BIO-key International Q4 2024 Earnings Call Transcript

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March 27, 2025

There are 6 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by, and welcome to Biokey International's twenty twenty four Fourth Quarter Conference Call. 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. As a reminder, this conference is being recorded today, Thursday, 03/27/2025.

Operator

I will now turn the call over to Bill Jones, Investor Relations. You may proceed.

Speaker 1

Thank you, Rocco. Today, our hosts are Biokey's Chairman and CEO, Mike DiPasquale and its CFO, C. C. Welsh. As a reminder, today's conference call and webcast as well as answers to investor questions include forward looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from current expectations.

Speaker 1

Words including anticipate, believe, estimate, expect, plan, project or similar words generally express and identify forward looking statements. Such statements are made based on management's beliefs, assumptions and information currently available as of today pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete description of risks that may affect future performance of the company, please see Risk Factors in the company's annual report filed on Form 10 ks with the Securities and Exchange Commission. We caution listeners not to place undue reliance on forward looking statements, which speak only as of today. The company undertakes no obligation to revise or disclose forward revisions to forward looking statements to reflect circumstances and events that occur after today's call.

Speaker 1

I will now turn the conference over to Mike to begin. Mike?

Speaker 2

Thanks, Bill. Good morning, and thank you for joining today's call. After my prepared remarks, I will turn the call over to Cece for a financial overview, and then we will open the call to investor questions. As highlighted in today's release, we substantially strengthened the margins, profitability and strategic potential of our business in 2024, putting us in a far stronger position to grow and move the business to profitability and positive cash flow. Also after the close of 2024, we substantially strengthened our financial position with approximately $3,800,000 in proceeds from a warrant exercise.

Speaker 2

Also, at the same time, we were able to reduce our outstanding debt to approximately $730,000 from approximately $1,500,000 at the end or close of 2024 to what is now currently approximately $730,000 This puts us in a much stronger position to continue to execute on our growth plans. We accomplished most of this by continuing to expand our base of customers and repeat customers and by exiting our low margin software and services relationship with Swivel Secure to focus our full efforts on core bio key solutions such as Portal Guard IAM and our identity bound biometrics. These solutions have far stronger technology, competitive positioning and customer value and also deliver far higher gross margin contributions than the third party solutions that played a helpful role for us in building our presence in Europe, The Middle East and Africa. Our efforts enabled us to increase high margin software license fee revenue by 20% to $5,200,000 in 2024. And excluding the impact of hardware reserves in both periods, 2024 gross profit rose 8% to $5,400,000 for an adjusted gross margin of 78% compared to an adjusted margin of 64% in 2023.

Speaker 2

The business transition did, however, result in the loss of lower margin services revenue, which offset the growth in license fees and contributed to an 11% decline in revenue to $6,900,000 in 2024. We were also able to further reduce operating expenses by 6% in 2024, and we were able to trim our cash burn by twenty three percent to $2,900,000 in 2024 from $3,800,000 in 2023. With this transition behind us, we entered 2025 in a much stronger position to drive top line growth and to bring more of that revenue to the bottom line. Importantly, we are already seeing very encouraging order activity and customer interest in our solutions so far in 2025, and that underscores our optimism for the business this year and in the future. Though we have long spoken of expanding breadth of cybersecurity vulnerabilities, actual breaches and the limitations of many widely used identity and access management solutions, many of the IT teams we speak with are recognizing the urgent need for them to deploy stronger and more user friendly and cost effective solutions to protect their systems and data.

Speaker 2

There's a growing recognition of the inherent vulnerabilities, growing costs and usability challenges of widely deployed current authentication methods that rely on passwords, mobile phones or tokens. 2024 was the first year of the SEC's new cybersecurity risk management and reporting rules for public filers. Elevating the importance of these issues with senior management and directors, in addition to compliance requirements for cyber insurance policies. This growing awareness is helping customers appreciate the substantial value we have built over the past years in forging our flexible suite of passwordless, phone less and tokenless authentication solutions. On top of increasing cybersecurity demands and high profile incidents, the shortage of cybersecurity talent is also challenging organizational ability to prevent or respond to cyber attacks and threats.

