Q1 2020 Earnings Call - Q4 2019
Good morning, ladies and gentlemen, thank you for standing by and welcome to Bio key Internationals 2019 in first quarter 2020 conference call.
During the presentation, all participants will be in listen only mode. After the speaker's remarks, you'll be invited to participate in a question and answer session.
As a reminder, ladies and gentlemen, this conference is being recorded today Friday may 15th 2020.
I would now like turn the conference over to Scott Mannequin O'keeffe's, Vice President of marketing please begin sir.
Thank you for joining us today with me this morning, our biopsies Chairman and CEO, Mike you Pasquale.
Great question to you know, our chief revenue officer, and she she Welch Chief Financial Officer.
Like to remind everyone that today's conference call and webcast may contain forward looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements.
Words estimate project intends expects anticipates believes plan may or will and similar expressions generally identify forward looking statements.
Such forward looking statements or me based on management's beliefs as well as assumptions made and information currently available to management pursuant to the Safe Harbor provision of the private Securities Litigation Reform Act up 1990 fives for a complete description of these and other risk factors that may affect a few.
What's your performance of bio key international she risk factors and the company's annual report on form 10-K, and its other filings with the FCC.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date me.
The company also undertakes no obligation to disclose any revision to these forward looking statements to reflect events or circumstances. After the date maybe.
At this time I'd like to turn the call over to Mike you Pos wall Mike.
Thank you Scott and good morning, everyone. Thank you for joining the call today.
There are unprecedented times and for the first time since joining by Okay. I'm hosting this call from my whole.
Before I start I believe it's appropriate to pay homage to all of the first responders doctors and nurses that have been working the front lines in supporting those impacted with Corona virus.
We all them a data gratitude for all they have done over the past six weeks and if you live in the Greater New York area, you will know when I'm speaking to.
I also want to thank all of my bio key teammates for remaining incredibly productive through the sudden change in our work environment.
Today, we reported results for fiscal 2019, as well as the first quarter fiscal 2020.
Our 2019 results were delayed due to the impact of travel and work restrictions on the timely completion of our yearend audit and the filing of our 10-K.
For similar reasons, we have requested a filing extension for our first quarter 10-Q.
Rather than delay our Q1 reporting we have provided preliminary Q1 results with our full year 2009 audited results. So that we were able to discuss them on our call.
Our form 10-K has been filed with the FCC and finalized results for the first quarter will be filed on form 10-Q on or before the end of the month.
As you can see from our results fiscal 2019 was both challenging and deeply disappointing relative to our expectations going into the year as we anticipated revenues and cash flows from a significant software license that did not materialize as expected.
Well other business development initiatives progress, but we did not yield meaningful revenue contributions.
Our revenue shortfall created liquidity challenges for the company, which we were able to address with short term convertible note financing as well as one of the half million dollars and proceeds from the exercise of warrants at $1.50 per share.
But rather than 12 further on the difficulties, we manage the business through over the past year I think it would be more constructive to focus my remarks on how bio key has emerged in 2020.
I'm reminded of saying what doesn't kill you makes you stronger well there are certainly some truth to it as biopsy has emerged from the challenges of last year with a refined focus and without question. The most promising outlook in our history.
Our duty Asms root of in two very large initial contracts. We secured earlier this year for a total of $75 million in software consulting services and hardware systems that we expect to deliver over the next 24 months for two customers in Africa.
Recall, we first discussed our intentions to pursue opportunities in Africa during our third quarter call and now a little over six months later, we've been successful in unlocking enormous opportunities and future potential.
Our success in Africa has been the direct result of our channel partner program, which was designed to establish relationships with value added resellers that have established customer relationships region specific market knowledge and capabilities that can play an instrumental role in bringing bio key.
Into the small and large enterprise and government mental opportunities.
We have long felt that Africa represents a very attractive region of opportunity given its large size and population and how well biometric solutions are suited to solving some of the continents, most pressing security and fraud prevention challenges.
We've had some success in the region in the past such as our deployment with South Africa's Captech Bank.
But had generally found it difficult to advance our business development efforts there.
In the latter part of last year, we decided to invest in building a stronger footprint in Africa, and we opened our bio key Africa subsidiary to provide an in country presence led by a highly respected executives, including stiebel Waze and turn day JJ.
