mean we are half of what we have before, and the rest – the strategy is clearly BIO-key and that is where we are putting our focus.

Unidentified Analyst

I see. Thank you.

Alex Rocha

My pleasure.

Unidentified Analyst

Mike, the margin on your license fees looks like about 70% is that a reasonable number for the next couple of quarters?

Michael DePasquale

Yes. Yes, that’s a reasonable number. And keep in mind that the gross margin on the BIO-key PortalGuard licenses that are sold is much higher. But remember with Swivel, Swivel Secure and Alex’s business which is why again you’ll see us over the next year converting that base to BIO-key. We still [Technical Difficulty] pay a license fee to the mother company, right, the mother company, Swivel Secure. So the margins are a little bit lower. And I think CeCi mentioned that in her prepared comments. That’s why you saw the gross margin. Gross margins across the board go down, because of the mix of hardware. But, more importantly, the license fee margin just will tremor a little bit because of that.

Unidentified Analyst

Got it. A couple more questions here, maybe the SG&A looks like it grew about 50% in the second quarter over last year and 40% for 6 months or so. So the expense seems to be accelerating. Was that non-recurring? Or is there something driving that increase and where do you think that’ll settle out? What will be the growth rate in SG&A for the second half you think?

Michael DePasquale

Well, I’ll let Ceci address the core question, and then I’ll talk about the future. But go ahead, Ceci.

Cecilia Welch

Yes, so that is a full month – or a full quarter, excuse me, the integration is Swivel. So a lot of that in the SG&A is attributed directly to the Swivel. And research and development also has quite a bit extra in it for the development of MobileAuth. So going forward, I expect R&D to be reduced. And SG&A to stay, where it is – it’s going to be level we don’t have any hiring in the second half of the year except for maybe one more in sales and that’s about it.

Unidentified Analyst

I see. Okay. I think actually – that’s it. That’s it. I have – okay, thanks a lot.

Michael DePasquale

Thank you, Dan.

Operator

[Operator Instructions] I’m showing no more questions. So at this time, the question-and-answer session has ended. I will now turn the call back over to Mike for closing remarks.

Michael DePasquale

Thank you. I just want to thank everyone for joining today’s call. We look forward to updating you on our Q3 call in November. In the meantime, we hope to see some of you at the H.C. Wainwright Global Investment Conference in New York in September, where we will be attending in person. As always, we will continue to provide regular news updates via press releases as significant develops happen within the business. Once again, thank you for your time this morning and have a great weekend.

Operator

This conference is now concluded. Thank you for listening today’s presentation. You may now disconnect.