Q3 2020 BIO-Key International Inc Earnings Call

Good morning, ladies and gentlemen, thank you for standing.

Hi, and welcome to <unk> key Internationals third quarter 2020 conference call.

During the presentation, all participants will be in listen only mode. After the speakers remarks, you will be invited to participate in a question and answer session.

A reminder, this conference is being recorded today Thursday November 12 2020.

I'd now like to turn the conference over to Scott Macon, Bio Keyes, Vice President of channel sales. Please begin.

Oh, Thank you for joining us. This morning with me today are buyer Key's Chairman and CEO, Mike Taposh Wall Street course in Chino, Our Chief revenue Officer, and Cc Welch Chief Financial Officer.

I'd 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. The words project estimate intend expect anticipate believe.

Plan may will and similar expressions generally identify forward looking statements such forward looking statements are made based on management's beliefs as well just sanctions made and information currently available to management.

We went to the safe Harbor provisions of the private Securities Litigation Reform Act.

1995 for a complete description of these and other risk factors that may affect the future performance of bio key international see risk factors in 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.

Mitch, which speak only as of the date me. The company also undertakes no obligation to disclose any revisions to these forward looking statements to reflect.

Statements to reflect events or circumstances after the date.

At this time I'd like to turn the call over to Mike Dipasquale, Mike.

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You Scott and good morning, everyone and thank you for joining our call today.

As we've all been dealing with the effects of the Corona virus pandemic. This past several months I wanted to start off by thanking the entire bio key team, including our new colleagues at fiscal star for their hard work and commitment during these challenging times.

I also want to congratulate Scott Macon, who just read our safe Harbor statement for assuming the very important new role of Vice President of channel sales for bio key.

Though the COVID-19 pandemic continues to impact our business in a variety of ways. The third quarter was a pivotal period for.

Bio key as we not only completed the recapitalization of the company, but we were able to build revenue momentum, particularly with our integrated portal guard solution.

During the quarter, we began to see a gradual return to more normal sales and marketing dialogues.

So many of those.

They're still remote meetings and many customer prospects have yet to fully reopened to IC vendor dialogues. Additionally, Q3 marked the first quarter incorporating the results of pistol star and its portal guard multifactor identity and access management or in business.

Sort of guide has proven to be an ideal solution for challenges created by the pandemic as businesses and institutions grapple to provide user friendly remote access.

In particular portal guard has demonstrated growing traction with higher education institutions seeking to strengthen and.

Putting line online access to educational resources for students faculty and administration as these institutions manage the spike in remote access requirements.

The portal guard purchase formally closed on June Thirtyth, the last day of Q2 and.

And we made significant.

Can steps and advancing our strategic vision for the company during the third quarter.

In July we successfully recapitalized our company with the proceeds from a public offering of common stock and warrants. This funding has put bio key now on the strongest financial footing, we've had in over a decade in.

Certainly it removes risks to our company from possible business disruptions related to COVID-19, or any other economic or political factors that could affect our company or our customers and allow us to focus our full attention on growth initiatives.

After repaying short term no financings funding the bulk of the pistol star acquisition and addressing other working capital needs Biocare ended the third quarter with $18.4 million in cash and just $235000 remaining on a note payable related to the pistol star transact.

Yes.

Our financial strength also serves us well when dealing with large enterprise and government customer prospects as well as partners, who seek assurances of long term strength when choosing partners for mission critical solutions.

It also allows us to make prudent investments in our business such as building out our biopsy.

Key Africa subsidiary and enhancing our sales and marketing team initiatives.

We are now extremely well positioned to execute on our backlog of over $75 million in contracts and to fully tapped the sales potential of our expanded team enhanced product portfolio growing customer relations.

Should ships and expanded visibility in the lucrative growth market for identity solutions, including authentication network security and access management.

CC will review, our Q3 financial results, which improved showed solid topline improvements over Q2, 2020, and the year ago third quarter.

We expect this trend to continue into Q4, and 2021 supported by our contract backlog and a strong outlook for our solutions on a global basis with particular emphasis on North America Africa and Asia.

As we mentioned in today's press release, we are achieving in it.

Traction in our African contracts as we have commenced work on the first of the two large projects in Nigeria.

