Q1 2024 BIO-key International Inc Earnings Call

[music].

Good morning, everyone. Thank you for standing by and welcome to Bio key International first quarter 'twenty 'twenty four conference call.

During managements 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 is being recorded today Tuesday June 18th 2024.

I would now like to turn the call over to Bill Jones Investor Relations. Please proceed.

Thank you Becky and thank you all for joining this call. Our hosts today are bio Key's, chairman and CEO, Brian Deep high Squali and CFO C. C. Well, that's what I was Jim Sullivan senior VP of strategy.

And CLO.

Speaker Change: Who will provide some insights on biopsies new product launch.

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 express and identify.

These forward looking statements.

Such 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 future performance of the company.

Please see risk factors in the company's annual report 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's date only biochem undertakes no obligation to revise or disclose revisions to forward looking statements to reflect circumstances or events that occur. After today now let me pass the call.

Mike we get right.

Thanks, Bill and good morning, and thank you all for joining us today.

After my remarks, Jim will provide more details around our formal launch of bio key past Tee you up allocation solution than C. C will provide a brief overview of our financial performance and afterwards, we'll open the call to your questions.

First the audit of our 2023 financial statements was recently completed by our independent public accounting firm and we filed our 10-K on June 5th.

And we recently filed our Q1 10-Q this past Friday.

<unk> is now up to date and compliant with all of our regulatory filings.

C C will review the numbers, but from a high level. We continued our progress in 2023 with revenue up 10% from 2022 to $7 $8 million.

In Q1, we had generated positive operating cash flow as we benefited from the expansion of a biometric clients identification system.

By a long term financial services customer who continues to expand their use of our biometric solutions.

In fact, they are currently looking at to potentially upgrade their license from a simple to a more complex clients I D featured <unk>.

Solution.

Which we may have more to say about later this year and they certainly have been a good customer a bio keys and has have generated significant revenue for us over the past few years as has our foreign defense force customer that had provided several add on orders.

Two bio key and later in late 2023, and there certainly will be more and the possibility of an expanded use.

She and into other areas within that organization.

In Q1, we also reduced our expenses, 17% year over year, and therefore reduced our operating loss by more than 70% to approximately $500000 in Q1 'twenty four.

We have more work to do but we believe we are heading in the right direction with our Q1 performance.

We look to continue this progress as we move forward through 2024 with a focus on larger opportunities that could have a meaningful impact on our results as well as further efforts to reduce cost we believe our growing global distribution network and customer base has us in a good position to drive revenue.

And moved to positive profitability over the next several quarters.

The majority of our sales today are through partnerships that we've developed through the years with over 150 partners, including value added resellers system integrators, msp's or managed service providers as well.

All of our European sales or through channel partners and the majority of our overall company sales now originate or are brought to us through a partner.

Speaker Change: Leveraging partners and their customer networks allows us to reach a broader addressable market.

It also frees up our direct sales team to pursue the larger revenue deals of which I've mentioned a couple of examples that are currently in our pipeline.

Another point of focus in 2023 is that we began strategically partnering with some of the larger identity and access management providers in the industry like Sailpoint Ping and forge rock, who have large customer bases with installed I E. M solutions, who can upgrade their MFA to include biotech <unk>.

<unk> identity bound biometric offering.

The overall iam market continues to grow for many reasons.

Enterprises are migrating to the cloud their workforces are working remotely our hybrid and third party contractors require access to systems.

There are increasing cyber security regulations, and cyber insurance requirements.

And <unk> solutions help our customers meet all of these regulatory and insurance requirements around stronger more secure authentication, while providing superior user experience and better value than alternative mainstream authentication options.

Current climate of broad enterprise adoption of multifactor authentication and advanced Iam approaches provide plenty of opportunities for bio key to differentiate itself on a more flexible lower total cost of ownership and more user experience centric authentication approach through biometrics.

Multifactor authentication and zero trust and password less environments are essential for enterprises, who want or need cyber insurance as well as to meet the FCC's, new cyber security risk management and reporting rules and see some regulations that require a cover.

Companies to promptly report cyber disruptions and ransomware payments.

We expect all of these emerging requirements as well as constant cyber security incidents and high profile breaches to keep cyber security a top priority item in boardroom and management discussions throughout 2024 and 2025.

Again biogas solution allow companies to meet these challenges with more flexibility lower cost and so the current environment represents a very favorable backdrop for sales of our solutions.

We also expect the use of Passkey authentication to expand its market preparation its market penetration in 2024.

As such we just launched <unk> a unique password less authentication solution that does not require the use of phones or hardware tokens.

This solution is very useful for a variety of business use cases and in a moment I'll pass the call to Jim Sullivan to discuss this exciting opportunity in greater detail.

