BIO-key International, Inc. (NASDAQ:BKYI) Q3 2024 Earnings Conference Call November 15, 2024 10:00 AM ET

Company Participants

William Jones - IR
Michael DePasquale - Chairman & CEO
Cecilia Welch - CFO

Conference Call Participants

Jack Vander Aarde - Maxim Group

Operator

Good morning, everyone. Thank you for standing by, and welcome to BIO-key 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 15, 2024.

I'll now turn the call over to Bill Jones, Investor Relations. You may proceed.

William Jones

Thank you, Wyatt. Our hosts today are BIO-key's Chairman and CEO, Mike DePasquale; and its CFO, Ceci Welch. 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. BIO-key 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?

Michael DePasquale

Thanks, Bill. Good morning, and thank you all for joining today's call. After my prepared remarks, I will turn the call over to Ceci for a brief financial overview, and then we will open the call to investor questions. BIO-key reported a solid Q3 performance with revenue increasing 18% compared to Q3 last year to $2.1 million, which is a $1 million improvement sequentially from last quarter.

Importantly, high margin license revenue rose 52% to $1.4 million in Q3 '24, which is a significant improvement. We also received a, subsequent to the close of the quarter, a number of large orders, one from a leading foreign defense ministry and 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 BIO-key technology to enroll the biometrics of more than 25 million of its banking customers 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 BIO-key'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 is 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 customers 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 in 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 BIO-key solutions into new programs and user scenarios, allowing for secure phoneless, tokenless and password-less 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 WEB-key software, which is integrated with Broadcom's SiteMinder infrastructure to streamline and strengthen secure biometric access to applications via SAML 2.0 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 reduced the cost 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 IDaaS 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.

BIO-key'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 an additional regulatory requirements are increasing stringent cybersecurity underwriting standards, and they're mandating enhanced security solutions such as multifactor authentication for employees, partners and customers that access business systems and data, which are exactly the problems that BIO-key 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 recurring 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 recurring revenues of approximately $6 million has a strategic value that significantly exceeds our current market cap. Today, millions of people use BIO-key multifactor 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 BIO-key, we go beyond just passwordless. We offer phoneless and tokenless authentication methods, which is a critical differentiator for retail, call centers, shop floor and health care 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 from the core of our -- 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 approximately $1.9 million in gross proceeds from a warrant inducement agreement with an existing holder of BIO-key warrants. The investor exercised warrants to purchase over 1 million shares of BIO-key'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 Ceci to review financials before we take questions.

Cecilia Welch

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.

BIO-key's 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 BIO-key deployments. Partially offsetting the gains were 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 the prior year period.

To provide more background, we agreed to exit our Swivel Secure services agreement in Europe in Q2 as it had proved to be challenging and fairly low margin business and 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 cost to support deployments and lower license fees for third-party software, included in BIO-key's full secure offerings.

We trimmed our operating expenses by $46,000 in Q3 '24 versus Q3 '23 due to reduction in headquarters expenses, sales personnel costs, marketing show expenses, partially offset by an increase in professional services, primarily related to the company's financing activity. Also offsetting lower SG&A costs was $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, BIO-key'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 reserves. 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, BIO-key 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, $387,000 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.

Question-and-Answer Session

Operator

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

Jack Vander Aarde

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 or 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.

Michael DePasquale

Yeah. Thank you, Jack. Good morning. Yes, you're absolutely correct. Typically, the Q3 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 slip. 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 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.

Jack Vander Aarde

Excellent. Well, great to see that. One -- another question kind of follow-up is, with regard to a specific order, you press released it as well, it was on September 10. It was a leading international defense ministry, a $500,000 follow-on order, that was announced September 10. So did that whole order get recognized in the third quarter or just curious there, if you have that off the top of your head?

Michael DePasquale

Yes.

Jack Vander Aarde

Okay. So that was recognized in the quarter. Okay. And then, this much larger order from a long-time financial services customer for $910,000. That came subsequently after the quarter end. So that -- will that all get recognized in the fourth quarter?

Michael DePasquale

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 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 starting next year. So about $250,000 this quarter and the $650,000 whatever in round numbers in Q1.

Jack Vander Aarde

Okay. Fantastic. And then, is that -- are you implying that there's further orders related to that customer after the renewal in February or is this kind of a part of that?

Michael DePasquale

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.

Jack Vander Aarde

Okay. Great. I appreciate the color there. That's great to hear. And then questions -- just a couple of questions on the outlook and then I'll hop back in the queue. But -- 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 4Q revenue of at least $2.3 million at a minimum basically, which is above where I was. So that's good to see. Do you expect the fourth quarter revenue to be mostly license revenue similar to the third quarter?

Michael DePasquale

Yes, we do. And we expect to have a good solid Q4, yes.

Jack Vander Aarde

Okay. Great. And maybe a question for Ceci as well if she wants to chime in here. The operating expenses in the third quarter, it looks like 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 the -- 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?

Cecilia Welch

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, the $2.3 million is a good number or less, obviously.

