BIO-key International, Inc. (NASDAQ:BKYI) Q4 2023 Earnings Conference Call April 2, 2024 10:00 AM ET

Company Participants

Bill Jones - IR
Mike DePasquale - Chairman and CEO
Ceci 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 Fourth Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today Tuesday, April 2, 2024.

Now I would like to turn the call over to Bill Jones with Investor Relations. Please proceed, sir.

Bill Jones

Thank you, and thanks to all for joining today's call. Our hosts today are BIO-key's Chairman and CEO, Mike DePasquale; and CFO, Ceci Welch

As a reminder, today's conference call and webcast as well as answers to investor questions. include forward-looking statements, which are subject to certain risks and uncertainties that can cause actual realized results to differ from those currently expected. Words such as anticipate, believe, estimate, expect, plan, project or similar words typically expressed and identify forward-looking statements. These statements are made based on management's beliefs and assumptions as of today and using information 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 risks that may affect the future performance of the company, please see risk factors in the company's annual and other reports as filed on Form 10-K with the SEC. Listeners are cautioned not to place undue reliance on such forward-looking statements, which speak as of today only. BIO-key undertakes no obligation to revise or disclose revisions to these forward-looking statements to reflect circumstances or events that occur after today.

And now let me pass the conference to Mike. Mike?

Mike DePasquale

Thank you, Bill, and good morning, and thank you all for taking the time to be with us today.

After my remarks, Ceci will provide a brief overview of our performance and we will then open the call to your questions. At the outset, I did want to mention that because the audit of our 2023 financial statements has not yet been completed by our independent accounting firm.

We were not able to report our full financial results in today's release. And instead, we provided an overview of our preliminary results, which are subject to change. We have filed a Form NT 10-K with the SEC which provides us an additional 15-day period in which to complete and file our audited 2023 results.

Now turning to 2023. I want to thank the entire global BIO-key team and our partners for their dedication and hard work that enabled us to achieve substantial top line and bottom line progress in 2023.

BIO-key grew revenue by approximately 29% to $9.1 million, and we were able to trim our adjusted operating loss, adding back inventory reserve by nearly two-thirds to $3.6 million, substantially advancing the company to our goal of profitability. Following the close of 2023, we completed a 2-year $1.5 million prepaid license agreement with a longtime financial services customer, enhancing our balance sheet to fund 2024 growth initiatives.

Over the past year, Identity and Access Management continued to build in importance as more and more enterprises navigate security, efficiency and cost challenges related to their transition to the cloud. This ongoing migration and the increasingly hybrid work environment provide a range of growth opportunities for BIO-key, both with new customers and through the transition of on-premise customers to the unique benefits of our ID Software-as-a-Service solutions.

More and more enterprises are experiencing a greater number and a variety of security incidents, reflecting new attack mechanisms, reducing the efficacy of their cybersecurity defenses. Adding to the challenge are persistent shortages of cybersecurity personnel to prevent and respond to cyber-attacks and threats.

Further supporting the adoption of enhanced Identity and Access Management solutions are a growing array of regulations, standards and even insurance underwriting requirements. As we have mentioned, multifactor authentication and passwordless security are already front and center for any business that wants or needs to receive cyber insurance coverage. And the SEC's new cyber risk management and reporting rules went into effect at the end of 2023.

Finally, the Cybersecurity and Infrastructure Security Agency will formally publish its proposed rules for cyber incident reporting this week with a 60-day public comment period. The CISA rules would require covered entities to promptly report cyber disruptions and ransomware payments and is just another framework that will put cybersecurity top of mind for all enterprises, no matter what size in 2024.

We believe these examples serve as a very favorable backdrop for the future sales of our key product solutions, including PortalGuard IDaaS and WEB-key, which provide organizations an integrated approach to managing and securing all of their digital identities with technologies they already use while providing flexibility to support future needs.

Our platform allows users to authenticate their customers, employees, contractors and partners. It enables any user to connect to any device, cloud or application, all with a simple, customizable, intuitive and consumer-friendly user experience.

We use service security identity bound biometrics to support roving users without requiring them to carry their phone or a token. In response to the proven vulnerability of passwords, 2023 witnessed mainstream adoption of passkeys by Google, Apple, Amazon, Microsoft and others due to the versatile security user-friendly authentication experience that they provide.

Passkeys utilized a combination of cryptography and publicly infrastructure to authenticate users to websites and applications without the need for passwords. We believe the global use of Passkeys which eliminate the use and inherent risk of passwords will continue to expand at a rapid pace. To position BIO-key in this large growth opportunity, later this month, we plan to introduce Passkey:YOU, the first Passkey solution that utilizes biometric authentication instead of relying on phone or hardware-based token methods.

