Q3 2024 BIO-key International Inc Earnings Call
Speaker Change: Good morning everyone. Thank you for standing by and welcome to BioKey International's 2024 third quarter conference call.
Speaker Change: During management's prepared remarks, all participants will be in listen-only mode. Afterwards, listeners will be invited to participate in a question-and-answer session.
Speaker Change: As a reminder, this conference is being recorded today, Friday, November 15th, 2024. I'll now turn the call over to Bill Jones, Investor Relations. You may proceed.
Bill Jones: Thank you, Wyatt. Our hosts today are BioKeys Chairman and CEO, Mike DePasquale, and its CFO, Cece Welch.
As a reminder, today's conference call is webcast.
Bill Jones: And answers to investor questions include forward-looking statements, which are subject to certain risks and uncertainties that may cause actual realized results to differ materially from those currently expected. Words such as anticipate, believe, estimate, expect, plan, and project, or similar words, typically express and identify forward-looking statements.
Bill Jones: These statements are made based on management's beliefs and assumptions using information currently available as of today pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995
Bill Jones: 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 as filed on Form 10-K with the SEC.
Bill Jones: Listeners are also cautioned not to place undue reliance on forward-looking statements which speak only as of today. BioQI undertakes no obligation to revise or disclose any revisions.
Bill Jones: to these statements to reflect circumstances or events that may occur after today.
Speaker Change: Now, I will hand the call over to Mike to begin. Mike?
Mike DePasquale: Thanks, Bill. Good morning, and thank you all for joining today's call. After my prepared remarks, I will turn the call over to Ceci for a brief financial overview, and then we will open the call to investor questions.
Mike DePasquale: BioKey reported a solid Q3 performance, with revenue increasing 18% compared to Q3 last year to $2.1 million, which is a million-dollar improvement sequentially from last quarter.
Mike DePasquale: Importantly, high margin license revenue rose 52% to $1.4 million in Q3-24, which is a significant, significant improvement.
Thank you.
Mike DePasquale: We also received, subsequent to the close of the quarter, a number of large orders. One from a leading foreign defense ministry, as well as the province of British Columbia and Williamsburg, Virginia.
Mike DePasquale: Again, as I mentioned after the quarter end, we closed a large order from a longtime foreign banking and financial services customer for secure in-person identity, a portion of which will be reflected in this quarter, or Q4 results, and the balance in 2025.
Mike DePasquale: This customer has utilized bio key technology to enroll the biometrics of more than 25 million of its banking customers.
Mike DePasquale: over the past few years as part of their Know Your Customer, KYC, process. And they have been using our fingerprint technology to verify customer identities against a bank card, account number, or ID number prior to processing any transactions.
Mike DePasquale: They are now in the process of upgrading its system to BioKey's far more robust fingerprint-only ID solution, which allows them to positively identify the customer by matching solely their fingerprint against the biometric record securely stored in the cloud.
Mike DePasquale: This, what we call one-to-many matching solution, requires greater sophistication and IT resources than matching a biometric to a known account or ID number.
Mike DePasquale: As a result, the customer plans to host our solution entirely on the Amazon Web Services or AWS infrastructure to support the substantial technical demands of real-time, one-to-many biometric ID.
Mike DePasquale: The customers deploying our enhanced solution, utilizing full benefit of our industry-leading biometric authentication technology, to provide greater customer security.
Mike DePasquale: reduce fraudulent transactions and enhance the customer experience as well as staff productivity by trimming transaction times by approximately 30 seconds.
Mike DePasquale: If you think about it, 30 seconds per transaction over millions of transactions is a lot of time savings.
Mike DePasquale: We believe this is a very exciting example of the power and efficiency of our biometric solutions to create transformational business and customer benefits.
Mike DePasquale: We did have a few other large orders from existing customers recently, including a $500,000 follow-on order received in September from one of the world's most respected and tech-savvy defense ministries.
Mike DePasquale: The orders were pursuant to a three-year purchasing agreement under which the Defense Ministry has steadily expanded its deployment of bio-key solutions into new programs and user scenarios.