These projects were delayed due to the COVID-19 pandemic and then more recently following civil unrest related to the police as well as reform concerns.

The Nigerian economy is now.

Well done business activity is beginning to return and our projects are beginning to move forward.

The first project to get underway involves our providing software and hardware solutions and support of the Nigerian Ministry of Labour program intended to create employment opportunities for recent college graduates.

Hopes in Nigeria.

This program has gained even greater importance in the wake of the pandemic and its impact on employment.

We're planning initial hardware and software deployments with anticipated orders for approximately $650000 in this current fourth quarter.

We expect.

Correct the project to ramp substantially over the next few quarters with total expected revenue of approximately 45 million by 2022.

We have another large scale project to provide biometric security solutions for secure authentication of customers for a major African telecom provider that is slated to start.

Whitley next year.

This project is expected to generate approximately $30 million of revenue over roughly two years.

On top of this we are continuing to build out our bio key Africa subsidiary to support government Civil I'd and business enterprise authentication and security opportunities.

These across the African continent.

We believe our breadth of multi factor authentication offerings, coupled with our biometric expertise positions us well in this burgeoning growth opportunity across the continent.

For example, we are looking to team with channel partners to deliver biometric security solutions.

Sounds for identification needs in areas, such as mobile communications and payments immigration and border security and social welfare programs. Some of these initiatives are attracting international funding as well.

Additionally, portal guard is becoming an integrated part of our core business providing.

On a more robust product offering across a broader range of business verticals. These verticals include financial government and highly regulated enterprises as well as higher education and state and local government.

It's not just market presence and customer reach but we are now a larger company in terms of bent.

Engineering product development and sales and marketing.

They are substantial cross selling or up selling opportunity with biotech biometric technology solutions that.

That can provide a more robust multi factor identical dedicate identification and access management single sign on to our existing.

Portal guide customers.

And we could also provide improved multi factor I am in Esa So solutions to our existing bio key customers.

To enhance our marketing efforts for our expanded product suite.

In August we named Kimberly Johnson, as our VP of product marketing.

Kimberly's charge is to provide.

Turning cohesive marketing leadership across the company and she brings to biotech strong track record of success.

Under her leadership last week, we unveiled a brand new integrated corporate website to clarify our company and product messaging.

Please be sure to visit our site.

Hi, good bio hyphen Doc key dotcom.

Finally, with respect to our outlook for Q4 beyond the comments. We've made we expect revenue to be substantially higher than in Q3, and we expect continued momentum carrying into 2021, driven by the growth of our core.

Business and the ramp up of our African projects.

Let me now turn the call over to Fred course, and Tino to highlight a few specific developments in our business Fred.

Thank you Mike.

As Mike said Q3 was a better quarter in terms of both sequential and year over year.

Revenue improvement and was achieved despite many projects in our pipeline being postponed or pushed into 2021 due to the pandemic.

We have made progress migrating to 100% subscription model, which includes both SaaS or cloud based offerings as well as on Prem offices or.

Offerings the.

The portal got SaaS platform was completed in Q3 with the strategic product launch that includes enterprise class a ws cloud infrastructure within a highly scalable system that is currently supporting over 35000 end users and can easily scale to support millions as we grow.

We have many customers who are migrating to the SaaS platform, which is both better for customers budgeting and also provides bio key with an up sell stable recurring software revenue.

We will also better integrating our marketing and sales functions around three key verticals education.

By.

Until services and government.

Jim Johnson, who was previously mentioned was appointed to head this effort to integrate the overall marketing plan tailoring specific tactics within each sales verticals for example, within the higher end vertical I know that one of Kim's priorities is to target larger institutions.

And we really believe that given our recognition and current customer base that we can become a more dominant player in this vertical.

We also plan to target new partners, who align well vertically within each channel.

In addition, we are also in the process of Onboarding current Channel Alliance program partners two out.

Quarter Guard platform on the Scotts direction, thereby expanding the potential reach of our solutions.

We also hired a strategic accounts executive late last month.

Obviously, we're very excited about building the team as we believe there's a large market opportunity both in the U.S. and abroad.

And we are working through.

