BIO-key International Q1 2023 Earnings Call Transcript

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May 16, 2023

Key Takeaways

  • Q1 revenue grew 59% year-over-year to $3.1 million, and operating loss was cut by 70% to $308,000, driven by recurring software/maintenance fees and new customer activity.
  • The sales pipeline includes several mid- to high-six-figure identity-bound biometric and IAM opportunities sourced from events like Gartner IAM and RSA, with multiple prospects in proof-of-concept stages.
  • Key customer wins: Capitec Bank expanded its biometric user base to 21 million, Swivel Secure launched a 1.5 million-citizen tax access project in Central America, and Alabama Power adopted PortalGuard for air-gapped networks.
  • Filing of the 2022 Form 10-K and Q1 2023 Form 10-Q was delayed by audit and acquisition complexities; both are now expected imminently, with no material changes anticipated.
  • A $400,000 inventory reserve was taken, but management expects to sell all remaining hardware inventory this year and convert over $3 million of receivables, supporting cash flow and note repayment.
AI Generated. May Contain Errors.
Earnings Conference Call
BIO-key International Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by, and welcome to the BIO Key International's First Quarter 2023 Conference Call. During management's prepared remarks, all participants will be in a listen only mode. Afterwards, listeners will be invited to participate in a question and answer session. As a reminder, this conference call is being recorded today, Tuesday, May 16, 2023.

Operator

I would now like to turn the call over to Mr. Bill Jones of Investor Relations. You may proceed.

Speaker 1

Thank you. Thank you for joining today's call. Participating today are BIO key's Chairman and CEO, Mike Steve Pasquale and CFO, C. C. Welsh.

Speaker 1

I remind everyone that today's conference call and webcast as well as answers to questions will include forward looking statements, which are subject to certain risks and uncertainties that can cause actual results to differ from those expected. Words such as anticipate, believe, estimate, expect, plan, project or similar words generally identify and express such forward looking statements. These statements are made based on management's beliefs and assumptions today 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 risk factors that may affect the future performance of the company, please see Risk Factors in the company's annual report as filed on Form 10 ks with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward looking statements, which speak as of today's date only.

Speaker 1

BIO key undertakes no obligation to revise or to disclose revisions to any forward looking statements to reflect circumstances or events that occur after today. And with that, I'll turn the call over to Mike.

Speaker 2

Thanks, Bill, and good morning and Thank you for to everyone for joining us today. We held our Q4 call just 6 weeks ago And so we can keep our comments brief on this call. After C. C. Does a brief update on our the status of our filings, our 10 ks and 10 Q, she'll review our financials and then we will open the call to investor questions.

Speaker 2

We are very proud to report quarterly revenue growth of 59 percent from $1,900,000 to $3,100,000 for Q1 'twenty three, Along with the substantial improvement in our bottom line performance, reducing our operating loss by 70% From $1,000,000 to $308,000 As we have discussed, our quarterly performance reflects our growing base of annual recurring software and maintenance revenue as well as strong new customer activity reflecting our growing global base of partners in our channel alliance program as well as enhancements to our direct sales efforts, including a disciplined focus on larger enterprise opportunities. These go to market paths are resonating in the market we serve and are generating a growing pipeline of opportunities, Including several large customer prospects in the mid to high 6 digits and above range. Specifically, our identity bound biometric solutions which address customer mandates for phone less, token less or password less authentication are really resonating in the marketplace. For example, at a recent Gartner hosted event, including the Gartner IAM Conference in April, we have developed several significant IAM deployment prospects that we are now working to progress to formal engagements. The Gartner events have proven to attract a very strong base of larger prospects with particular requirements that match well to our solutions.

Speaker 2

We're optimistic that a number of these larger opportunities we'll progress to formal deployments later this year, including a few that are already in proof of concept stages. Building on this traction, we attended the RSA conference earlier this month and will be attending the Identiverse conference early June. We've also refined our focus in Africa signing a number of new partners who will sell our PortalGuard solutions to the emerging markets in a number of countries on the continent. Concurrently, we continue to serve the larger contracts that we've executed 2 years ago. Our work with Nellix in supporting the onboarding of young college level graduates to support the emerging identity and payment ecosystem is starting to gain traction and you will be hearing more from us on this initiative in the coming months.