Speaker 2

This current backdrop though scary is proving ideal in supporting the secure and cost effective solutions we offer. And as a result, we are seeing very encouraging interest and demand for our solutions in mission critical national defense, financial services and education applications. We're also seeing growing strength in Europe, The Middle East and the Asia region or EMEA countries, where the security and value of our passwordless, phone less and token less authentication solutions enabled by our unique biometric capabilities are gaining growing recognition and adoption. As an example, in late twenty twenty four, we secured a $910,000 contract with a long time foreign financial services client to implement our most secure and user friendly one to many biometric identification technology across its branches. The client has already enrolled fingerprint biometrics for over 25,000,000 of its customers and is now upgrading our fingerprint only identification technology, which enables our client to positively identify each individual from its universe of enrolled customers solely via a fingerprint scan.

Speaker 2

This enhanced solution is expected to trim approximately thirty seconds from each of their customer interactions, resulting in an improved customer experience as well as a substantial long term savings for them. Another example is our long standing relationship with one of the world's most esteemed defense ministries, which substantially expanded its deployment of our biometric solutions in 2024, a trend we expect to continue. We currently provide authentication security for over 80,000 minuteistry personnel and expect the size of this deployment to double or triple in the coming years as work under a new three year procurement arrangement that was initiated in Q3 twenty twenty four has begun. For perspective, this customer has already contributed a total of over $3,300,000 in hardware and license revenue to date. Similarly, we referenced in today's release the partnership we forged with the National Bank of Egypt and our partner, RIOT Information Technology to integrate our Portal Guard IAM platform with their and with their leading industry governance solution.

Speaker 2

This project will initially secure the digital access and identities of the bank's 30,000 employees. And we believe there is a future potential to expand the deployment ultimately to its millions of customers. Turning to The U. S, we have built a very strong presence in education to over 100 institutions representing 300 individual single opportunities serving over 4,000,000 end users. We continue to build our presence in this market to new colleges and universities that are adding Portal Guard, their Portal Guard platform to their use case.

Speaker 2

So far in 2025, the Wyoming Department of Education deployed Portal Guard IDAS and we recently executed a strategic partnership with California Education Technology Joint Powers Authority, which guides IT solution procurement for 195 K-twelve schools and districts serving over 2,500,000 students. This new relationship positions Biokey to provide our IAM solution to those member schools. As we also referenced in today's release, we have been working to see future business opportunities in emerging markets, including food and food safety, Internet of Things solutions, drone technology and autonomous vehicles. We partnered with Fiber Food Systems Inc. And exchanged BIO key shares to secure a stake in an innovative drone technology developer, Boomerang, Inc, which will surely require strong identity and access management solutions.

Speaker 2

The equity exchange strengthened our balance sheet and also led to a strategic collaboration seeking to integrate our biometric technology in aerospace, defense, healthcare logistics and smart cities applications in development by Gwynne Partners, an engineering and design firm. These initiatives are in the early stages and will take time to develop, but we believe they represent exciting potential commercial opportunities for BIO key down the road. On the current business front, 2025 is off to a solid start and we feel well positioned to deliver improved top and bottom line performance. We've transitioned our EMEA focus to IoT solutions and are seeing meaningful signs of customer engagement, particularly in Europe and The Middle East. Globally, we are also seeing growing appreciation for the value of our unique passwordless, phone less and tokenless IAM solutions and core biometric technology, all of which underscores our optimism.

Speaker 2

We also continue to focus on opportunities to reduce cost and lower our breakeven level. At the same time, we seek to drive growing sales through our Channel Alliance partner program and our internal sales teams. In addition, we launched Portal Guard IDaaS on the AWS marketplace last fall, enabling AWS customers to seamlessly purchase and integrate Portal Guard into their enterprise. Today, our business is predominantly subscription based and partner centric, as roughly 50% of our new Portal Guard business is sold through partners, while nearly all of our EMEA business is partner based. As a result of these initiatives and with approximately two thirds of our revenue derived from contracted ARR, we are very confident that BIO key will return to growth and deliver improved profitability in 2025.