Mike DePasquale: allowing for secure, phone-less, token-less, and password-less authentication access to digital services.
Mike DePasquale: The deployment now encompasses over 33,000 users and we expect additional awards as the Ministry expands the scope of our solutions to additional personnel.
Mike DePasquale: Likewise, as I mentioned, the province of British Columbia is adding 10,000 users to their existing deployment of our WebKey software, which is integrated with Broadcom's SiteMinder infrastructure to streamline and strengthen secure biometric access to applications via SAML 2 federation standards.
Mike DePasquale: British Columbia is in the forefront of using biometric authentication for roving user scenarios that require advanced security.
Mike DePasquale: delivered in a user-friendly way, which is where we really excel.
Mike DePasquale: Our biometric solutions also reduce the costs and risks of what you have solutions that only verify that a card, token, or even a password is present, but not necessarily with the authorized user.
Mike DePasquale: In terms of business development, I want to highlight the recent availability of our PortalGuard iDesk platform on Amazon Web Services or the AWS Marketplace, which enables Amazon customers around the world to purchase and deploy PortalGuard within their enterprise.
Mike DePasquale: Over 300,000 active customers find, test, buy, and deploy software solutions on the AWS Marketplace.
Mike DePasquale: BioKey's position on AWS expands our visibility and reach into the community's substantial base of customer prospects.
Mike DePasquale: Though we are still in the early days and just starting to roll out marketing and issues, we've been meeting with the Amazon sellers and partners to support this opportunity. We've already begun to source initial interest and product inquiries.
and Michael DePasquale.
Mike DePasquale: The continued trend of remote work environments is likely a permanent fixture
and additional regulatory requirements are increasing stringent cybersecurity underwriting standards.
Mike DePasquale: and they're mandating enhanced security solutions such as multi-factor authentication for employees, partners, and customers that access business systems and data, which are exactly the problems that BioKey solutions address.
Mike DePasquale: As with most small public companies, our performance varies on a quarter-to-quarter basis, mainly due to the timing and impact of larger customer contracts.
Mike DePasquale: Importantly, we are building a growing base of high-margin Annual Recovering Revenues, or ARRs, with solid expansion potential.
Mike DePasquale: We will also continue to evaluate potential strategic opportunities to leverage our core expertise, products, and assets to create value for shareholders.
Mike DePasquale: We believe that the value of our technology, products, and our customer base, with annual recovering revenues of approximately $6 million, has a strategic value that significantly exceeds our current market cap.
Mike DePasquale: Today, millions of people use BioKey Multi-Factor Authentication solutions on a daily basis for secure access to a variety of mobile and web applications, on-premise and in the cloud, from all of their devices.
Mike DePasquale: At BioKey, we go beyond just passwordless. We offer phoneless and tokenless authentication methods, which is a critical differentiator for retail, call centers, shop floor, and healthcare environments where roving workers use shared workstations.
Mike DePasquale: We remain very encouraged by the growing enterprise awareness of the importance of implementing secure, zero-trust, identity and access management solutions, which is really the core of our business offerings.
Mike DePasquale: We remain focused on driving revenue growth and progressing our business to the point of profitability and positive cash flow over the coming quarters.
Mike DePasquale: We will support and leverage our Channel Alliance partners around the globe, while also working to progress larger scale customer dialogues via our in-house direct sales efforts domestically.
Turning to our balance sheet.
Mike DePasquale: We were successful in improving our cash position in Q3 with approximately $1.9 million in gross proceeds from a warrant inducement agreement with an existing holder of Bioki warrants.
Mike DePasquale: The investor exercised warrants to purchase over 1 million shares of BioKey's common stock at an amended exercise price of $1.85 and received Series A and Series B warrants to purchase additional shares also at $1.85.
Mike DePasquale: With that, let me turn the call to Cece to review financials before we take questions.