Speaker 2

1st quarter developments included the expanded use of our biometric client identification system to 21,000,000 users by Capitec Bank In South Africa from just 9,000,000 users in March of 2020. Our solution delivers enhanced security which streamline client identification in a highly scalable manner. Capitec has been a flagship banking client since 2015, when they took the pioneering step to leverage fingerprint biometrics to secure their clients against fraud and theft. Our work with Capitec has developed into a long term relationship, a very valuable customer case study and of course a growing base of recurring revenue for BIO key. Also in Q1, our Swivel Secure business launched a project to enable 1,500,000 citizens in a Central American nation to securely access their country's online tax applications.

Speaker 2

Our solution will reduce long queues for tax delivery, providing substantial benefits to both taxpayers and the tax authority. We have also recently supported Dayton Children's Hospital with their migration to Epic Hyperdrive, the next generation web based medical records application, our PortalGuard solutions provide support for their existing deployment of our biometric authentication solution in this new web based Epic environment. Our work with Dayton's Provides an excellent proof of concept for other EPIC clients utilizing our biometric solutions who are now contemplating the migration to EPYC HyperDrive. Our identity bound biometrics or IBB capabilities create a personalized authentication solution that is both highly secure and frictionless for end users. Shared workstations are common in a variety of settings in healthcare, customer service centers and even in manufacturing and industrial settings.

Speaker 2

Such shared workstation access Creates the potential for security vulnerabilities due to password, token or card sharing. Our IBB solutions allow customers to cost effectively deploy flexible authentication capabilities in a boneless, tokenless And cardless environment balancing strong security, expediency and convenience. Another Q1 highlight was with Alabama Power headquartered in Birmingham, which selected BIO key's Portal Guard and WebKey to secure their 15 enterprise air gap networks representing a new customer relationship for us. BIO key serves over 600 customers around the globe with strong engagement in higher education, county governments, Healthcare and Financial Services. Customers are attracted to our highly efficient, cost effective solutions that deliver secure, scalable, Easy to use, quick to deploy user access across hybrid user environments.

Speaker 2

As mentioned, we are seeing particularly strong engagement prospects that are seeking a more robust app authentication solution to meet their specific needs And eliminate commonly used authentication factors that are failing. To address this global opportunity, we continue to build on our technology and distribution partner efforts to position BIO key solution before a broader base of prospects. We're also working to more deeply engage with some of our larger and more influential partners. For example, Our EMEA Group recently met with a leading global web service provider about quickly onboarding BIO key into their accelerator program. We hope to have more to say on this next quarter.

Speaker 2

Additionally, we have an effort focused on building Alliances with other leaders in the IAM industry such as BeyondTrust and ForgeRock, where we can collaborate to bring the best in breed solutions to their customers. Though we had viewed these companies sometimes as competitors, we recognize today that there are mutually beneficial ways that we can work together. We continue talking with other industry leaders where we feel there are good synergies. We expect these tech partnerships to open new sales opportunities, Both small and large and we would not that we would not otherwise be able to pursue. As partner sourced sales opportunities are increasing, we're building awareness, engagement and understanding of our capabilities within our CAP program members, in that vein, we have watched the program we call Biokey University for channel partners to train online on BIO key integrated solutions with the first version ready to roll out this quarter.

Speaker 2

In terms of product development, we recently completed a WebKey passwordless login browser for EPYC. I mentioned that before. We're releasing 2 new Portal Guard family products, a Portal Guard desktop MFA for Windows and Mac this month and Portal Guard for MSPs this quarter as part of our effort to expand the capability and relevance of our suite of software solutions, especially for managed service providers, managed security service providers and all of our other partners in our partner network. On the marketing front, we have implemented an account based marketing model where our marketing and sales resources are better focused and aligned to target new commercial account opportunities with larger deal sizes. Our goal is to increase our average project size by 50% this year.

Speaker 2

For perspective, we've contacted 35 new marketing qualified accounts in April alone, leveraging this new approach. C. C. Will review our Q1 financials next, but from a high level, the strategic actions we have been taking enabled us to achieve record quarterly revenue in Q1, 2023, while also trimming our operating loss. Considering this solid start to 2023 and our growing pipeline of new and existing customer opportunities, including larger engagements, we are confident BIO key is positioned to deliver top line growth and bottom line improvements for the full fiscal 2023 year, with some variability in our quarterly results driven by timing of new business activity.

Speaker 2

With that, I'll turn the call over to Cece.

Speaker 3

Thanks, Mike. I'd like it first to address the status of our SEC filings. As many of you know, our filing of the 2022 Annual Report on Form 10 ks has been delayed. After over a decade of never missing the SEC filing deadlines for our quarterly and annual reports, we were unable to file our 10 ks on time this year. This was primarily due to our acquisition of Civil Secure in March of 2022 and our auditors being acquired by Markham LLP in February of 2022.