Speaker 2

With that overview, I would like to turn the call over to our CFO, C. C. Wells, to review the financials before we take investor questions. Cece?

Speaker 3

Thank you, Mike. Our results were released this morning and we plan to file our 10 K by Monday. Now let me review some of the operating highlights keeping in mind that year over year comparisons are to our restated 2023 results that we filed in our prior 10 K. As Mike touched on, we are excited about our EMEA Civil Secure Services Agreement in Q2 twenty twenty four excuse me, exited, sorry, and related royalty structure and fees created fairly low margin business and no longer justify the resources that required. While the termination created revenue headwinds in 2024, we believe it ultimately strengthens our business by enhancing gross profit margin moving forward and focusing our EMEA activities solely on Biokey solutions.

Speaker 3

As a result, BIO key's revenues decreased 11% to $6,900,000 in 2024, principally due to our exit from the Civil Secure Limited distribution agreement. This strategic decision caused a reduction in lower margin service revenue related to third party licensed products, but has enabled BIO key to focus on its own higher margin software products. As a result of this transition, the 2024 license fee revenue increased 20% to $5,200,000 in 2024. Service revenue declined to $1,100,000 from $2,200,000 in 2023 and hardware revenue declined $632,000 from 2024 and January in 2023 due to a large expansion order received from an existing customer in Q4 twenty twenty three that did not reoccur in 2024 but is expected again in 2025. In Q4 twenty twenty four, our license fee revenue increased 77% to $1,000,000 lower margin services decreased 28% to $344,000 and hardware revenue declined 88% to $94,000 resulting in Q4 revenue of $1,500,000 compared to $1,800,000 in Q4 'twenty three.

Speaker 3

Our gross profit grew to $5,600,000 in 2024 from $1,400,000 in 2023 due to the impact of the $3,600,000 hardware revenue in 2023 hardware reserve, sorry, growth in high margin license fee and reduction in lower margin services and hardware revenue compared to 2023. '20 '20 '4 gross profit also benefited from the sale of $213,000 of hardware in 2024, which was previously fully reserved. We reduced our operating expenses by $600,000 to $9,700,000 in 2024 from $10,300,000 in 2023 due to the reduced SG and A, partially offset by higher research and development engineering costs to support new product development. Biokey continues to proactively reduce expenses where possible and we will continue to closely manage and monitor our operating costs to identify possible savings in 2025. Reflecting on greater gross profit and lower operating expenses, BIO key's twenty twenty four net loss improved to $4,300,000 or $2.1 per share from net loss of $8,500,000 or $15.21 per share in 2023.

Speaker 3

Likewise, IoT's Q4 net loss improved to $1,600,000 or $0.53 per share compared to a $2,400,000 loss or $3.99 per share in Q4 twenty twenty three. '20 '20 '3 results also included a hardware reserve of $3,600,000 in 2023 and $1,080,000 in Q4 of twenty twenty three. '20 '20 '4 included positive hardware reserve adjustments of $213,000,000 in Q4 for the sale of hardware that was previously reserved. Per share amounts are based on weighted average shares of 2,059,884 in 2024 and 560,000 to $170,000 in 2023, primarily reflecting new shares issued for the warrant conversions of over 1,000,000 shares issued pursuant to the warrant inducement agreement in September 2024. The shares were priced at 1.85 per share for the warrant inducement, yielding gross proceeds of approximately $1,900,000 before agencies and offering expenses.

Speaker 3

Turning to our balance sheet, as of 12/31/2024, BIO key had current assets of $1,900,000 including 438,000 of cash and cash equivalents. This concludes my prepared remarks. So operator, we can now begin the Q and A session.