Cece Welch: Thank you, Mike. As you know, we issued our earnings release and filed our 10-Q last evening. So let me review some of the highlights, keeping in mind that our year-over-year comparisons are to the restated 2023 results as filed in our Form 10-K.
Cece Welch: BioQIES revenues increased 18% to $2.1 million in Q3-24 from $1.8 million in Q3-23 and $1.1 million in Q2-24.
Cece Welch: The increase was driven by higher software license fees and hardware revenue as several long-term customers expanded their BioKey deployments.
Cece Welch: Partially offsetting the gains were declines in recurring and non-recurring service revenues. For the nine months ended September 2024, revenues were $5.5 million compared to $5.9 million for the first nine months of 2023. As license fees and hardware gains...
Cece Welch: were more than offset with the loss of large recurring software agreement and won
a large customization customer from a prior year period.
Cece Welch: To provide more background, we agreed to exit our Social Secure Services Agreement in Europe in Q2, as it had proved to be a challenging and fairly low-margin business that did not justify the resources required.
Cece Welch: While the termination of the agreement provides some revenue headwind in the near term, this action should substantially benefit our blended gross margins moving forward.
Cece Welch: Our overall gross profit and gross margin comparisons improved significantly in Q3-24.
Cece Welch: primarily due to a $1 million hardware reserve that was taken in Q3-23, a higher portion of license fee revenue in Q3-24, lower cost to support deployment, and lower license fees for third-party software included in BioQE's full secure offering.
Cece Welch: We trimmed our operating expenses by $46,000 in Q3-24 versus Q3-23 due to reductions in headquarters expenses, sales personnel costs,
Cece Welch: marketing show expenses partially offset by an increase in professional services primarily related to the company's financing activities.
Cece Welch: also off-centering lower SG&A costs was $122,000 increase in research development and engineering expense related to personnel to support product development.
Cece Welch: Reflecting higher revenue and gross profit and level operating costs, Ioki's net loss improved to $0.7 million, or $0.39 per share, in Q3-24, from a loss of $1.8 million, or $3.22 per share, in Q3-23.
Cece Welch: For the first nine months of 2024, we reduced our net loss.
Cece Welch: the $2.9 million or $1.69 per share versus a net loss of $6.1 million or $10.79 per share in the comparable 2023 period, which included a $2.5 million hardware reserve.
Cece Welch: We continue to focus on increasing revenue and controlling costs to support our path to cash flow break-even and profitability.
Cece Welch: In terms of our balance sheet, the cash position as of September 30th, 2024, Ioke had current assets of approximately $4.6 million, including $1.8 million of cash and cash equivalents.
Cece Welch: 2 million of accounts receivable and due-from-factor, 387 of inventory, net of reserves, and 383,000 of prepaid expenses and other current assets.
Speaker Change: Mike mentioned two large customer expansions we expect to benefit our Q4 results and future quarters and I look forward to updating you on these and other items in our Q4 call.
Speaker Change: This concludes our prepared remarks and I'll ask the operator to prepare for Q&A.
and Michael DePasquale.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are 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 2. At this time, we will pause momentarily to assemble our roster.
Thank you.
Speaker Change: And the first question comes from Jack Vendorard with Maxim Group. Please go ahead.
Speaker Change: Okay, great. Good morning, guys. I appreciate the third quarter update, in case you're taking my questions. Mike, great to see the revenue pickup in the third quarter, which I believe is a typically seasonally soft quarter, at least in Europe.
Speaker Change: I guess it was was the strength of the stronger third quarter I guess some of it probably has to do with that large order that slipped into the third quarter I think you announced last quarter that there's this large 450,000 or it may have slipped in there but just just give me your thoughts on where the upside was this quarter and Because I do think it is typically a weaker quarter
Speaker Change: Yeah, thank you, Jack. Good morning. Yes, you're absolutely correct. Typically the Q3
Speaker Change: business is softer than any of the other three quarters in the year, mostly again, as you say, because of the international business, right? Things are very, very slow in Europe in July and August. We did have a softer Q2 than expected because of some slips, so that's part of it. But we also saw some very strong
Speaker Change: business as I described in my prepared remarks for some existing customers and so we're seeing a really really positive trend.
in the adoption, I will call it the expansion,
Speaker Change: and the quality and the value of what we bring to the table. So this was a very productive and a really good quarter for us.