Speaker 3

The combination of the expanded operations in Europe and the transition to Markham, a large national accounting firm, increased the scope of work for both our internal financial team and outside auditors. Due to resource constraints, the completion of the audit process and the 10 ks filing have been delayed. We now expect our Form 10 ks to be filed by the end of this week, And we expect our Q1 'twenty three Form 10 Q to be filed early next week. Importantly, we have had no difference of opinion with our auditors, and we do not anticipate any material changes to our 2022 results or our Q1 2023 results from the results disclosed in our news release. Now I will turn to the Q1 results.

Speaker 3

Q1 'twenty three revenue increased to $3,100,000 or 59 percent over Q1 'twenty two, reflecting higher software license and service fees and the full quarter benefit of Swivel Secure Europe, which was acquired in March of 2022. Revenue from software licenses increased 69% in Q1 'twenty three and $136 sequentially to $2,500,000 in Q1 'twenty three, reflecting strength from new Portal Guard customers, existing recurring revenue contracts and Civil Secure. Service revenue increased 33% year over year to $527,000 which is down from $587,000 in Q4 2022. Due to the timing of new customer projects and existing customer migrations to the PortaGuard IDaaS from their on prem version. Hardware revenue was down 15% year over year and 43% sequentially, which is related to the mix of installations and other projects completed in the period.

Speaker 3

We view ourselves as primarily a software solution provider and use hardware to support the sales of our software, primarily for biometric deployment. Gross profit increased to $2,300,000 from $1,600,000 in Q1 2022 due to revenue growth. As a percent of sales, gross margin declined to 74% from 83% in Q1 'twenty two, with Evarist reflecting a full quarter of Swivel Secure revenues in Q3, Q1 'twenty three, which reflects 3rd party software license fees. Sequentially, our consolidated gross margin improvement from 66% realized in Q4 due to a mix in the due to a mix that included more high margin licenses fees in Q1 'twenty three. Total operating expenses decreased modestly to $2,570,000 in Q1 'twenty three from $2,600,000 in Q1 'twenty one 22, as higher selling G and A expenses related to Civil Secure were offset by lower research and development and engineering expenses, following the completion of significant enhancements to our mobile app and the Portal Guard IVAS enhancements, generally, we expect lower R and D expenses in 2023 as the outside resources required in 2022 are no longer required.

Speaker 3

IoT has also taken a number of expense reduction initiatives that should help to reduce the overhead expenses in the coming quarters for the full year of 2023, particularly as a percentage of sales. As a result of the higher revenue and slightly lower operating costs, BIO key reported a reduced Q1 net loss of 526,000 Or $0.06 per share versus $1,000,000 for a loss of $0.13 per share in Q1 2022. IoT ended the quarter with current assets of $9,300,000 including $700,000 of cash and cash equivalents, dollars 3,400,000 of accounts receivable and $4,400,000 of inventory. Our receivables are typically collected on a normal payment term of 30 to 90 days. In terms of inventory, much of what we purchased to avoid the supply chain concerns the patient of ramping up requirements related to the Civil ID projects in Africa is now being fully sold and liquidated to further strengthen our financial position.

Speaker 3

That concludes my remarks. And now we can turn the call back over to the operator for Q and

Operator

And the first question will come from Jack Venderotti with Maxim Group. Please go ahead.

Speaker 4

Okay, great. Good morning, guys. I appreciate the quarterly update and Really good to see the strong growth in operating improvement. Michael, great to see as well record quarterly revenue of $3,000,000 I imagine the majority of that first quarter revenue is attributed to recurring license revenue. Last year looking at the Q2 and the Q3, it did dip down below the Q1.

Speaker 4

So just looking ahead for this year, do you expect a similar sequential trend or do you expect sequential growth throughout the year? Thank you.

Speaker 2

Well, we don't provide quarterly guidance. So I can't address that very specifically, but our base is growing as you can see And getting much stronger. We did have a strong Q1 and Q4 Last year. And so if you think about our European business, for example, the summer is always a very slow Period. So the Q3 in Europe might be lower than, for example, our domestic business.

Speaker 2

So there will be variability, But we certainly believe that this business is going to grow. Our base is growing. Our Pipeline is growing. The size of the opportunities that we're pursuing is growing. And so all of this combined should put us in a very nice Position to do 2 things.