Operator

Thank you. And today's first question comes from Jack Vanderard with Maxim Group. Please go ahead.

Speaker 4

Okay, great. I appreciate the update guys. Thanks for taking my questions. Maybe just I'll start with a point of clarification. So did I hear correctly, the 10 K is expected to be filed on Monday or by Monday.

Speaker 4

And then on the restatements that were referenced, was there any new additional restatements in prior periods since you last reported 3Q results in November? Or is this just a reference to the restatements that were already disclosed earlier in the year? Thanks.

Speaker 2

Yes, let Cece take that. Sure.

Speaker 3

So yes, we expect to file the 10 K on Monday, this coming Monday. And we also are referring to the 2023 restatement, nothing new this year.

Speaker 4

Okay. Thank you. That's helpful. So I guess moving on, Mike, last quarter, I was encouraged by the strong license revenue uptick that happened in the third quarter, especially just given historical seasonality of the business, which kind of softer, especially in Europe. And I believe you're expecting from in November, I think you were expecting to finish 2024 with at least having overall total revenue flat compared to 2023.

Speaker 4

So maybe just help me understand what changed or didn't happen relative to your expectations that you're talking about, I guess, back in November? Did something just get pushed into 2025? Did it spill through? Was something longer sales cycles? Just help me understand kind of what changed relative to your I think your kind of flat growth expectations in 2024?

Speaker 2

Yes. I will say it's exactly as I described. It's fundamentally the transition and exit from the Swivel Secure business. The services agreement resulted in, I guess, a delta of about $800,000 or $900,000 for the full fiscal 2024. We had a couple of opportunities that we had in the pipeline for the Swivel side that we were converting to Biokey.

Speaker 2

And so they took a little bit more time and some of that slipped into the first quarter. But the gross margin impact is just tremendous. I mean, you can see our blended gross margins now are nearing 80%. Getting out of that low margin, 10% margin software contract was software support contract was huge for us. And then selling Biokey core product versus a third party product, which had a 50% gross margin just has a huge impact on us.

Speaker 2

And so we've made a couple of announcements and on contracts that we closed out of EMEA, 1 with the National Bank of Egypt in January, but one very notorious defense agency in Europe that is all BioKey product and in fact is including biometrics as well with it. So it's fundamentally that transition, Jack, and that's where we came up short.

Speaker 4

Okay. Got you there. And then maybe just, I guess, if I look at the fourth quarter, Mike, the license revenue was is up year over year, substantially at least. So that's a positive there. I guess just given the nuance comments about the Swivel moving off or transitioning away from the Swivel Secure contracts to some of your new BioKey solutions, Is that disruption and transition process, is that behind you now?

Speaker 4

Or is this going to be is there some headwinds related to that, I guess, as you're entering 2025? How should we think about that?

Speaker 2

Totally complete, totally done. We are again, you saw the contract yesterday, huge, huge contract for us in the context of visibility, size and magnitude, we are building a very significant presence in the international defense marketplace. And this is just another one of those. We are totally behind the transition. We're complete with that.

Speaker 4

Okay. That's helpful to know. And then just in terms of your outlook, so you are expecting it sounds like you're officially expecting it sounds like you're confident you expect to return to growth in the revenue line and improve profitability during 2025 relative to 2024. Since we're already almost done with the first quarter here, it's March 27, just any sort of data points insights into how you expect the first quarter to kind of look compared to the fourth quarter of twenty twenty four and the first quarter of twenty twenty four? How's the first quarter of this year looking?

Speaker 2

Yes. Well, we're not closed yet and that's number one. And number two, we do expect to absolutely emphatically grow our business in 2025. And more importantly, you can see just again via the numbers, the gross margins and the march towards profitability should be very aggressive this year. Our breakeven is coming down.

Speaker 2

Our expenses, we continue to manage them very, very closely. We're still investing in R and D in areas that are necessary to stay on the leading edge, and we are doing that in our biometrics business. So, yes, I'm expecting a very, very good 2025 and not only growth on the revenue side, but also a much more accelerated path to profitability and cash flow breakeven.