Speaker Change: Excellent, well great to see that. You know one another question kind of follow-up is out with regard to a specific order you press released it as well. It was on September 10th, it was a leading international defense ministry
Speaker Change: a $500,000 follow-on order, that was announced September 10th. So did that whole order get recognized in the third quarter? Or, just curious there if you have that off the top of your head. Yes.
Speaker Change: Okay, so that was recognized in the quarter. Okay, and then the much larger order from a long-time financial services customer for $910,000.
Speaker Change: That came subsequently after the quarter end, so will that all get recognized in the fourth quarter?
Speaker Change: Yeah, as I mentioned it first of all that was not in the third quarter that was in the fourth quarter as you're accurate with that a portion of it about two hundred and
Speaker Change: 50 or so thousand dollars will be recognized in the fourth quarter and the balance will be in Q1 They are an annual subscription customer and they doubled
the size of their
Speaker Change: of their deployment. So their annual subscription, I believe, renews in February. So now that will be part of their newer and updated subscription starting next year. So about 250,000 this quarter and the 650 whatever in round numbers in Q1.
Speaker Change: okay fantastic and then is that are you implying on there's there's further orders related to that customer after the renewal in February or is this a part is this kind of a part of that?
Speaker Change: No, there will be additional opportunities and expansion, but their annual now recurring revenue contract size will be
Thank you. Bye.
Speaker Change: in the $1.4 million range, so significant. That will be one of our larger subscription contracts.
Speaker Change: Okay, great. I appreciate the color there. That's great to hear.
Thank you.
in red.
Speaker Change: Questions, just a couple of questions on the outlook and then I'll hop back in the queue. So you expect 2024 revenue to meet or exceed 2023 revenue of $7.75 million. So this implies it looks like you expect at least 4Q revenue of at least $2.3 million at a minimum basically, which is above where I was. That's good to see. Do you expect the 4Q revenue to be mostly licensed revenue similar to the 3Q?
and Mary Martin. Bye.
Yes.
Speaker Change: Yes, we do. Okay. Yes, and we expect to have a good solid Q4.
Yes.
Speaker Change: Okay, great. And, you know, maybe a question for Cece as well, if she wants to chime in here. The operating expenses in the third quarter, it looks like...
Speaker Change: All in, almost $2.3 million, so a nice kind of reduction from the prior two quarters.
Speaker Change: So it looks like you have been pretty effective with cutting some costs here. Is this a good baseline looking at though? I can't quite recall, is the fourth quarter, is there a seasonal uptick in OPEX at all or is this a good run rate going forward?
It's a fairly good run rate. We've done some...
Speaker Change: As we've said, some financing, so it's a little heavy right now, so we are looking long term to just cut some of those types of expenses. But I would say the 2.3 is a good number, or less, obviously.
Speaker Change: Okay, that's very helpful. So that sets you guys up for a fairly reasonable break-even revenue target, I imagine, as we move forward here in 2025.
Speaker Change: You know, Mike, with your license install base and subscription install base kind of ramping up here, it has been ramping up, do you feel like you're at the point or getting close to the point where you have enough visibility to kind of introduce formal guidance at some point? I'm just curious to get your thoughts when you might. What needs to happen for you to have that level of visibility and confidence?
Thanks.
Mike DePasquale: I think as we get into 2025, I think we will be able to do that. You can see that more and more of our business is subscription.
Mike DePasquale: You know, we have really migrated, especially the portal guard base, we're migrating that portal guard base, the subscription.
Mike DePasquale: We're getting, we have visibility into some some larger opportunities and I think we're getting close there. I think we're also, you know, look our goal and objective obviously, Cece and I
Mike DePasquale: want to get this company to break even and to profitability.
