Q4 2023 BIO-Key International Inc Earnings Call

Participants

Bill Jones; IR; Catalyst IR

Mike DePasquale; Chairman & CEO; BIO-key International, Inc.

Ceci Welch; CFO; BIO-key International, Inc.

Jack Vander Aarde; Analyst; Maxim Group

Presentation

Operator

Good morning, everyone, and thank you for standing by, and welcome to BIO-Key International's fourth-quarter 2023 conference call. (Operator Instructions)
As a reminder, this conference is being recorded today, Tuesday, April 2, 2024. Now I would like to turn the call over to Bill Jones with Investor Relations. Please proceed, sir.

Bill Jones

Thank you, and thanks to all for joining today's call. Our host today are BIO-key's Chairman and CEO, Mike depots, Quali and CSOTC. wells.
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 expressed and identify forward-looking statements.
These statements are made based on management's beliefs and assumptions as of today, 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 the future performance of the company, please see Risk Factors in the Company's annual and other reports as filed on Form 10-K with the SEC, and listeners are cautioned not to place undue reliance on such forward-looking statements, which speak as of today. Only BIO-key undertakes no obligation to revise or disclose revisions to these forward-looking statements to reflect circumstances or events that occur after today.
And now let me pass the conference to Mike. Mike?

Mike DePasquale

Thank you, Bill, and good morning and thank you all for taking the time to be with us today are After my remarks, CECO will provide provide a brief overview of our performance, and we will then open the call to your questions.
At the outset, I did want to mention that because the audit of our 2023 financial statements has not yet been completed by our independent accounting firm. We were not able to report our full financial results in today's release. And instead, we provided an overview of our preliminary results, which are subject to change and we have filed a Form NC. 10 K with the SEC, which provides us an additional 15 day period in which to complete and file our audited 2023 results.
Now turning to 2023, I want to thank the entire global biotech team and our partners for their dedication and hard work that enabled us to achieve substantial top line and bottom line progress in 2023. Bio-key grew revenue by approximately 29% to $9.1 million, and we were able to trim our adjusted operating loss, adding back inventory reserve by nearly two-thirds to $3.6 million, substantially advancing the company to our goal of profitability.
Following the close of 2023, we completed a two-year $1.5 million prepaid license agreement with a longtime financial services customer, enhancing our balance sheet to fund 2024 growth initiatives over the past year. Identity and Access Management continued to build in importance as more and more enterprises navigate security efficiency and cost challenges related to their transition to the cloud.
This ongoing migration and the increasingly hybrid work environment provide a range of growth opportunities for BIO-key, both with new customers and through the transition of on-premise customers to the unique benefits of our ID software as a service solutions. More and more enterprises are experiencing a greater number of variety of security incidents, reflecting new attack mechanisms, reducing the efficacy of their cybersecurity defenses, adding to the challenge of persistent shortages of cybersecurity personnel to prevent and respond to cyber cyber attacks and threats.
Further supporting the adoption of the enhanced identity and access management solutions are a growing array of regulations, standards and even insurance underwriting requirements. As we have mentioned, multi-factor authentication and passwordless security already front-and-center for any business that wants or needs to receive cyber insurance coverage and the SEC's new cyber risk management and reporting rules went into effect at the end of 2023.
Finally, the Cybersecurity and Infrastructure Security Agency will formally publish its proposed rules for cyber incident reporting this week with a 60-day public comment period. The SEC rules would require covered entities to promptly report cyber disruptions and ransomware payments and is just another framework that will put cybersecurity top of mind for all enterprises, no matter what size in 2024.
We believe these examples serve as a very favorable backdrop for the future sales of our key products solutions, including portal guard I DAS and web key, which provide organizations an integrated approach to managing and securing all of their digital identities. What technologies they already use while providing flexibility to support future needs. Our platform allows users to authenticate their customers, employees, contractors and partners. It enables any user to connect to any device cloud or application, all with a simple, customizable, intuitive and consumer friendly user experience.
We use service security identity bound biometrics to support roaming users without requiring them to carry their phone for a token in response to the proven vulnerability of passwords, 2023 witness mainstream adoption of past keys by Google, Apple, Amazon, Microsoft and others due to the versatile security user friendly authentication experience that they provide past keys utilize a combination of cryptography and public key infrastructure to authenticate users to websites and applications without the need for passwords.
We believe the global use of past care keys, which eliminate the use and inherent risk of passwords will continue to expand at a rapid pace position BIO-key in this large growth opportunity later this month we plan to introduce past key EU, the first pass key solution that utilizes biometric authentication instead of relying on phone or hardware-based token methods. This differentiation makes our solution, particularly compelling for a variety of enterprise use cases with planned enhancements to the solution coming out later this year.
Turning to our go-to-market strategy in the US, our direct sales team is focused on a pipeline of larger customer opportunities. And while the sales cycle is typically much longer for these initiatives, they provide much greater potential to drive meaningful revenue recognition and opportunity going forward.
Our other path to market is through the global channel alliance partner or CAP program, which continues to build both in its geographic scope and its sales productivity. We have built a base of over 150 partners, including resellers, system integrators and other distribution partners. We're committed to supporting the growth and success of our channel partner base in 2024 as it represents a very efficient and cost-effective means to expand our global customer reach.
Our direct and channel sales strategy enabled BIO-key to achieve solid growth over the past few years, and we expect it to contribute to meaningful top and bottom line improvements in 2024. The recurring nature of our SaaS and services model has provided a growing revenue base on which to add new deployments through new customer wins and the expanded penetration of existing accounts.
Annual current recurring revenues represented more than 70% of BIO-key's total revenue in 2023 with a blended gross margin of approximately 65%. I've touched on many of the reasons for a very positive market outlook for 2024, but what is critical is the very attractive value proposition that our products provide, plus the fact that enterprise security needs are not currently being met by mainstream authentication methods. We are an industry leader in offering 17 authentication methods and within our IBM solutions to meet an ever evolving customer demand and use cases.
However, it is our deep biometric experience and intellectual property and the strategic use of biometric technology provides that greatest differentiation for us and for our APM solutions and our IBM customers, we currently have more than 6,600 customers across multiple industries using BIO-key to secure and manage access for approximately 40 million users around the world. And we have partnered with some of the larger IBM industry players like SailPoint paying and for drop to expand our reach into enterprise accounts with deployed IBM solutions that can upgrade their multifactor authentication to include to include ours.
And as our brand becomes better known our increasingly, we are increasingly finding that enterprises who have significant risk are turning to our channel partners and to our direct sales organization to upgrade their existing MFA to buyers for these and other reasons, we are excited and optimistic about BIO-key's potential to deliver continued growth and bottom line improvements in 2024 and beyond.
With that, I'll turn the call over to C.C. Welch, our CFO.