Speaker 4

Okay, great. And then maybe just from a segment perspective, because things have obviously been you guys it's been very fluid here. Licensing recurring license revenues, obviously, the story. From I guess, from a hardware perspective and then a services perspective, those two segments, are we expecting can you just help walk me through those, I guess, are we expecting growth in the hardware line at all or is that maybe that's a potential upside benefit or is that not really the focus? And then the services revenue side as well, it's been kind of stable between $20,000 to $34,000 I guess per quarter on the or $340,000 to $200,000 on the revenue quarterly line.

Speaker 4

Yes. Expecting growth in any of those segments?

Speaker 2

Yes. So great question. So on the hardware side, interesting, as I mentioned, biometrics and that's our unique competitive advantage are becoming more and more part of every contract that we're selling. So with that comes hardware sales, because typically customers are deploying in the enterprise, they're deploying our finger biometric technology. So along with the software, the subscription license software, they're also acquiring the hardware to be able to facilitate the authentication process.

Speaker 2

So I do believe we'll see growth on the hardware side. I do believe that. On the services side, I think we're going to be very, very stable to growing, but it's not going to be again against that software support contract like we had in 2023. That's gone. It didn't exist in 2024.

Speaker 2

So I do believe you'll see growth on the services side as well as we proceed forward. And that will be professional services or different types of support that may be even episodal that we provide our customers as they onboard our solutions. So yes, I do believe we'll see growth in both of those lines in 2025.

Speaker 4

Great. Okay. And then maybe just one more and I'll hop in the queue. That the large order you secured in the fourth quarter, the $910,000 contract, did that was that fully recognized in the fourth quarter? Or is any of that getting spilled into Q1 of twenty twenty five?

Speaker 2

Actually, a significant portion of that order is in Q1 of twenty twenty five. So that was in addition. As I mentioned, we have a very large financial services customer that upgraded to our latest technology. So that was and we sold them a two year subscription, which will renew in Q1 of next year, which now represents $1,500,000 in recurring revenue. So this was kind of an add on or an upgrade to that existing subscription.

Speaker 2

So there was about $250,000 or so recognized in Q4 Q3, Q4, I believe Q4 and about $600,000 in Q1. So good question.

Speaker 4

Okay, great. That's good to hear. I think that's it for me. I'll hop back in the queue. Thanks for the questions for taking my questions.

Speaker 2

Thanks, Jack.

Operator

Thank you. And our next question comes from Dan Camis, a Private Investor. Please go ahead.

Speaker 5

Hey, I'm just looking at the release from yesterday or the day before on the you said it's a European defense agency. I'm just wondering, is there any kind of idea of the scale, the amount of the contract here or the recurring revenues?

Speaker 2

Yes. Thanks. And that's the new contract that we announced yesterday?

Speaker 5

Yes. The Spain and Holmdel, New Jersey, it's the global leader in identity and access management.

Speaker 2

The contract we announced yesterday is with an international a new customer. That's not an existing customer. It's a new customer. And I can't share any more detail on that other than what you saw. We, as the press release described, we completed the initial deployment in record time.

Speaker 2

I mean, we did it in days. And we'll be working on the next phase And this is phased we'll be working on the next phase in the second quarter, this quarter coming up. So it's a substantial contract and it's with a very notorious defense agency in Europe.

Speaker 5

I see. I mean, can we assume that since it was done so fast that the first phase is pretty small? Or is that

Speaker 2

No. I wouldn't make any assumptions on that at all. But again, I can't really share any more of the data on that and our partner and the likes. It's just highly confidential.

Speaker 5

I noticed there's been some noise in the World Bank about moving Nigeria forward on their ID plans. Is there any update on that that you can give us in terms of the long stalled BIO key contracts in that?