Standout channel Alliance program beyond the Us and Africa to the Asia Pacific region, and the Middle East.

On the last call I said that we believe that the pistol star acquisition and the portal platform is a game changer for us and you're just starting to see its impact and our revenue.

The colors and that trend should continue.

Combined that with the exciting opportunity in Africa, and we think we are set up well for 2021 and beyond as the pandemic receipts.

We also think that to work from home and remote study are trends that will endure creating increased I'd or.

Complication and access management challenges the that we are uniquely positioned to solve.

With that.

Ill pass the ball to Cc for the financial review Thank you.

Thank you Brad.

Hi, Keith Q3, 20 revenues increased to 940.

30000 from 453000 in Q3 19, mainly due to higher license and service fees related to the proposed acquisition, which closed on June thirtyth.

And are included in the Q3 20 resolved.

Our real sales decreased by 12000 due to less hardware, including customer touch point.

Yes, and no orders for logs due to buy and Keith exit from the retail lock business.

For the nine months ended September Thirtyth revenues increased to 1.77 million from 1.73 million during the comparable 2019 period also primarily due to the higher license and service fees.

The inclusion of the pistol start 2020 results, partially offset by the lower hardware sales.

Gross margin improved to 78% Q3, 20 versus a negative gross margin in Q3 19, primarily due to the non cash software license amortization expense recorded in Q3 night.

18, which did not recur in Q3 20 adjusted.

Adjusting for the software license amortization Q3 gross margin would have been approximately 50% on a comparable basis.

Q3, 20 operating expenses included 1.8 million from the 1.2 million and that partially.

She's me with the increase primarily reflecting the inclusion of the pistols, our operating expenses in the consolidation.

Higher expenses also included new marketing personnel website integration of pistol star and additional costs associated with pistol Star office staff and other expenses and costs associated with the set up of.

African subsidiary.

Overall bio keys operating loss was reduced to 1.1 million in Q3 20 versus 1.3 million in Q3 19.

Other expenses were 2.2 million in Q3 versus 558000 in Q3 19, primarily related to the amort.

Station of the debt discount and debt issuance costs incurred as a result of the convertible debt financing.

Okay resulted in that as a result, net loss available to stockholders of 3.3 million or six cents per share and in Q3 20.

Compared with the.

In Q3, 20, compared with 1.8 or 13 cents per share for Q3 19.

For the first nine months of 2020 by Oki reported a net loss available to shareholders of 8.4.

4 million or 28 cents per share versus 5.1 million or 36 cents per share for the first nine months of two.

2019.

In Q3 bio key completed the sale of common stock and warrants for the gross proceeds of 24.8 million given the effect of the payment offering expenses and some accounts payable as well as the retirement of 4.2 million of convertible notes bio key has 18 million in cash.

And it was 235000 to the note payable for the five key for the pistol Star acquisition.

With that overview I can now turn the call back to the operator for the investor questions.

Thank you operator.

Thank you at this time, we will begin the question and answer session. GSK question you May press.

Star then one on your torched don't phone for using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

This time, we will pause momentarily to assemble a roster.

Okay. Your first question comes from Jack.

Andr hard from Maxim Group. Please go ahead.

Great. Thank you good morning, Hi, Michael and hygiene. Thanks.

Thanks for taking my questions.

So.

It's good to see the strong revenue.

Resolve those that exceeded my expectations. This quarter looks like this so star definitely contributed nicely to the results were.

Wondering if I don't believe you disclosed it but wondering if you're able to provide.

They're an explicit or maybe a rough estimate of what pistol star contributed to Threeq.

Revenue.

Cc altered.

Ill turn that to you.

What was that all about 50 50 split in the quarter. Okay. So 50 50 Jack.

50 50, Okay. That's helpful.

And then as you as you look at the net.

Next quarter here.

Obviously that the elephant in the room here for you guys that could really move the needle or these two large African contracts and I appreciate the.

Pretty granular update on the status of those.

It's encouraging to see that you expect one of them to start deployment and generating revenue.

Of the 650 K. a revenue of 650000, you expect from that one African contract in Q4.

How much how how should I think about that the segment level in terms of the services revenue licensing revenue in hardware, how how would you expect that to be broken out just roughly yes, Jack the good question and it's.