Mike DePasquale: very aggressively in that direction right now. So I hope that we'll be able to do that as we get into 2025, Jack.
Jack Vendorard: Okay, great to hear. Well, I think that's all the questions I have for you. I appreciate the time and good luck recording the story. Thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: Our next question comes from Dan Kamis as a private investor. Please go ahead.
Oh, hey guys, good quarter.
I'm wondering about...
Do you have any kind of estimate for...
The recurring revenues do you expect from the Defense Ministry?
going forward.
and I think that's it. Bye-bye. Bye-bye.
Speaker Change: The Defense Ministry is not subscription revenue. They are still, I'll call it, one of our larger perpetual customers. We do have a subscription element in the agreement, but it's for support and maintenance.
Speaker Change: But the Defense Ministry is just, you know, continuing to expand.
Speaker Change: We're up to 33,000 or so users now. There's a long, long way to go and a lot of runway ahead there. So that business is going to continue to be significant, right, over the coming two to three years. And it'll be, you know, in the ranges that we've seen in the past, right, where they've typically spent.
Speaker Change: somewhere between a million or so, a million to a million and a half a year. Sometimes more, sometimes a little bit less.
I see.
Speaker Change: What's the maintenance on that? Is that like 10% or something? Well, it's for support. So it's for support. Dollar-wise? I can't say. It's dependent on the user count, right? So it's...
Speaker Change: It's generally at 20% of the typical contract value of the software.
Speaker Change: Is there any recurring revenue on the British Columbia deal or is that also?
No, that's a subscription.
and Michael DePasquale.
Is there any estimate on the recurring revenue on that?
Speaker Change: Yes, it's a subscription, yes. The answer to that question is yes. No, but how much recurring revenue do you expect?
Oh, I don't, Dan, I don't, I don't know.
Speaker Change: I don't have that off the top of my head. I don't even know the size of that order, quite frankly, off the top of my head.
Um.
Speaker Change: You mentioned that the gross margins were pretty high, and it was related to the hardware reserve.
Does that mean that you sold some of the old...
hardware inventory that was reserved.
Speaker Change: We have, and we continue to sell the hardware, and we expect to see more significant orders for that this quarter and beyond. So the answer to that question is yes. But also, we're very, very focused on
higher margin licensed sales.
and we're also, we've been razor focused on
Speaker Change: software maintenance agreement that was negligible in the context of margins and we decided not to renew that agreement.
Speaker Change: So, it's going to have a very positive impact on our overall blended gross margins.
Speaker Change: And more importantly, it's giving us an opportunity to focus more, especially with our resources, on the bio-key products that are much higher gross margins, which, you know, our software is in the 80-90% range.
Speaker Change: So that's another reason why you're seeing an increase in the gross margin. So overall, this is going to have a much, much better
Speaker Change: Impact on our financials and it's going to create a shorter pathway to getting to break even and profitability
I see.
Speaker Change: Well, I think that's good news. Are you saying that these kind of gross margins...
You expect to continue?
Yes.
Speaker Change: And we've been, you know, look, exclusive of the write-down, especially over the last year, year and a half on the hardware, our gross margins have been, you know, been in that range. They've been in the 70s. We've been holding in that range, and we expect that to absolutely continue.
Speaker Change: Okay, can you give some kind of number to how much hardware you sold?
Third quarter?
Ceci, I think you can.
Speaker Change: We reduced the inventory by about $100,000 this last quarter. We expect at least double or a lot bigger based on the contract that we expect to come in this quarter.
Speaker Change: Well, we've already sold some this quarter and we have again, and I think I've spoken to this openly, we've been waiting on a very large order.
Speaker Change: for a significant project and it appears that that is going to happen this quarter, so we're we're thinking this is
Speaker Change: pretty positive for us. As you know, we've written down the entire inventory and so you know, it's all cash and it's all goes to the bottom line. So it's a very, very positive impact on the financials.
Yeah, yeah, absolutely. This isn't Africa, is it?
Speaker Change: You mean, is the project in Africa? Yeah. It's an international project.