Speaker 2

Well, you're right about that, Dan. There is a lot of talk. The World Bank has circled back at the beginning of this year, at the end of last year, beginning of this year to try to accelerate what they have been trying to accelerate for ten years, which is the full enrollment of all citizens in Nigeria for all kinds of applications, but mostly in the financial sector. And we'll see. They claim to now be putting an infrastructure in place to be able to pay all of the vendors that enroll these individuals.

Speaker 2

And obviously, that includes purchasing hardware and software and all that other stuff. So we'll see. We're watching it and we'll see what happens over the next few months or as we approach the middle of the year. I really can't share any more than that. Again, we're following it closely.

Speaker 5

I mean, is there any potential for sales of the original hardware that had the inventory?

Speaker 2

Oh, absolutely. But again, there has to be the facility in place to do it. And we are obviously have other opportunities for that equipment outside of, again, Nigeria and some of the African countries. So we're not just waiting on that particular opportunity to materialize. We're working other ones as well at the same time.

Speaker 2

So we have sold some of that inventory. We sold some of it in 2024 and we expect to sell much, much more of it in 2025.

Speaker 5

I noticed there was about $200,000 in reversed reserve or something this quarter. Does that mean that you sold about $200,000 worth of that hardware in the fourth quarter? Yes. Can you tell us any more data about that? Or is it No.

Speaker 2

It's just again, we have various projects that are in the works, and we're seeding them. So we hope that we'll see some more significant, I'll call it, volume orders, right, larger orders in the coming periods.

Speaker 5

Am I calculating right that you had about a $500,000 loss in the fourth quarter? Or am I not calculating that right? Because there's no quarter data.

Speaker 3

I'm sorry, you're breaking up a little bit there. I'm missing what you were saying.

Speaker 5

I'm sorry. What was your cash flow loss in the fourth quarter from operations?

Speaker 3

I don't have that number in front of me. We didn't yes, I didn't do a separate cash flow for the fourth quarter actually just for the year.

Speaker 5

All right. I mean, but it was less, right?

Speaker 3

Oh, yes. Yes. It was

Speaker 1

cut back.

Speaker 3

Yes. And then that cutting back.

Speaker 5

And Mike, on the R and D, is that an increase? I think you mentioned an increase in R and D. Can you give us some clue as to what that is being spent on or anything that's coming up?

Speaker 2

Yes. And I think we've communicated quite a bit about this as well. We feel there's a significant opportunity with Passkeys and we introduced a product called Passkey U. And so we're doing some integrations around that. And biometrics are becoming almost part and parcel of almost every deal that we're selling now.

Speaker 2

I mean, for someone who's been doing this a long time and pushing biometrics because of the not only the security, but because of the convenience and the overall user experience, We're seeing that really come to life now. And so the integrations with some of the larger partners, those APIs, things like that are really where we're spending most of our time and energy and also money also in the mobile auth area. So we continue to believe that biometrics for real enterprise mobile authentication are a big play. So that's where we're investing right now. We're not our product is very, very complete.

Speaker 2

These are just tweaks and additions to stay on the edge.

Speaker 5

Okay. In terms of OpEx, should we expect like it flat from the fourth quarter for the first quarter or going back to the third quarter or what should we expect going forward in terms of OpEx?

Speaker 2

I have to throw that to CC.

Speaker 3

I think we're going to be pretty flat for a little while. We're just looking for to optimize what we're doing right now. So pretty flat for a few quarters.

Speaker 5

Okay. All right. That's all I got. Thank you.

Operator

Thank you. And showing no further questions, this concludes the question and answer session. I'd like to turn the call back over to Mike DePasquale for closing remarks.

Speaker 2

Thank you, everyone, for your time today and for joining this call. You may reach out to our IR team whose contact information is in today's press release with any follow-up questions. Also, look for us at the Maxim TMT Conference in early June, which we expect to participate in and be available for investor meetings. We also look forward to updating you on our Q1 call in May. And as always, we'll provide interim news updates via press release as they evolve.

Speaker 2

Thank you again and have a great day.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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