Speaker 2

Number 1, continue to grow aggressively, continue to build A significant base of customers, which we already have, but to build on that and ultimately, to get the Company to breakeven and profitability, which we expect to happen as we proceed through the year.

Speaker 4

Okay, fantastic. I appreciate the color there. And obviously, so the licensing side of the business in the Portal Guard I do want to just touch on the Africa contracts. I know you're standing with other opportunities in Africa and elsewhere in the world. But can you just provide an update on your visibility regarding the original 2 large Africa contracts?

Speaker 2

Yes, I made some comments actually in my prepared comments mentioned that we are expanding our partner network On the continent to push and sell our IAM solutions. We do have a really nice base in the Middle East. And We're continuing to expand our partner network to sell our traditional products there. As it relates to the two contracts we have, I mentioned that The larger one, the one that fundamentally allows for us to help the country employ College graduates, young college graduates, in get them into the identity and the payments ecosystem It is progressing forward, albeit slow, but you'll hear more from us shortly. That program and the Initiatives that we have centered around that contract are starting to take hold.

Speaker 2

The other contract as it relates to the hardware Sales for identity and identity management, there was that's centered solely in Nigeria And there was recently a national election, so the new regime is kind of taking over. And we're hoping that the country will settle down and that will begin the initiatives to continue to enroll all of the citizens there will continue. But we have a significant, as C. C. Mentioned, Portfolio of inventory associated with that project.

Speaker 2

We're not sitting on it. We are actively selling That inventory off to other projects and other programs, while we expect In Africa that to begin to produce and bear fruit for us as we get through the rest of the year. But We're not sitting on that. I mean, it's been nearly 2 years and just the Timultion in the country, the Consternation with the World Bank just makes it very, very difficult for us to continue to sit on that inventory and wait for that project to move forward. So We've got, I'll call it, a lot of irons in the fire right now, and we're progressing forward.

Speaker 4

Okay, great. And then maybe just one more follow-up for me on the liquidity side, given the current the cash balance, I know you mentioned you're rolling out some cost reduction initiatives, but can you just speak to your liquidity needs in cash runway? Thank you.

Speaker 2

Well, I think we you can see we have a significant portion of receivables. And as C. C. Mentioned, our DSO is pretty good. Typically, we collect all of our receivables in in the 30 to 90 day period, some customers again are net 45, most are net 30, but some are even out to net 90.

Speaker 2

So we have a significant Chunk of receivables that we expect to collect going forward well over $3,000,000 and we have the hardware inventory That we expect to be selling almost on a weekly basis. So we expect that Our cash flow from those two items right now will satisfy our business requirements.

Speaker 4

Okay, great. Yes, I see that looking at your balance sheet now. Okay, that makes a lot of sense. Very helpful. Again, congrats on the strong momentum and record quarter.

Speaker 4

It's great to see. Thanks, Michael.

Speaker 2

Thank you, Jack.

Operator

Our next question will come from Dan Kamath with Private Investor. Please go ahead, sir.

Speaker 5

Nice quarter, guys. Hi, Ken. Yes. I'm trying to understand the mix. Was there a large biometric deal in that $2,500,000 of license fees or was the big increase And license fees mostly slow?

Speaker 5

Just trying to understand the mix a little bit.

Speaker 2

Actually, it's a combination of all of our business. The large contract with Capitec Bank in South Africa is a biometric contract. So that is a substantial contract and that is biometric. So it's a Fair piece of that total license revenue is biometric as well.

Speaker 5

I see. And Was the Central American deal like 6 figures or something or you mentioned?

Speaker 2

Yes. It's a high 6 figure deal.

Speaker 4

Okay. All right.

Speaker 5

Yes. In the past, I think there have been some large 7 figure foreign contract receivables And they haven't been able to be collected. I mean is there any chance that any of these receivables, especially that $2,000,000 increase in AR becomes uncollectible?

Speaker 2

No, actually all of these receivables Our solid contracted orders, recurring revenue or new business that's Solidly contracted. So, no, the answer to that question is, there's always a risk, right, in any contract, but the answer is no. These are call, I would consider low risk contracts.

Speaker 5

All right. Fantastic. In terms of variability, do you expect At least year over year growth each quarter?

Speaker 2

We don't provide quarterly guidance. I'm just not going to go there. I think again the base I don't want to repeat myself. I think you heard me. The base is growing.