Africa like virtually every other market is relationship driven and those who are known interested in a field are able to accomplished so much more than those who are new to the scene.
Through Stephen Today, we were introduced to the technology transfer Institute of Africa, a well connected incubator of technology services and projects and a facilitator in bringing foreign technology expertise to bear in the African markets.
We're very fortunate at the site.
As our first African Challenge Channel Alliance partner.
Since then the team along with Ti and growing base of relationships have proven very effective at identifying opportunities and bringing bio key into the procurement discussions at a high level.
And efforts that had been instrumental in our early success.
Landing the two large contracts in Nigeria that we referenced in our press release.
Longer term, we believe these projects adjusted beginning of a very substantial opportunity to team with local partners to deliver biometric security solutions for large scale I'd and authentication needs in areas like mobile communications and payments immigration and border security and for social welfare programs men.
Three of which are attracting external funding from entities such as the World Bank.
And no opportunities in Africa currently to work those in the US at elsewhere, we were extremely bullish regarding pent up demand for enhanced multifactor authentication and security solutions that are needed to manage the distributed workplace created virtually overnight in response to the Corona van virus AEP.
Pandemic.
The pandemic is causing a temporary pause and a great deal of enterprise and government activity as we progressed a more normal business conditions, we fully expect increased interest in our solutions as enterprise works to put in place a more secure infrastructure for those who were now working outside.
Production of the under.
Finally designated Thats, an essential service given our work in healthcare defense law enforcement in the government bio key continue to operate at both staffing over the past two months, but most of our team have worked remotely.
As a result, we've remained in contact with our partners customers and prospects and have continued to provide excellent service and support.
Through these dialogues, we're hearing a similar and encouraging refrain, namely the desire to extend biometrics and other mouth multifactor solutions to help secure substantially expanded remote workforces.
Through these dialogues it has become very clear the extent to which enterprises are thinking and have added altered by the Corona Vivus pandemic and the substantially increased importance in priority being given to identity solutions that can help companies addressed the demands of a distributed workforce and.
Client base.
So to better position biopsy to compete for and when coming opportunities. We're intently focused on rounding out our suite of multi factor authentication solutions. So that we can become a one stop shop for customers no matter their choice of authentication methods, while our core expertise in value remains in biomet.
Eric solutions at close second and our ability to securely manage remote authentication is in the cloud.
So it would be premature to say more about our plans I did want to underscore. This is a major strategic and technology priority for Biocare in the us and around the globe and how I hope to have more to say about this in future periods.
Finally, with our with respect to our financial outlook for the current fiscal year.
Understandably reluctant to provide any sort of guidance and frankly, there I remain too many variables regarding timing schedules and the path to more normal business interactions to provide a reliable outlook.
However, what I can reiterate as that we've taken steps to improve our bottom line performance at the same time, we've positioned biopsy to execute on the two very large contracts. We're very confident that work will commence on these contracts likely in our third quarter, perhaps before and we've made it clear that weve.
Require significant advanced deposits prior to moving forward.
Given the project scale in time timeliness of approximately two years, we believe bio key is well positioned to achieve substantial growth and likely profitability for the full year 2020.
We also remain actively engaged in business developments here in the us in Asia and in other markets. In addition to several countries in Africa.
While we fully expect progress to be muted by the Kuroda virus situation, we're optimistic that our efforts can yield meaningful opportunities in a world that has been forced to invest in protecting their businesses and remote workers against the increased threats of a far more distributed workforce.
Given their scale and expected your duration the two African projects alone positioned bio key for substantial revenue growth and as I mentioned likely profitability for the full year 2020.
And we are confident that they will also allow us to pursue other large scale opportunities across Africa outside of just Nigeria and on a global basis.
We look forward to providing more visibility into the timing and expected impact of our Africa business.
As final planting is completed and the projects are underway.
Let me now turn the call over to Fred course, and Tino to review a few specific developments in our business Fred.
Thank you Mike.
First off I wanted to underscore what Mike has said about channel lights program and it's important for positioning okay to participate in the far broader base of opportunities.
We were fortunate to make quick inroads with this strategy in Africa.
And having proven out the programs Merit, we will continue out work to expand the program in the U.S. Asia and other regions around the globe.
Adding partners is the easy part.
The challenge is choosing the right partners and then working openly and cooperatively to support a mutual objective.
