BIO-key International Q1 2024 Earnings Call Transcript

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June 18, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by, and welcome to BIO Key International's First Quarter 2024 Conference Call. During management's prepared remarks, all participants will be in a listen only mode. Afterwards, listeners will be invited to As a reminder, this conference is being recorded today, Tuesday, June 18, 2024. I would now like to turn the call over to Bill Jones, Investor Relations.

Operator

Please proceed.

Speaker 1

Thank you, Betsy, and thank you all for joining this call. Our hosts today are BIO Key's Chairman and CEO, Mike DiPasquale and CFO, C. C. Welsh as well as Jim Sullivan, Senior VP of Strategy and CLL, who will provide some insights on BIO key's 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.

Speaker 1

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 as filed on Form 10 ks with the SEC. Listeners are cautioned not to place undue reliance on such forward looking statements, which speak as of today's date only. BIO key undertakes no obligation to advise or disclose revisions to forward looking statements to reflect circumstances or events that occur after today.

Speaker 1

Now let me pass the call to Mike to begin. Mike?

Speaker 2

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's Passkey U authentication solution. Then C. C. Will provide a brief overview of our financial performance and afterwards we'll open the call to your questions.

Speaker 2

First, the audit of our 2023 financial statements was recently completed by our independent public accounting firm and we filed our 10 ks on June 5. And we recently filed our Q1 10 Q this past Friday. BIO key is now up to date and compliant with all of our regulatory filings. Again, C. C.

Speaker 2

Will review the numbers, but from a high level we continued our progress in 2023 with revenue up 10% from 2022 to $7,800,000 In Q1, we had generated positive operating cash flow as we benefited from the expansion of a biometric client 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 to potentially upgrade their license from a simple to a more complex client ID featured solution, which we may have more to say about later this year. They certainly have been a good customer of BIO keys and have generated significant revenue for us over the past years as has our foreign defense force customer that had provided several add on orders to BIO key in late 2023. And there certainly will be more and the possibility of an expanded use of our solution 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 $500,000 in Q1 'twenty four.

Speaker 2

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 move 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 system integrators, MSPs or managed service providers as well. All of our European sales are through channel partners and the majority of our overall company sales now originate or brought to us through a partner.

Speaker 2

Leveraging partners in their customer networks allows us to reach a broader addressable market and 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 who can upgrade their MFA to include BIO Key's who can upgrade their MFA to include BIO key's unique 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 or hybrid and third party contractors require access to systems. There are increasing cybersecurity regulations and cyber insurance requirements and BIO key 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.

Speaker 2

The 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. Multi factor authentication, 0 trust and passwordless environments are essential for enterprises who want or need cyber insurance, as well as to meet the SEC's new cybersecurity risk management and reporting rules and CISA regulations that require covered companies to promptly report cyber disruptions and ransomware payments. We expect all of these emerging requirements as well as constant cybersecurity incidents and high profile breaches to keep cybersecurity a top priority item in boardroom and management discussions throughout 2024 2025. Again, BIO key 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 penetration in 2024.

Speaker 2

As such, we just launched Passkey U, a unique passwordless 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. I've discussed many of the reasons for Pars' 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 palm and facial ID, which are among the 17 different authentication factors that we currently offer our customers, which is the most flexible and option available in the industry.

Speaker 2

And that really does separate Vayuki from the competition. Today, we have over 600 customers and a solid base that provides recurring high margin license fee revenues or ARR. 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.

Speaker 2

In 2023, we wrote down approximately $4,000,000 of inventories, including about $3,100,000 which was purchased for our African initiatives. We expect to monetize some of that inventory in the current and continuing quarters. For all of these reasons, we believe BIO key 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 Pass Key U solution. Jim?

Speaker 3

Thank you, Mike. Everyone may have seen the press release from last week where we announced the formal launch of BIO key's Passkey U authentication solution, which is targeting underserved workplace scenarios that involve roving users who share workstations, Preventing phishing by eliminating passwords and implementing multi factor authentication or MFA is a goal of nearly every enterprise, But mainstream identity platforms are only offering limited authentication options based on 1 of 2 priority approaches, either phone apps, which now would include things like phone based passkeys or per user FIDO hardware tokens like YubiKeys, which sell for a cost of $30 to $80 each. Both phone apps and FIDO tokens are 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 aren't well suited for many workplace scenarios such as manufacturing shop floor, retail, call centers, healthcare or 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 strongly authenticating those large roving workforces.

Speaker 3

That's to buy them FIDO hardware tokens. But one token per user risks user lockout if they lose their token. So the FIDO Alliance recommending that each user be provisioned with 2 or 3 FIDO tokens each. Now, outfitting 5,000 workers with a pair of tokens would mean buying and maintaining $10,000 to $15,000 of these $25 to $70 tokens so that if we're looking at a manufacturer who has 5,000 workers, they're spending 1,000,000 of dollars every couple of years in order to be able to provide those tokens to workers. Manufacturers of tokens themselves are projecting that 25% loss per user is a typical loss rate.