Speaker 2

The size the deal size is growing. The pipeline is growing. We expect to grow this business and we'd love to grow it On a record basis every quarter, I don't know if we can do that. We're certainly going to try, but we're going to grow pretty significantly Through the rest of this year. And goal and objective, Dan, is to clearly get to breakeven at a minimum profitability And be cash flow positive as we leave the year.

Speaker 2

I mean that's our goal and objective. And we're on a pathway to do that. We've got to execute.

Speaker 5

I understand. Maybe C. C. Can answer a couple of these. The OpEx came down to 2.6 from 3.4 in the 3rd quarter, which were significant drops in SG and A and R and D, on the Q4, you guys were giving estimates of $3,000,000 to $3,500,000 Was this an anomaly or is this kind of the range moving forward?

Speaker 3

So the lower range for the Q1 is the one moving forward, at the end of last year, we wrote off some of the things we had been writing off slowly. We just wrote them off in full at the end of the year. So yes, the Q1 was very different from the Q1. Q1 is more realistic for the expenses going forward, yes.

Speaker 5

That's fantastic. Can you say why or what happened to reduce the SG and A? I understand about the R and D. What came out of the SG and A?

Speaker 3

Well, we have been writing off, we have a note receivable, we are writing down slowly. We I've been collecting it slowly, but just not fast enough to present a nice financial picture. So we wrote off the rest of that, which was $146,000 It's in bad debt, but like I said, we expect to collect it, but more slowly than GAAP likes to let you recognize. And then there was another receivable that we also wrote off that We're not confident on collecting that one. So there was a couple of bigger numbers in the Q4 to finalize So in particular those 2 items.

Speaker 5

The other thing I was curious about, Cece, was there's The inventory was 4.9 in September. I think Mike said on the call that it was down to 4.8, but now we're down to 4 4 so, but only $72,000 in sales. Was that written off too or am I missing something?

Speaker 3

Yes, we took a reserve on the inventory of $400,000 that was in the 4th quarter numbers. So it will be in the final K numbers, but we did take that $400,000 reserve against the inventory just based on slow moving inventory, again another GAAP requirement.

Speaker 5

Okay. Well, let's see. I have one more question I think On that inventory, I'm wondering, can you give us, Mike, some color on a little more color on how much of that inventory you expect to sell moving forward this year? And do you need to sell that inventory to be able to pay off the note?

Speaker 2

Dan, are you done?

Speaker 5

Yes.

Speaker 2

Okay. Yes. So the answer to that question is all the inventory. So remember that that 4 Plus $1,000,000 number is not all associated inventory associated with Africa. So we have we do sell, for example, to a number of our larger clients, we sell Full and complete solutions.

Speaker 2

So we sell the hardware and the software to them, right? So we keep a decent amount of inventory on hand so that we can Quickly turnaround for them. So that's probably a $500,000 or so even maybe more. It depends on timing. But we expect to sell all of that inventory this year, not some of it, all of it.

Speaker 2

And certainly that Sale of that inventory will help us pay off the AJB note that we have, which is a $2,000,000 note. So the answer to that question is yes on both.

Speaker 5

Okay. There is one more. Ping was bought out recently and you mentioned competitive synergies. Is there a capability that you guys have that competitors are particularly interested in?

Speaker 2

Absolutely. I mentioned it in my prepared comments and you'll see it as a Common thread in all of our messaging on our website at every event that we do and fundamentally every talk that we give. It really is about providing tokenless, passwordless solutions that don't require A phone. So in the context of kiosks and roving users and workstations that are shared, we have a solution that others including Ping and Duo, a lot of the larger players do not have. And in larger accounts, for example, on the manufacturing floor or in the customer call center where they don't allow phones, We have a solution that can be complementary to what they may offer for SMS push or for again a phone token type option.

Speaker 2

So we don't necessarily have to be Competitive, we can be collaborative. And I think that's what I was trying to get across. And we're working with a number of these very large players To integrate into their overall ecosystem to provide that kind of a solution For those types of users within larger entities.

Speaker 5

Okay. Thanks a lot. Fantastic quarter. Good luck in the rest of the year.

Speaker 2

Thank you, Dan.

Speaker 4

I'm

Operator

showing no further questions at this time. The question and answer session has ended. I would like to turn the call back over to Mr. Mike DePasquale for any closing remarks. Please go ahead, sir.

Speaker 2

Thank you, and thank you everyone for joining today's call. We look forward to updating you on our Q2 call in August. As always, we'll provide news by press releases regarding anything that is appropriate. Once again, thank you for joining us this morning and have a great day.

Operator

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

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