From that I think weve addressed before as we indicated as we start much of what we do will be.

Delivering hardware and deploying hardware.

And putting that into the hands of the resources on the ground there. So you.

You could look to that to be.

To be dominantly heart.

His work.

Got you Okay and then just just curious you know my I don't have as good of insight into how the deployment process and just just deal with the whole plans or our unraveling here. So just curious to know what why why only a six.

<unk> hundred 50, K kind of revenue initial hardware deployment.

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Oh, just relative to the $45 million opportunity. It's it's such a minimal amount. So I'm just curious what why why is it such a small piece upfront is that conservative is there room for upside there or is that just kind of.

With.

Was that expected.

Its initial startup so it's what we expected.

At the outset, when we would begin deploying.

Ours, our hardware in our services. So we were expecting this to begin back in Q2, obviously things have slipped so.

No. It was expected it clearly in purely is startup.

Okay understood and then I mean do you have any insight maybe into just sticking with this particular contract.

In terms of how the the remainder of the the revenue.

So are the purchase order will be deployed are allocated throughout the quarters.

Would you expect a sizable amount to then hitting Q1 21 from that contract or is it really just.

Still uncertain.

No no we expect the ramp to two to six.

You actually grow quarter over quarter, so as we get going as we begin deploying we expect that the ramp meaning the revenue each quarter out.

Out through 22022 is going to grow.

Obviously this is a 60 $45 million is a significant number so we're going to have.

Good to see a significant ramp in deployment and delivery.

Each quarter going forward.

Okay got it now I mean that makes sense.

And let me I'll, let me interject one one other item.

Hopefully as we get to.

The end of the year Bill.

Beginning of next year, we'll be able to predict and to be able to provide some guidance as to the deployment schedules and then ultimately what the.

Order and revenue impact will be so I think again as we get through the end of this year as we see things opening up as we get more.

Clarity on how things will proceed forward, we'll be able to be more predictable end with our portal guard business as you know its full and complete hsas.

And well not gets its full and complete subscription ultimately as Fred described we're moving our customers too.

To a SaaS platform and right now we're seeing great reception from our existing customers as well as prospects I think will be much more predictable in 2021.

Okay fantastic.

And that makes sense too.

As it relates to moving your customer.

Hers to a SaaS subscription kind of model for portal Guard has.

Dick were any of those actively converted and contributing to revenue in terms of like a SaaS revenue contribution or are those is that going to expected to really be active.

In Q4.

No it's Fred.

Described we have custom.

Customers on the SaaS platform. We have 35000 end users that have been using the solution from the start of Q3 to the end of the quarter. So that's going to continue to grow no. This is this is in place.

And running and operate.

And we expect that to grow dramatically.

Okay, great fantastic.

If if if.

If we just removed the went when I'm looking at the fourth quarter here.

And given your comments you know you are very positive on on your outlook of the I think the overall business is fair to say.

I think though if I exclude the 650 K you're embedding from this Africa contract would you still.

What's your confidence level or uncertainty and outlook on that.

The the non Africa related revenue would would that be up.

How confident are you that would be up Q over Q and year over year in Q4 highly.

Confident.

Got it okay, Great and then just lastly, maybe just a quick question for Cc, because I didn't see the I don't think the 10-Q is out yet.

Do you have that stock based comp number on hand for the third quarter.

I believe that was around.

30000 for the third quarter.

The total stock comp.

Yeah Yeah.

Got it fantastic all right Hum Michael I appreciate the update TC. Thank you good data point, it's great to see the momentum building it sounds like.

Yeah.

The deployment of these these major needle moving contracts is is finally.

On its way so.

Congrats on the on the progress update and I'll hop back in the queue.

Thank you Jack.

Again, if you have a question. Please press Star then one.

There are no questions in the queue. This concludes our question and answer session I.

I will turn the call back over to Mike They piss squarely for closing remarks.

Great first I want to thank everyone for participating in today's call. We look forward to updating you on our next quarterly call and of course, we'll continue to provide.

Interim news updates and reports as warranted. Thank you everyone stay safe and stay healthy.

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

Okay.

[music].