This differentiation makes our solution particularly compelling for a variety of enterprise use cases with planned enhancements to the solution coming out later this year. Turning to our go-to-market strategy. In the U.S., our direct sales team is focused on a pipeline of larger customer opportunities.

And while the sales cycle is typically much longer for these initiatives, they provide much greater potential to drive meaningful revenue recognition and opportunity going forward. Our other path to market is through the global channel alliance partner, or CAP program, which continues to build both in its geographic scope and its sales productivity.

We have built a base of over 150 partners, including resellers, system integrators and other distribution partners. We're committed to supporting the growth and success of our channel partner base in 2024 as it represents a very efficient and cost-effective means to expand our global customer reach. Our direct and channel sales strategy enabled BIO-key to achieve solid growth over the past few years, and we expect it to contribute to meaningful top and bottom line improvements in 2024.

The recurring nature of our SaaS and services model has provided a growing revenue base on which to add new deployments through new customer wins and the expanded penetration of existing accounts.

Annual recurring revenues represented more than 70% of BIO-key's total revenue in 2023 with a blended gross margin of approximately 65%. I've touched on many of the reasons for a very positive market outlook for 2024. But what is critical is the very attractive value proposition that our products provide plus the fact that enterprise security needs are not currently being met by mainstream authentication methods.

We are an industry leader in offering 17 authentication methods. And within our IAM solutions to meet an ever-evolving customer demand and use cases. However, it is our deep biometric experience and intellectual property and the strategic use of biometric technology provides that greatest differentiation for us and for our IAM solutions and our IAM customers. We currently have more than 600 customers across multiple industries using BIO-key to secure and manage access for approximately 40 million users around the world.

And we have partnered with some of the larger IAM industry players like SailPoint, Ping, and ForgeRock to expand our reach into enterprise accounts with deployed IAM solutions that can upgrade their multifactor authentication to include ours.

And as our brand becomes better known, we are increasingly finding that enterprises who have significant risk are turning to our channel partners and to our direct sales organization to upgrade their existing MFA to ours. For these and other reasons, we are excited and optimistic about BIO-key's potential to deliver continued growth and bottom line improvements in 2024 and beyond.

With that, I'll turn the call over to Ceci Welch, our CFO.

Ceci Welch

Thank you, Mike.

As Mike referenced, the audit of our 2023 financial statements has not yet been completed by our independent registered public accounting firm and therefore, are numbers provided in our release and our remarks today are preliminary and therefore, subject to change. 2023 revenues increased 29% to $9.1 million from $7 million in 2022 driven by increases in all license fees, hardware sales and service revenue.

Service revenues benefited from custom services for our new installations, civil security service fees and conversions from on-premise deployment of PortalGuard - to our PortalGuard IDaaS cloud platform. Hardware revenue benefited from the fourth quarter sales to a foreign defense agency in 2023, likewise Q4 '23, revenue grew 26% over Q4 '22, also driven by the aforementioned hardware sales to the foreign defense agency.

In Q4 2023, we took a $2.8 million noncash reserve on slow-moving inventory purchased for large projects in Nigeria in Q4 2023. The reserve expense, which was included in the cost of hardware, positive decline in the gross profit to $3.3 million in 2023 from $4.6 million in 2022.

Excluding the noncash charge, our gross profit would have increased 34% to $6.1 million in 2023. Also excluding the reserve, our gross margin would have increased to 67.6% in 2023 from 65.2% in 2022. We continue to pursue opportunities to monetize this hardware in Africa and other to further support our growth in operations.

Turning to operation expenses. Our SG&A decreased 22% to $7.3 million in 2023 reflecting lower sales and marketing expenses, including personnel and related benefits and outside services expenses.

Our channel-centric sales strategy is also allowing us to grow with minimum payments of all the related commissions or discounts to total revenue. Further, as many of our teams can now work remotely, we have downsized our corporate headquarter footprint in New Jersey in 2023 reducing annual lease expense and related occupancy costs.

These cost-cutting initiatives were slightly offset by higher professional fees related to regulatory filings and costs related to debt repayment and reverse split. Research and development included engineering expenses also declined by approximately $900,000 or 26% due to reductions in personnel-related benefits and outside service expenses.