And showing up part in this focus is inline with our goals that their industry and customer reputation is strong.
And that they are both committed and able to invest meaningful resources in our collaboration are key to our thought process.
We are also optimistic regarding opportunities to accelerate outgrowth, providing authentication and access management solutions for election security and government related engagement.
We are working to build on our growing traction in the state of Florida.
Well over the past quarter, we expanded our penetration into three more county.
Bringing our total eight county election board that have chosen to deploy bio key solutions for their identification and authentication process for granting staff members and volunteers with secure access to voting data.
Of course, it is our goal to expand this into other counties and states as we progress toward the 2020 presidential election.
Finally.
To amplify mikes comments about the rapid growth in remote work.
We are working to develop a sample plugin that would enable uses of popular video conferencing tools like zone Webex go to meeting and teams to easily incorporate biometric authentication into the access control solution.
This solution will extend the flexibility and strength of biometric authentication into increasingly relied upon web applications.
With that I'll leave it there appears to call to Cc for the financial review they say.
Thank you Fred.
Okay 2019 revenues declined to 2.3 million from 4 million in 2018, mainly due to lower licensees, including the impact of bio keys transition into software subscription module.
And reduced hardware sales and service revenue.
As we've stated our transition to the subscription model substantially reduces the upfront revenue, we would realize from a perpetual license.
Our software license fees for 2019 reflect the acceleration of this trend. However, the subscription model provides the opportunity for recurring annual fees required for our customers to use our solution and this ongoing revenue stream has the potential to be significantly larger over time.
Our service revenue decreased during.
Due to reduced nonrecurring revenue of approximately $100000 well, our maintenance revenue increased slightly with associated subscription revenue.
Relative to our early expectations 2019, with particularly impacted by the absent the software license payments totaling 5 million that were expected in monthly installments.
Despite our active collection efforts over the past year, we determined that there collection is unlikely as a result, we were also elected to take a $7 million charged to fully right down the resealable license rights underlying expected payments.
As a result, we no longer need to record the software amortization expense related to the software license rights, which will substantially improve our reported results going forward.
The decline in hardware sales in 2019, primarily reflects a decrease in biometric lock sales as we transition from an enterprise only model for Smart luck technology, and we exited the lower margin U.S. and online retail market.
Reflecting lower revenue higher software amortization expense and lower license fees as a percentage of revenue we incurred a growth profit loss of 194000 in 2019 compared to gross profit loss of 120000 in 2018.
2019 operating expenses decreased to 6.4 million from 6.7 million in 2018, reflecting lower DNA expense and lower R&D and engineering expenses.
Hi, Oki reported interest expense of 1.1 million in 2019 related to interest amortization of debt discount and issuance costs for convertible debt financing, whereas our 2018 results reflected a 1.4 million deemed dividend from required repricing of outstanding warrants most of which.
But since expired.
For the full year 2019, Ironkey recorded a net loss of 14.6 million.
Three per basic share compared to net loss of 8.5 million or 73 cents per basic year per basic share in 2018.
Weighted average basic shares outstanding were 14.2 million and 11.6 million in 2019 in 2018, respectively.
We also provided preliminary financial results for our first quarter ended March 30, Onest 2020 in today's press release.
Final financial statements are not yet finalized for the period.
Q1, 20 revenue declined slightly to Fiat 530000 from 552000 into Q1 19, primarily due to lower hardware revenue related to buy accuse exit in the retail lock business and the decrease in maintenance revenue.
These were primarily offset by more than 150 increase in software license revenue.
Gross margin improved to 67% from Q1 twinning versus a negative gross margin in Q1 may 19, primarily reflecting the elimination of the 281000.
Noncash software license amortization expense recorded in Q1 19, confirming the accounting benefit of the software license write down in 2020 and future period.
Q1, 20 operating expenses declined to 1.7 million from 1.8 million in Q1, 19, reflecting the benefit of the cost reduction effort.
Reflecting.
Gross profit improvement and lower operating expenses bio keys operating loss was reduced to 1.3 million in Q1 20 versus 1.8 million in Q1 19.
At March 31st 2020.
Bio key had 1.3 million of cash and accounts receivable person to 700000 at Q at December 31, 2019.
Subsequently in May we raised 2.1 million from a convertible note financing with Warren.
No, it's convertible and an option at the option of the investor into common stock at above market conversion price of $1.16 per share subject to redemption at any time bye bye.