Ceci Welch

Thank you, Mike. As Micron reference to the audit of our 2023 financial statements has not yet been completed by our independent registered public accounting firm. And therefore, our numbers provided in our release and our remarks today are preliminary and therefore, subject to change 2023, revenues increased 29% to $9.1 million from $7 million in 2022, driven by increases in all license fees, hardware sales and service revenues. Service revenues benefited from customer services for new installations and civil security services and conversions from on-premise deployments of Border Guard to our part of our identity cloud platform, probably revenue benefited from the fourth quarter. Sales to foreign defense agency in 2023.
Likewise, Q4 '23, revenue grew 26% over Q4 '22, also driven by the aforementioned hardware sales to the foreign defense agency in Q2 for 2023, we took a $2.8 million noncash reserve on slow-moving inventory purchased for large projects in Nigeria in Q4 2023, the reserve expense, which was including the cost of hardware caused the decline in the gross profit to $3.3 million in 2023 from $4.6 million in 2022, excluding the noncash charge, our gross profit would have increased 34% to $6.1 million in 2023. Also excluding the reserve, our gross margin would have increased to 67.6% in 2023 from 65.2% in 2022. We continue to pursue opportunities to monetize this hardware in Africa and other to further support our growth when operation.
Turning to operation expenses, our SG&A decreased 22% to $7.3 million in 2023, reflecting lower sales and marketing expenses, including personnel and related benefits and outside services expenses. Our channel Centrix sales strategy is also allowing us to grow with minimum payments of all the related commissions or discounts to total revenue further, as many of our team can now work remotely.
We have downsized our corporate headquarter footprint in New Jersey in 2023, reducing annual lease expense and related occupancy costs. These cost cutting initiatives were slightly offset by higher professional fees related to regulatory filings and costs related to debt repayment and reverse split. Research and development included engineering expenses also declined by approximately $900,000 or 26% due to reductions in personnel related benefits and outside service expenses.
Our operating loss was trimmed by 3.5 million to $6.4 million in 2023 versus the operating loss of $9.9 million in 2022. We continue to focus on cost saving initiatives in 2024 to support our path to cash flow breakeven and profitability in terms of our bottom line and reflecting revenue improvement and lower operating costs, IoT significantly trimmed its net loss by 48%, $6.2 million in 2023 from $12.2 million in 2022.
Likewise, the Q4 23 IOP reduced its net loss by more than 40% to $4.1 million from $6.7 million in 2022, with both 2023 periods being impacted by the $2.8 million inventory reserve as of year end, BIO-key has current assets of $5.3 million, including $5 million of cash and cash equivalents and 3.2 million of accounts receivable and due from factor and $1.2 million of inventory net of the $3.2 million reserve subsequent to the year end. We as we have mentioned in this release, BIO-key received $1.5 million in cash related to an expanded two year extension and expansion of license agreement with longtime financial services customer that utilizes our biometric technology for customer authentication.
That concludes our prepared remarks. And now I turn the call over to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
[Dan Kurnos], private investor.