Our operating loss was trimmed by $3.5 million to $6.4 million in 2023 versus the operating loss of $9.9 million in 2022. We continue to focus on cost-saving initiatives in 2024 to support our path to cash flow breakeven and profitability. In terms of our bottom line and reflecting revenue improvement and lower operating costs, IoT significantly trimmed its net loss by 48% to $6.2 million in 2023 from $12.2 million in 2022.

Likewise, the Q4 '23 BIO-key reduced its net loss to more than 40% to $4.1 million from $6.7 million in 2022, with both 2023 periods being impacted by the $2.8 million inventory reserve. As of year-end, BIO-key has current assets of $5.3 million, including $0.5 million of cash and cash equivalents and $3.2 million of accounts receivable and do form factor and $1.2 million of inventory net of the $3.2 million reserve.

Subsequent to the year-end, as we have mentioned in this release, BIO-key received $1.5 million in cash related to an expanded 2-year extension and expansion of license agreements with long-term financial services customer that utilizes our biometric technology for customer authentication.

That concludes our prepared remarks. And now I turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And today's first question comes from [indiscernible] a Private Investor. Please go ahead.

Unidentified Analyst

Good morning.

Ceci Welch

Good morning, Dan.

Unidentified Analyst

So the inventory reserve was increased from $500,000 to 3.2%. Is that what I heard you say, Ceci?

Ceci Welch

It was 400,000 last year in 2022 and then this year, another $2.8 million.

Unidentified Analyst

And - what is it - did you say $1.2 million was met out of the $3.2 million reserve? I'm not sure what that means.

Ceci Welch

Yes, we have other inventory that is not reserved, it's fingerprint readers and other products that come in and out on a regular basis, both here and in Hong Kong?

Unidentified Analyst

I guess I'm kind of wondering, does this mean - does this reserve mean that you guys think you can only get, say, $1 million or $2 million for the hardware? Or is there a potential that you'll have to write the rest off? I'm just kind of wondering what this means exactly?

Mike DePasquale

Well, I can answer the question on the reserve. It's fully reserved Ceci. Is that correct? .

Ceci Welch

The African yes, is fully reserved.

Mike DePasquale

So it's fully reserved. So - in the context of very specific to your question, do we think that we're going to have to sell it at a reduced price, not really sure. But the bottom line is all of that inventory when it's sold, that component of inventory will go right to the bottom line. And obviously, we'll turn into cash immediately. And so that's our focus right now.

And we have two, I'll call it, larger projects that look very promising for us to move a substantial quantity of that inventory in the short term. So I think from a cash and a bottom line perspective, it will be certainly positive for us in 2024.

Unidentified Analyst

Is the Passkey, are you - was there a lot of R&D on that? Are you done with the R&D? Should we expect an increase in R&D on that .

Mike DePasquale

No. It's been something that we've had in the works for a while. There's still a little bit of work to do around it, but it's - it's a product that we've actually demonstrated before a number of industry events, and we'll be launching it shortly, formally launching it GA shortly. What it does Dan as it allows our biometric to look exactly like a FIDO token without, again, the token or a phone.

So fundamentally, you can put your finger down on any one of our finger scanners utilize a biometric and have that act as a FIDO token. So think about a manufacturing floor where those employees can't carry phones around and you don't want them plugging tokens into the USB port of a kiosk or a computer that may be on the shop floor or for service techs perhaps in an auto dealership or those that are in a call center, where you don't want them to have, again, a phone and you don't want to provision tokens.

So this solution is a perfect, perfect enabler for a FIDO-type authentication without a device. So we think it's going to be very powerful. And most enterprises, large enterprises have departments or use cases where they can take advantage of this. And the beauty about it is it does not require infrastructure. It's very, very simple, and it can operate underneath anyone's existing IAM infrastructure.

So we could, for example, if a client is using Okta or a SailPoint or Ping or ForgeRock, they can fundamentally take advantage of this solution underneath that infrastructure and take advantage of our biometrics.

Unidentified Analyst

So is this a software-only solution then? Or is there still a hardware piece involved?

Mike DePasquale

There could be hardware involved if they need to purchase finger scanners if they don't have them. available. Yes, it's definitely a hardware opportunity, but it is a software solution.

Unidentified Analyst

I see. So instead of the FIDO key that the guy carries, there's a reader that goes with the device or whatever they use to log in or something .

Mike DePasquale

But it stays on the device. So it can be used by multiple individuals. So for example, keys, as you know, have to be deployed to each individual. And they have - and you have to deploy multiple keys in case an individual loses one or misplaced it or it gets damaged. In this case, you put one fingerprint scanner on the device and multiple users can take advantage of that and do a [FIDO] authentication without again having their individual device or their phone to use this a token.