We also received 340000 and PPP funds via the FDA program to support our operations through the challenges of Cobot 19, and expect the ball if not all the funding to be forgiven pursuant to the program term.
With that overview, we can now turn the call over to the Investor question.
Operator could you. Please start the question and answer session.
Thank you we will now begin the question and answer session to ask a question. You May proceed Star then one hundreds touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to this time, we will pause momentarily to assemble our roster.
Our first question comes from Roger Slacken with Rs management. Please go ahead.
Thank you for the comments about Covidien all good work everybody's doing much appreciated.
My question has to do is overall revenues.
The story is a wonderful about the African contracts.
Sure they all come to fruition godless.
The Companys, obviously very good shape for the future.
As as things occur in the world as we're all seeing if there's any slippage in that what efforts if any are being brought about to secure.
Revenues, so significant import on domestic soil and United States and what are the likelihoods of that happening.
As of your current state of Affairs.
That good morning, Roger that's a great question and.
It's one that.
For sure we're very very focused on our core business outside of the recent African opportunities is providing multifactor authentication solutions for.
Enterprises healthcare institutions state and local government at federal government agencies, and that business and I'll, let Fred talked to that a little bit more after I finish year that business and our pipeline seems to be very very robust and we're morphing to be able to provide.
Slide a full and complete solution for our customers not just including our own biometrics, but also including other factors of authentication like challenged response and tokens and cards in keys things that are being used.
Commonly.
So we're very very focused on that and we have been building a strong pipeline of opportunities in that area now whether they will be highly impacted or moderately impacted by as I mentioned in my comments the delays associated with Corona virus.
Is really yet to be seen but I think it's very wise for us to focus on two threats of our business right. The large scale I'd components, which again right now happened to be in Africa, but the other thread, which is the core offering that we can provide for multi factor authentication for enterprise.
And other agency side I mentioned the other thing that is emerging very rapidly is work from home.
As the.
Typical small medium even large enterprise has been impacted immediately.
Two.
Force.
Our allow employees to access all of their corporate infrastructure and portals from hall, and it's very difficult to know who's sitting behind back computer or device at home.
And it was accessing all that information. So we have what we consider the perfect solution for that not only our software solution, but also our finger scanner technologies and the fingers scanners that we provide and are commonly available across the board in retail and bulk from from the.
Company directly for our enterprise accounts. So we see that also as a very very strong opportunity going forward and that one.
May actually accelerate.
Despite the existing issues that we're facing.
Appreciate it less follow up if I may.
We'll go through tough times.
We all operate.
Moderate size businesses buyback is a moderate sized.
By staffing.
During this.
Obviously missed.
Revenue numbers and everything so as a company done anything to reduces.
Workforce et cetera.
Because obviously if the sales are off the revenues off the volume of work as off of.
The commensurate work requirements are obviously off.
What's the company's thought on that list with you as well.
Absolutely.
We're looking and have looked across the board.
And as Cc mentioned at the tail end of her comments.
We did apply and did receive PPP funds to ensure that we could keep our staff onboard and as she mentioned, we expect that bid PPP funds, which totaled about $350000 for us.
We'll be fully forgiven. So that's one action we took immediately salary reductions as the second and clearly.
We're going to look in every nook and cranny for any expense that we can reduce including outside vendors consulting services. So we're we're looking across the board and our expenses are absolutely going to decline. We're also going to take a hard look now at our physical infrastructure.
Offices, I think everyone is going to do that not just by oaky, but.
I think theres, an opportunity to reduce footprint there.
And.
We'll see how it goes but the bottom line is we have been making good progress in reducing our expenses and we'll continue to do that if necessary. Thank you very much.
You're welcome.
As a reminder, if you would like to ask a question. Please press Star then one.
Our next question comes from Jack vendor away with Maxim Group. Please go ahead.
Hey, good morning, everyone.
Thank you for taking my questions, especially during these these times that we find ourselves and.
I guess I'll start with Michael while you your node you're not you noted you're not providing an explicit 2020 guidance outlook.
But did I hear correctly in your prepared remarks that you expect to finished 2020 with a positive operating profit.
Well, if our contracts the ones that our backlog I'll call it backlog not pipeline, but backlog if our backlog of contracts.
Begin to start up in the second half as we.