Speaker 3

So this becomes a consumable spend that really swamps the economics of adding multifactor for those roaming workforces. Our PassKey U changes all of that by marrying BIO key's renowned biometric authentication with just a touch of a finger to a hosted passkey that is based in software and hosted on servers so that each user can unlock a personal passkey at any of those workstations with just a touch of their finger instead of having to carry a phone or a token. And that means users carry nothing and PASCU U does the work to provide a phoneless, tokenless and passwordless authentication experience at any workstation in the enterprise. So PASCU is leveraging the existing FIDO2 web auth and 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 used hardware tokens to instead allow the user experience of a touch of a finger or also support tapping their door access pads that they already have in many cases on a shared device at the workstation.

Speaker 3

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 multi factor strong authentication to a workforce. Now the fact that we're FIDO compliant is important because we're passing all of the superior user experience and lower cost through the existing standard FIDO authentication workflows that usually are thought of as accepting only FIDO hardware tokens or phone based passkeys. 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 love more accessible without having to necessarily do integrations and maybe even bring in our product like Portal Guard. So this allows us to enter existing solutions where there are IDPs like Okta or Ping already present and those identity providers are able to then adopt our biometric experience.

Speaker 3

And we built this in order to deliver this solution with our partner, ID Mellon, who has the ability to essentially turn our authentication experience into a passkey. And that makes it so that it's essentially effortless for an enterprise to add passkeys where they're already potentially looking at hardware tokens instead. And we think this product will be a valuable tool for the 100 or even 1000 of enterprises that are currently struggling to deliver strong passwordless authentication to all their users within an existing IAM workflow. And in its biometric mode, passkey U is already powered by our existing platform, which allows an unlimited number of users to essentially be their own fish proof credential. And this is a fish proof solution because the entire authentication process cryptographically secured so that no credential could be obtained by fooling the user with a phishing attack into providing their authentication credential like a password.

Speaker 3

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 they're going to be a very popular solution to bring into these shared workstation workflows. 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 is being used, have control over whether they want to revoke it or remove it. Those are the capabilities that we've built into the product so our customers don't have to worry about it.

Speaker 3

This ensures that BIO key, PASQ U 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 and benefit from the biometric experience that we've got so many customers using already. I'd be happy to answer any questions that you may have regarding PASCU in the Q and A. But for now, I want to turn the call over to Cece Welch, so she can review the financials.

Speaker 4

Thank you, Tim. As Mike referenced, the audit of our 2023 financial statements was recently completed by our independent registered public accounting firm. And therefore, we filed both the 2023 10 ks and our 10 Q for Q1 'twenty four. I'll review the Q1 'twenty four results, which were also in our press release issued yesterday as compared to the restated Q1 'twenty 23 results. Q1 2024 revenues were up 19% sequentially to $2,200,000 which was in line with the comparison in Q1 2023.

Speaker 4

The current year period benefited from the expanded use of our BIO key biometric client identification by a long time financial services customer in South Africa. A large order from them drove 23.6% increase in license fee revenues offset by a decline in recurring and custom services and hardware revenue. Services declined due to the loss of a large service agreement and a large customer order for Swirl Secure Q1 'twenty three that did not recur. Our gross profit and gross profit margin benefited from the greater proportion of license fee revenues, which command a higher margin than services and equipment. As such, our gross profit grew to $1,900,000 from $900,000 in Q1 'twenty three, with our blended gross margin improved to 86% from 40% in Q1, Q3, which included a hardware reserve expense.

Speaker 4

If you exclude the hardware reserve expense in Q1 'twenty three, it would have been 62% versus 86% in Q1 'twenty four, with the current year period also benefiting from revenue mix that included a higher margin licensee revenue. Turning to expenses, we reduced our total operating expense by $231,000 or 17 percent in Q1 'twenty four versus Q1 'twenty three. This included SG and A reductions of $149,000 $83,000 less in research and development and engineering expenses. Expense reductions included sales personnel and marketing show expenses and lower lease expense for our New Jersey headquarters as discussed in prior calls. We were able to downsize the corporate headquarters reducing our lease expense and related occupancy costs as most of the team is now working remotely.

Speaker 4

Given higher revenues and gross profit, we Given higher revenues and gross profit, we trimmed the operating loss by $1,200,000 to an operating loss of $509,000 in Q1 'twenty four from operating loss of $1,800,000 in Q1 'twenty 23. In terms of bottom line, BIO key significantly trimmed its net loss by 70% to $710,000 or 0 point dollars per share in Q1 'twenty four versus $1,900,000 or $3.51 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 31, 2024, BIO key had current assets $2,300,000 including $690,000 of cash and cash equivalents, dollars 7.10 of accounts receivable and due to factor and $440,000 of inventory, net of the $4,000,000 of reserves. As mentioned, in Q1 'twenty four, BIO key received 1 point $5,000,000 in cash related to an expanded 2 year extension of the license agreement with a long term financial services customer that utilizes our biometric technology for customer authentication.

Speaker 4

In 2023, we wrote down $3,100,000 of inventories that were slated for projects in Africa down to 0. We are working to convert that portion of the hardware inventory to cash upon shipments to support our growth initiatives and operations. We also have several larger projects with new and existing customers that are in a request for proposal or proof of concept stages with health care and financial customers and the foreign defense force that's an existing customer, which could potentially benefit our results in upcoming quarters. That concludes our prepared remarks. Now I'll ask the operator to begin Q and A.

Operator

We will now begin the question and answer session. At this time, we are showing no questions and the Q and A session has ended. I'll ask Mike DiPasquale for closing remarks.

Speaker 2

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.

Operator

The conference has now concluded.

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