Hello. Good morning, Dan. Morning.
So the inventory on reserve was increased from $500,000 to $3.2 million, is that what I heard you say CC 3.8 to 400 days last year and 2022, and then this year, another $2.8 million and what does it did you say $1.2 million was met out of the $3.2 million reserve?

Ceci Welch

I'm not sure what that means. Well, we have other inventory that is not reserved fingerprint readers and others, our products that come in and out on a regular basis, both here and in Hong Kong.
And I guess I'm kind of wondering does this mean does this reserve mean that you guys think you can only get, say $1 million or $2 million for the for the hardware? Or is there potential that you'll have to write the rest off? I'm just kind of wondering what this means.

Mike DePasquale

Exactly. Well, I can I can answer the question on the reserve. It's fully reserved. She sees that correct and B, they are booking the bomb. Yes, is pulling together. So so it's fully reserved.

Ceci Welch

So in the context of very specific to your question, do we think that we're going to have to sell it at a reduced our price. I'm not not really sure of what the bottom line is all of that inventory when it's sold that component of inventory will go right to the bottom line and it obviously will turn into cash immediately. And so that's our focus right now.
And we have two, I'll call it larger projects that look very promising for us to move a substantial quantity of that inventory in the short term. So and I think from a cash and a bottom line perspective, it will be certainly positive for us in 2024.

Okay. And yes, so in the past, you'd argue was there a lot of R&D on that or you done the R&D? Should we expect an increase and R&D on that?

Mike DePasquale

No, it's been something that we've had in the works for a while. There's still a little bit of work to do around it, but here. So it's a product that we've actually demonstrated before at a number of a number of industry events, and we'll be launching it shortly, formally launching at GA shortly. What it does band is it allows a our biometric to look exactly like a FIDO token without again the token or phone.
So fundamentally, you can put your finger down on any one of our finger scanners, utilize a biometric and have that act as a final token. So think about a manufacturing floor where those employees can't carry phones around and you don't want them plugging tokens into the USB port of a of a kiosk or a computer that may be on the on the shop floor for service techs, perhaps in a in an autumn in an auto dealership for those that are in a call center where you don't want them to have again a phone and you don't want to provision tokens.
So this solution is a perfect perfect enabler for a vital type authentication without a device. So we think it's going to be very powerful.
And most enterprises, large enterprises have departments or use cases where they can take advantage of this. And the beauty about it is it does not require infrastructure.
It's very, very simple and it can operate underneath anyone's existing IBM infrastructure so we could, for example, if a client is using a Octa or a SailPoint are paying or for drop, they can fundamentally take advantage of this solution underneath that infrastructure and take advantage of our biometrics.
So is this is this a software only solution or is there still a hardware piece involved and there could be hardware involved if they need to purchase finger scanners if they don't have them available?
Yes, that's it's definitely a hardware opportunity, but it is a software solution.
So instead of the FIDO key that the guy carries there's a a reader that goes with the device or whatever they use to login or something, but it stays on the device.
So it can be used by multiple individuals. So for example, the keys, as you know, have to be deployed to each individual and they have and you have to deploy multiple keys in case an individual loses one or misplaced toward or it gets damaged. In this case, you put one fingerprint scanner on the device and multiple users can take advantage of that and do a FIDO authentication without again, having their individual device for their phone to use this a token.