Unidentified Analyst

Were your customers asking for this? I'm wondering, is there a differentiator that will make customers move from the dongle or the hardware device to this?

Mike DePasquale

Well, I think there's a number of potential reasons for that. Number one, the cost and the provisioning. So even take the money aside, these keys have to be provisioned. You've got to send them to individuals. We're looking at hybrid workforces today that, in fact, some fully remote and hybrid at best work environments that create a real difficult scenario to provision these devices.

So it's compelling to take advantage of a software and again, a kiosk-based biometric solution for the use cases I mentioned, right in call centers, manufacturing, healthcare, where multiple individuals access a single workstation. So it's pretty compelling. And yes, customers are responding very nicely to the use case potential and the opportunity and the cost savings associated with it.

Unidentified Analyst

Great. You mentioned 65% gross margins. Is that where you think you'll be in 2024 or ?

Mike DePasquale

As you know, that varies, right? We can be in the 60% to 75% range depending upon the hardware component of that particular quarter. But - but we're in that range. And I think on a blended basis, we were at 65%. We're certainly going to be there or above.

Unidentified Analyst

Okay. Of course, this time of the year, we always hope for some type of guidance for 2024. Do you have any feel for your recurring revenues or some idea that you can give us on what you feel your growth rate is going to be?

Mike DePasquale

Well, we've historically grown in the 20% to 30% range. And I would expect that we'll be able to continue on that trajectory, and that's historic. So we're not stretching here. We'd like it to be more significant than that. And depending upon the larger strategic opportunities that we have in our pipeline that is certainly possible and may happen.

As I mentioned in my prepared remarks, we have a bifurcated approach and go-to-market strategy, and that is to use our direct sales resources on the larger strategic opportunities that are a little bit longer term, but again, are in the high 6-figure to 7-figure range. and to utilize our channel and all of our channel partners to handle our small medium enterprise business and to become much more efficient in being able to consummate a larger number of transactions.

And so we're getting better and better there. Our partners are coming up to speed and are getting more independent in being able to source and then ultimately deploy our solutions. So I think as that evolves, we certainly will see growth on both sides of that bifurcated model. So we're not going to go off and provide guidance numbers. But if you look at our historic growth, we believe we certainly can continue to grow as we have in the past.

And we're getting closer to breakeven and to profitability and cash flow breakeven and cash flow positive, and we hope that will be a milestone that we achieved in 2024.

Unidentified Analyst

Okay. And what about - I mean last year, I think you announced $7 million, you were very happy with that in terms of recurring revenues. Do you have any kind of feel for I mean is it $7 million again for recurring revenues this year? Or is it up a bit or?

Mike DePasquale

Yes. I mean the bulk of our sales, our subscription-based recurring revenues. And so I think in our prepared remarks, we said about 70% of our 2023 revenue was recurring or contracted. And so that percentage is likely going to hold and maybe even grow. The only outside of our legacy customers, a handful of our larger legacy customers that still buy perpetual licenses, virtually everything we sell is subscription-based.

Unidentified Analyst

Okay. And the last question, I guess. So do you - how much did you scale down your office in New Jersey? I mean you do still have offices there? Are you guys...

Mike DePasquale

Yes, we do. We had quite a large 6,000, 7,000 square foot office, which we had for great, I think, 10 years. We probably had two lease renewals on that office. We closed that down, and we're now in the Bell Works facility in Holmdel, New Jersey, which is a shared office kind of complex. And so we still have our headquarters in New Jersey, and we have a small office there.

And it's a flex office. So we can utilize conference facilities, all kinds of different amenities if we need them, but we don't have to pay for them unless we need them and unless we're going to use them.

So we've cut our expenses down significantly there. Also, we look at whenever we have a lease renewal up, obviously, we're looking at efficiencies and opportunities. We're looking right now at our Eagan office in Minnesota, which houses our biometric technology resources and all of the equipment associated with that. And we're looking at that as well. There may be some cost savings for us as our lease expires later this year to even get more efficient.

Unidentified Analyst

I see. Do you have a number in cost savings that you can give us for closing down the office? Just curious .

Mike DePasquale

My guess is that, that's probably - when you think about all the infrastructure, fiber lines and rents, cleaning, I would say we're probably saving anywhere from $125,000 to $170,000 a year, if not more.

Unidentified Analyst

All right. Well, I think I've asked a number of questions here. So I'll get back in the queue. Appreciate it. Thank you.