Ive discussed many of the reasons for our parts positive market outlook for identity and access management providers and I've touched on some factors specific to bio key and our very unique solutions. We are an industry leader in biometric identity, such as fingerprint and pom and facial I D, which are among the 17.

Authentication factors that we current are currently offer our customers, which is the most flexible and option available in the industry and that really does separate <unk> from the competition.

Today, we have over 600 customers and a solid base that provides recurring high margin license fee revenues or a or are we continue to pursue large revenue opportunities through our direct sales team, while leveraging our channel partners to reach a larger addressable market.

We will continue to pursue cost reduction initiatives to accelerate our path to profitability and continued positive cash flow.

Also in Q2, we are exploring opportunities to convert some slow moving hardware inventory into cash in 2023, we wrote down approximately $4 million of inventories, including about $3 $1 million, which was purchased for our African initiatives, we expect to monetize some of that in.

Tori in the current and continuing quarters for all of these reasons. We believe <unk> is well positioned to continue meaningful top and bottom line performance improvement as we progress through this year.

Now, let me turn the call over to Jim to discuss our new passenger use solution Jim.

Mike.

You may have seen the press release from last week, where we announced the formal launch of biopsies past you authentication solution, which is targeting underserved workplace scenarios that involve roving users who share workstations preventing.

Preventing fishing by eliminating passwords and implementing multifactor authentication. Our MFA has a goal of nearly every enterprise, but mainstream identity platforms are only offering limited authentication options based on one of two priority approaches either phone apps, which now would include things like phone based past keys or per user.

Oh hardware tokens like Ub keys, which sell for a cost of 30 to $80 each.

Both phone apps and Phyto tokens or implementations of what we call something you have authentication as opposed to something you know like passwords or something you are like biometrics operational challenges arise because something you have authentication options don't fit well and are well suited for many workplace.

Scenarios, such as manufacturing shop floor retail call centers health care hospitality, where users are typically roaming among a variety of shared workstations kiosks or point of sale terminals or they use handheld devices.

These workplaces often prohibit the use of personal phones for safety or distraction reasons and leave an enterprise identity team only a single apparent option for all strongly authenticating those large roving workforces that's to buy them phyto hardware tokens, but one token per user risks user lockout, if they lose their token so phyto.

<unk> recommending that each user be provisioned with two or three phyto tokens each.

Ill fitting 5000 workers with a pair of tokens would mean buying and maintaining 10 to 15000 of these 25 to 70 dollar tokens. So.

If we're looking at a manufacturer who has 5000 workers, they're spending millions of dollars every couple of years in order to be able to provide those tokens to workers manufacturers of tokens themselves are projecting the 25% loss per user.

Is.

A typical loss rate. So this becomes a consumable spend that really swamps, the economics of adding multifactor for those Reuben workforces.

Our past Ku changes all of that by marrying Biochemists around biometric authentication with just a touch of a finger to a hosted passkey that is based in software hosted on servers. So that each user can unlock a personal task eat any of those workstations with just a touch with their finger instead of having to carry.

Phone or a token and that means users carry nothing.

<unk> task you does the work to provide a phone with token listen password less authentication experience at any workstation in the enterprise.

So can I ask you is leveraging the existing Phyto two web Austin authentication workflows that are already in every identity and most application platforms and therefore it supports a drop in functional replacement, where you might have previously use hardware tokens to instead allow the user experience of a touch of a finger or also support cap.

Their door access pads that they already have in many cases on a shared device. After workstation. This changes the hardware economics from buying hardware for every user to putting hardware at the access point itself and radically reduces the cost of rolling out multifactor strong authentication to workforce now.

That were final compliant is important because we're passing all of the superior user experience and lower cost to the existing standard Phyto authentication workflows.

Usually are thought of as accepting when we find a hardware tokens or phone based past keys. So the economics of putting this in place is going to be simple in terms of both cost to deploy as well as the fact that you're not buying hardware for every one of your users and our customers have been asking us to make the biometric experience that they loved.

Accessible without having to necessarily do integrations and maybe even bring in a product like portal guard. So this allows us to enter existing.

Solutions, where there are I b piece, like okta or paying already present and those identity providers are able to then adopt our biometric experience and.

And we built this in order to deliver this solution with our partner <unk> Mellon, who has the ability to essentially turn our authentication experience into a passkey and that makes it so that it's essentially effort with for an enterprise to add task use when they're already potentially looking at hardware tokens. Instead, we think this product.

It will be a valuable tool for the hundreds or even thousands of enterprises that are currently struggling to deliver strong password less authentication to all their users within an existing iam.

Workflow.

When it's biometric mode by Pascal you as is already.

Powered by our existing platform, which allows an unlimited number of users to essentially be their own fish Bruce could credential and this is our fifth proof solution because the entire authentication process cryptographically secured with no credentials can be obtained by fooling user with a fishing attack into providing the authenticate.