Anticipate we believe that will be the case.
Okay got you and is there any can you quantify what that would that backlog is currently in the how that's changed from last quarter.
We haven't provided those numbers, but it's kind of intuitive a with the announcements that we've made recently.
What the overall backlog would be as you know, we announced a 30 million dollar contract and then a 45 million dollar contract a host of smaller ones as well.
But if you look at that intake and transcend bad across 24 months right of course of two years.
You can figure it out get significant.
So that's about all the color I can provide at this point, but that again as all all out there and.
Has been out there from now for over a month.
Sure Fair fair enough.
So if I if I.
Tom was to those two contracts in that 75 million revenue opportunity.
Is there anything you can share in provide more color on in terms of the logistical plan on how you will approach the implementation of the contract and what what still needs to be done in terms of your preparation I believe you're gonna be targeting three Q 20 is kind of the.
The target for that to begin to what will you be kind of working on I guess, leading up to that that deployment.
Well, we're going to be deploying hardware software and services.
Across.
In particular, Nigeria to start here.
And so as soon as the.
The environment.
Is more open right, which right now again, they're experiencing in Nigeria. The same scenarios, we're experiencing here locked down.
They have fewer cases occur on a virus, but on the other hand, they have fewer tests. So we don't know what the future will hold there, but they were on full locked down.
They went to moderate locked down last week and the government and businesses are open from eight in the morning until two in the afternoon. So they have limited opening.
Quite frankly, it's a matter of the country opening up for us to begin the deployment.
That is the enrollment of the individuals that will participate in the systems that will be building.
First for a.
A large telecom in Nigeria, and then second on the second large contract are beginning to enroll.
And to train individuals.
To work through the Ministry of Labor.
To accelerate the adoption of advanced technologies across Nigeria. So it really is right now dependent on the opening and the opening stature of the country. So we're prepared and we're ready to begin moving forward, but we can only do that when the environment is such that.
We can start.
Sure that that makes perfect sense to me.
Is that is there any.
I guess is there any is there any bottleneck in fact it the countries not opened up is it would this whole to any sort of preliminary process, leading up to you know if the country opens up at the the the week before Q3 or something is there any delay that that.
Because as a result of that.
Rather if the country for open up say next week is there anything just in your planning and preparation, though that would be delayed just regarding the timing of the country opening up.
Opens up before the Q3.
Yeah, It's just hard to say I think we have to watch it we're watching it we have a.
Full team of partners.
And resources on the ground there that are monitoring this daily if not hourly so.
I think we just have to wait and see and see how things start up but once they start bio key certainly we.
And I believe our partners are ready to begin and what that will require as again initial deposits and.
We are ready to go we're ready to begin.
Delivering and deploying the necessary technology to get the programs and projects underway.
Excellent and then.
My follow up with.
Gross margin.
The positive surprise, just relative to my expectations for the quarter.
I know reflects an elimination of a noncash software license amortization as recorded last year.
Is is there anything else that.
That you can touch on there that would that would suggest that this is a more of a normalized gross margin go forward level.
Or where where would you expect a range that gross margin to bounce between.
I know theres a lot of factors involved in that but just because of the positive upside this quarter I just would like to see if there's any change the range that you'd expect in gross margin.
Well I think it's pretty straightforward, we exited as Cc mentioned in her prepared comments, we exited the lower margin.
Lock business, the biometric lock business.
And that it in of itself was a drag on our gross margins and so that is a big factor of the second piece. As you know is software is gross margins in the 90 plus percent range, our typical and classic hardware the ones that hardware that we manufacture and develop and deliver and some of the third party.
Hardware that we are resell.
Our gross margins average in the in the probably 60, 50% to 60% range on that hardware. So blended our gross margins could possibly be in the depending upon the software mix should be.
Anywhere between you know on the low end, 50% to a you know as high as 70, depending upon the mix. So that's typically what and historically, what we've had prior to entering the consumer lock business and we think we'll get back into those ranges again.
Okay excellent I appreciate you taking my questions and that's it for me. Thank you guys. Thank you.
Again, if you would like to ask a question. Please press Star then one.
At this time, the Q and a session has now ended are there any closing remarks.
Yes, I'd like to thank everyone for participating in today's call. We look forward to updating you in the next quarter. Thank you very much everyone stay safe and stay healthy.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Mm.
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Wow.