Mike DePasquale

Thank you.

Operator

And our next question comes from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde

Okay, great. Good morning, BIO-key team. Thanks for taking my questions. So Michael, maybe just some more quick housekeeping questions as we kind of wait for the 10-K. I guess, first, when can we expect to see an income statement balance sheet kind of complete financial statements? Is that something we have to wait for the 10-K? Or is that something you can provide in a press release?

Mike DePasquale

No, we're going to wait for the 10-K. We just felt it made more sense. The auditors are - that just weren't at a point where we felt comfortable publishing those numbers. So within the next two weeks, that's our expectation is that we'll file the K and we'll have the full financials available at that time.

Jack Vander Aarde

Okay. And then in terms of - on the front page of the 10-K kind of gives an updated exact total share count. How many shares are outstanding if maybe Ceci has in front of her.

Mike DePasquale

Yes. It's just about 1.9 million shares, maybe a little bit less Ceci in that range.

Ceci Welch

Yes. You're right.

Mike DePasquale

That's it .

Ceci Welch

It's a little bit less than $1.9 million.

Jack Vander Aarde

Got you. About 1.9 . Okay. And then - so okay. So that being said, I guess, in terms of the fourth quarter revenue by segment, it's just - it's helpful for - to try to dig in to just to understand the moving parts here.

If I try to back into the fourth quarter, license revenue for 4Q? It seems like it was just about - just over $1 million maybe, kind of flat, maybe down slightly year-over-year. And services revenue may be about $450,000 down kind of year-over-year and sequentially, I believe. I guess, does that sound about right, 4Q license revenue just over $1 million and services revenue, about $450,000.

Mike DePasquale

Unfortunately, Jack, I can't answer that question. I don't know if Ceci has that data.

Ceci Welch

I do have that data, but it's not opened, but I know it was a big quarter for our hardware. So I can get back to you I guess. Yes.

Mike DePasquale

The only thing I can comment on, Jack, is that we had a large Defense Ministry had placed a very large order for our - both our software and the hardware to facilitate it. So it was a big hardware quarter for us in Q4.

Jack Vander Aarde

Okay. Understood. Let me see it. I think that's it for me. If I have any more I'll follow-up offline. Thank you.

Mike DePasquale

Thanks, Jack.

Operator

[Operator Instructions] Our next question comes from [Sam Chan] Private Investor. Please go ahead.

Unidentified Analyst

Hi BIO-key team. Good morning. The first question I have is the gross margin. The gross margin for of control is a lot higher than the mobile PortalGuard. Are we planning on selling the marketing PortalGuard in Middle East and Europe.

Mike DePasquale

I think - yes, let me repeat the question, just to make sure I understand it. So I think you said that the gross margins on our BIO-key software are higher than the gross margins on some of the software that we sell in Europe. Is that - was that your question? .

Unidentified Analyst

That is correct.

Mike DePasquale

So the answer is yes, we sell both the Swivel Secure product in Europe, and the gross margin on that product is 50%. Obviously, the gross margins on the products that we sell that are BIO-key-related are higher and so the answer to that question is yes, we sell both. And our plan is obviously to grow both of those segments. But yes, certainly, that's our mission and objective.

Unidentified Analyst

Thank you. And the second question is the - for the last couple of years, we do see revenue increase. And if you look at the breakdown by region, the North America is pretty flat, but we do have increase in Middle East, Europe and Africa. Is there a particular reason why the North America is pretty flat for the last couple of years?

Mike DePasquale

I would say some of the larger opportunities that we've closed like with the International Defense Ministry and a very large bank in Africa have certainly from - just from a revenue perspective, those larger strategic deals have contributed more to the overall growth in our business. Our transaction count seems to be higher in North America. The deals are smaller. And that's what we're very, very focused on right now, some of the larger strategic opportunities that we have in our pipeline are North American-based, so they're household name companies.

And I think you're going to start to see that grow here in 2024. So I think we'll grow across the board in each of the key regions in 2024.

Unidentified Analyst

Thank you. That's it for me.

Mike DePasquale

You're welcome.

Operator

This concludes our question-and-answer session. I like to turn the conference back over to Mr. DePasquale for closing remarks.

Mike DePasquale

Well, thank you, everyone, for joining us today. We look forward to updating you on future quarterly investor calls, including our Q1 call next month. Please reach out to our IR team, whose contact information is in today's press release with any follow-up questions. And as always, we'll provide news and updates in the interim via press releases. Again, thank you for your time this morning, and have a great day.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.