And credential like a password. So this is entirely secured against phishing and yet it's also easier for the users. So that combination of lower cost easier user experience is going to make it. So that this is a we think there's going to be a very popular solution to bring into these shared workstation workflows.

Biofuels biometric platform is built with privacy.

Capabilities and privacy law compliance built in so that our customers don't have to worry about being compliant because we take care of ensuring that things like consent for all the users as part of enrollment is integrated into the workflows. We also provide user controlled privacy dashboards. So that users can be compliant with understanding how their biometrics has been.

Used have control over whether they want to revoke it remove it those are the capabilities that we've built into the product. So our customers don't have to worry about it.

This ensures that bio key task you you will integrate into any existing framework without having to have either a compliance concern or an integration effort and again, we want to make it as easy as possible for people to adopt it benefit from the biometric experience that we've got so many customers using already.

I'd be happy to answer any questions.

He may have regarding Pascal you in the Q&A, but for now I want to turn the call over to Cc Welch. So she can review the financials.

Thank you Jim.

As Mike referenced the audit of our 2023 financial statement was recently completed by our independent registered public accounting firm.

And therefore, we filed both of 2023 10-K, and our 10-Q for Q1 24.

At the end of Q1, 'twenty results, which were also in our press release issued yesterday as compared to the restated Q1 2023 result.

124 revenues were up 19%.

Silly for $2 2 million, which was in line with the comparison in Q1 'twenty three.

Speaker Change: The current year period benefited from me.

And it is about by my keys biometric client identification system by a long time financial services customer in South Africa.

A large order from them drove 23, 6% increase in license fees.

<unk> revenues offset by a decline in recurring in custom services and hardware revenue.

Services declined due to the loss of a large service agreement and a large customer order first of all secure a Q1 'twenty three that did not recur.

Our gross profit and gross profit margin benefited from a greater proportion of license fee revenue, which command a higher margin from services.

Yeah.

As such our gross profit grew to $1 9 million some night.

From <unk> 9 million in Q1, 'twenty three with our blended gross margin improved to 86% from 40% in Q1 two three.

Which included a hardware reserve expense.

The hydro areas of expense in Q1 'twenty three it would have been 62 person is 86% in Q1 24.

With the current year period parcel benefiting from revenue mix that included a higher margin licensing revenue.

Turning to expenses, we reduced our total operating expense by 241000 or 17% in Q1 24 versus Q1 'twenty three.

This included SG&A reduction of 149000.

And 83000 less in research and development and engineering expenses.

<unk> reductions included sales personnel and marketing expenses and lower lease expense for our New Jersey headquarters as discussed on prior calls.

We were able to downsize our corporate.

Corporate headquarters, we do say that lease expense and related occupancy costs as most of the team is now working remotely.

These cost cutting initiatives were slightly offset by higher audit and professional fees related to public reporting and regulatory filings.

Given higher revenues and gross profit.

Some of the operating loss by $1 2 million to an operating loss of 509000 in Q1 24.

From operating loss of $1 8 million in Q1 'twenty three.

In terms of bottom line biotech significantly trimmed its not loss by 70%.

1023.

<unk> 32 per share.

In Q1 24.

One 9 million or three.

$3 61.

<unk> per share in Q1 'twenty three.

We will continue focusing on increasing revenue and cost saving initiatives in 2024 to support our path to cash flow breakeven and profitability.

In terms of the balance sheet items as of March 31st 2020 for Iot and current assets of approximately $2 3 million, including 690000 of cash and cash equivalents.

710 of accounts receivable and data factor and 440000 of inventory net of the $4 million of reserves.

As mentioned in Q1.

<unk> 24, a biochemist sneak $1.5 million in cash related to an expanded two year extension I think Evan.

The license agreement with a long term financial services customer that utilizes our biometric technology for customer authentication.

2023.

Speaker Change: We wrote down $2 1 million of inventory.

We're slated for our projects in Africa down to zero.

We're working to convert that portion of the hardware inventory to pass upon shipment to support our growth initiatives in operation. We also had several larger projects with new and existing customers.

Oh and the request for proposal what proof of concept stages with health care and financial customers and the foreign Defense Force, that's an existing customer.

Could potentially benefit.

I always felt in upcoming quarters.

That concludes our prepared remarks, now I'll ask the operator to begin Q&A.

We will now begin the question and answer session.

To ask a question you May press star one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Once again to ask a question. Please press Star then one to be joined into the question queue.

At this time, we are showing no questions in the Q&A session has ended I'll ask Mike D. Pasquale for closing remarks.

Thank you everyone for joining our call today, we look forward to updating you on future investor calls.

Please reach out to our IR team, whose contact information is listed in our press release with any follow up questions. We look forward to updating you on our Q2 call and as always we'll provide news and updates in the interim by press release again. Thank you for your time today.

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

[music].