OK.
So,
Speaker Change: I think, yeah, at least $2.4 million in the fourth quarter.
Speaker Change: And you said that was mostly licensing, right? I think you answered that question.
Thank you for your question.
Speaker Change: and some of this hardware as well, which again, carries even a higher margin than the software.
Speaker Change: I see. Yeah, absolutely. Right? Yes, yes, yes. I mean, it's the iron margin. Yeah. How much in one-time financial costs?
Speaker Change: What are you going to have in the fourth quarter and will that be the end of it?
or are they down already?
from the financings and...
Speaker Change: I'm not sure I understand that. I think what Cece was saying is SG&A expense, meaning legal and interest, that kind of thing. Is that what you're referencing? No, I'm talking about, I think you did a, you raised capital with a loan and then you had the warrant. I'm just wondering if there's a one-time cost there.
You'll be taking the fourth quarter.
Speaker Change: Cecilia, I don't know if you can answer that question. We're always working on things, so I expect it to continue, but not at the rate it's been.
I'm saying they're usually financing costs, right, associated with
Thank you.
the warrants and the loans and
Speaker Change: I'm just wondering what those costs are, just to find out the one-time costs.
for the financings.
Speaker Change: Well, for the first three quarters, it's been close to probably $200,000 between auditors and legal folks.
Speaker Change: Were there any costs? I think you did the warrants in the fourth quarter in October, right? So, were there any significant costs, financing costs for that warrant deal?
We had some
Associated costs to that, of course, yes.
Just trying to get a feel for how much.
if you can.
Speaker Change: Also, by the way, I think the warrant inducement was done in the third quarter, if I'm not mistaken, Cece, wasn't that September? Yeah, it was. Yeah, so that was the third quarter, Dan, so it's already disclosed. Oh, okay, my mistake, sorry. Yeah, it's already disclosed, it's already there. So then, there shouldn't be too much for the fourth quarter, then? But I think that's what Cece's intimating. I see, I got it, okay, got it.
Speaker Change: Okay, so you exited the civil service market, you're talking about European operations, right?
yeah when you say civil service I didn't
Speaker Change: Didn't you say civil service? That's what I thought you were... No, no, no. I said services agreement. We had a services support agreement with Civil Secure Limited. And that agreement, again, was...
Speaker Change: It was we really put that in place to be able to support have a little more control over the support of the product But again with the amount of resources that were required and the margins on the contract It just didn't make any sense for us to continue
So...
did
Thank you very much.
Speaker Change: Did that change your relationship with with the act with swivel or I'm not quite sure is this by key personnel that were No, no, I mean we we always had that remember we have a reseller agreement We have a reseller agreement in place with swivel where the margins on what we sold in in
out of that product in the European markets was 50%.
Speaker Change: Our own products obviously carry a higher gross margin. It was always our goal, right, over time, we negotiated that contract about two years ago to ultimately morph those customers into the PortalGuard solution, which is a much higher margin product. And so this is kind of a, I'll call it the evolution of
Speaker Change: of that business arrangement. And again, it just didn't make any sense anymore for the thin margins to continue to operate with that agreement.
just pretty straightforward.
All right.
Um...
Thank you.
So, your accounts receivable are at $1.9 million.
Speaker Change: pretty large. When do you expect to be able to collect those sums?
Speaker Change: We've collected a majority of it. We just happened to ship a lot of things in September.
but most of it's been collected already.
in the fourth quarter.
So far? Okay, good.
All right, well, it sounds good, guys. Thank you.
You're welcome. Thanks, Dan.
Speaker Change: At this time showing no further questions the Q&A session has ended. I'll ask Mike DePasquale for closing remarks.
Mike DePasquale: Thank you everyone and thank you for taking the time to join our call today. Look for us at the Gartner IAM conference in December and as always we'll continue to update you via regular press releases.
Speaker Change: Feel free to reach out to our IR team whose contact information is listed in our press release if you have any questions regarding this call Or any other items. Thank you very much and have a great day and a great weekend
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.