Jack Vander Aarde

Okay. That's very helpful. So that sets you guys up for a fairly reasonable breakeven revenue target, I imagine as we move forward here in 2025. Mike, with your license installed base and subscription installed base kind of ramping up here, it has been ramping up. Are we at the -- do you feel like you're at the point or getting close to the point where you have enough visibility to kind of 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.

Michael DePasquale

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've really migrated, especially the PortalGuard base. We're migrating that PortalGuard base to subscription. We're getting -- we have visibility into some larger opportunities. And I think we're getting close there. I think we're also -- look, our goal and objective, obviously, Ceci and I want to get this company to breakeven and to profitability. 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.

Jack Vander Aarde

Okay. Great to hear. I think that’s all the questions I have for you. I appreciate the time and good luck. [indiscernible]

Michael DePasquale

Thank you.

Operator

[Operator Instructions] Our next question comes from Dan Cummings (ph), who is a Private Investor. Please go ahead.

Unidentified Participant

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?

Michael DePasquale

The defense ministry is not subscription revenue. They’re still are, I'll call it, one of our larger perpetual customers. They do -- 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, right, over the coming two to three years, and it will be in the ranges that we've seen in the past, right, where they've typically spent somewhere between $1 million or so, $1 million to $1.5 million a year, sometimes more, sometimes a little bit less.

Unidentified Participant

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

Michael DePasquale

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

Unidentified Participant

I mean dollar-wise?

Michael DePasquale

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

Unidentified Participant

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

Michael DePasquale

No, that's a subscription.

Unidentified Participant

Is there any estimate on the recurring revenue on that?

Michael DePasquale

Yes. It's a subscription, yes. Yes. The answer to that question is yes.

Unidentified Participant

No. But how much recurring revenue do you expect?

Michael DePasquale

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

Unidentified Participant

You mentioned that the improvement -- I mean 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?

Michael DePasquale

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 are 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 BIO-key products that are much higher gross margins, which are in the -- or software is 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 breakeven and profitability.

Unidentified Participant

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

Michael DePasquale

Yes. And we've been -- look, exclusive of the write-down, especially over the last year or 1.5 years 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.

Unidentified Participant

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

Michael DePasquale

Ceci, I think you can...

Cecilia Welch

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

Michael DePasquale

Well, we've already sold some this quarter, and we have, again, I -- 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 all goes to the bottom line. So it's a very positive impact on the financials.

Unidentified Participant

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

Michael DePasquale

You mean is the project in Africa?

Unidentified Participant

Yeah.

Michael DePasquale

It's an international project.

Unidentified Participant

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

Michael DePasquale

Yeah. And it will be -- and some of this hardware as well, which again, carries even a higher margin than the software, right?

Unidentified Participant

I see. Yeah. Absolutely. Yes.

Michael DePasquale

I mean [indiscernible] a higher margin, yes.

Unidentified Participant

How much in onetime financial costs are you going to have in the fourth quarter? And will that be the end of it or are they down already from the financings and...

Michael DePasquale

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

Unidentified Participant

No, I'm talking about -- I think you did a -- you raised capital with a loan and then you had the warrant. I'm just wondering if there's the onetime costs there that you'll be taking in the fourth quarter?

Michael DePasquale

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

Cecilia Welch

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

Unidentified Participant

I don't think she -- 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 onetime costs for the financings?

Cecilia Welch

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

Unidentified Participant

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

Cecilia Welch

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

Unidentified Participant

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

Michael DePasquale

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

Cecilia Welch

Yes, it was.

Michael DePasquale

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

Unidentified Participant

Okay. My mistake. Sorry.

Michael DePasquale

Yeah. It's already disclosed. It's already there.

Unidentified Participant

So then -- there shouldn't be too much for the fourth quarter then?

Michael DePasquale

But I think that's what Ceci is intimating.

Unidentified Participant

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

Michael DePasquale

Yes. When you say civil service, I didn't...

Unidentified Participant

Didn't you say civil service? That's what I thought you're...

Michael DePasquale

No. I said services agreements. We had a services support agreement with Swivel Secure Ltd, 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.

Unidentified Participant

So did that change your relationship with Swivel, or -- I'm not quite sure, is this BIO-key personnel that were...

Michael DePasquale

No. I mean, we always had -- remember, we have a reseller agreement. We had a reseller agreement in place with Swivel, where the margins on what we sold in -- 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 PortalGuard solution, which is a much higher-margin product. And so this is kind of a, I'll call it, the evolution of that business arrangement. And again, it was -- it just didn't make any sense anymore for the thin margins to continue to operate with that agreement, just pretty straightforward.

Unidentified Participant

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

Cecilia Welch

We've collected the majority of it. We just happened to ship a lot of things in September. So -- but most of it has been collected already.

Unidentified Participant

In the fourth quarter?

Cecilia Welch

Correct.

Unidentified Participant

Okay. Good. All right. Well, it sounds good, guys. Thank you.

Michael DePasquale

You’re welcome. Thanks, Dan.

Operator

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

Michael DePasquale

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.

Operator

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