And were your customers asking for this, I'm wondering, is there a differentiator that will make customers move from dongle are the hardware device to this?

Mike DePasquale

Well, I think there's there's a number of potential reasons for that. Number one, the cost and the provisioning.
So it would be even take the money aside, these keys have to be provisioned, you've got to send them to individuals.
We're looking at hybrid workforces today that, in fact, some fully remote and hybrid at best work environments that create a real difficult scenario to provision these devices. So it's compelling to take advantage of a software and again, a kiosk based biometric solution for the use cases.
I mentioned right in call centers, manufacturing healthcare, where multiple individuals access a single workstation.
So it's pretty compelling.
And yes, customers are responding very nicely to two the use case potential and the opportunity and the cost savings associated with it.

Great, great. You mentioned the 65% gross margins. Is that is that where you think you'll be in 2024 as you know, that varies right.

Mike DePasquale

We can be we can be in the 60% to 75% range, depending upon the of the hardware component of that particular quarter. But but we're in that range. And I think on a blended basis, we were at 65%. We're certainly going to be there or above.
And of course, this time of year we always hope for some time guidance for 2024. Do you have any feel for your recurring revenues or some idea that you can give us on what you feel your growth rate's going to be?
Well, we've historically grown in the in the in the 20% to 30% range. And I would expect that we'll be able to continue on that trajectory and that's historic. So we're not we're not stretching here.
We'd like it to be more significant than that. And depending upon the larger strategic opportunities that we have in our pipeline that it's certainly possible and may happen. As I mentioned in my prepared remarks, we have a bifurcated approach and go-to-market strategy, and that is to use our direct sales resources on the larger strategic opportunities that are a little bit longer term, but again, are in the six high six figure to seven figure range and to utilize our channel and all of our channel partners to handle our small medium enterprise business and to become much more efficient in being able to consummate a larger number of transactions.
And so we're getting better and better there.
Our partners are coming up to speed and are getting more independent and being able to source and then ultimately deploy our solutions. So I think as that evolves, we certainly will see growth on both sides of that bifurcated model. So we're not going to go off and provide guidance numbers. But if you look at our historic growth we believe we certainly can continue to grow as we have in the past, and we're getting closer to breakeven and to profitability and cash flow breakeven and cash flow positive. And we hope that will be a milestone that we achieve in 2024.

Okay. And what about I mean, last year, I think you announced $7 million. You're very happy with that in terms of recurring revenues, do you have any kind of feel for I mean, is it $7 million again for recurring revenues this year have a better?

Mike DePasquale

Yes, I mean, the bulk of our sales on our subscription-based recurring revenues. And so I think in our prepared remarks, we said about 70% of our 2023 revenue was was recurring or contracted. And so that percentage is likely going to hold and maybe even grow the only outside of our legacy customers, a handful of our larger legacy customers that still buy perpetual licenses, virtually everything we sell is subscription based.

Okay. And the last question, I guess, so do you how much did you scale down your office in New Jersey? I mean, you do still have offices there? Are you guys and?

Mike DePasquale

Yes, we do. And we didn't have we had a we had a quite a large six 7,000 square foot office which we had for a great I think 10 years, we probably had two lease renewals on that office. We closed that down, and we're now in the Bell Works facility in hometown, New Jersey, which is a shared office kind of complex.
And so we still have our headquarters in New Jersey, and we have a small office there and it's a flex office. So we can utilize conference facilities all kinds of different amenities if we need them, but we don't have to pay for them unless we unless we need them. And unless we're going to use them.
So we've cut our expenses down significantly.
They are also how we look at whenever we have a lease renewal up. Obviously, we're looking at efficiencies and opportunities we're looking for right now at our Egan office in Minnesota, which houses our biometric technology resources and all of the equipment associated with that. And we're looking at that as well, there may be some cost savings for us as our lease expires later this year to even get more efficient.

I see. Do you have a number of cost savings that you can give us for closing down the office.

Mike DePasquale

Just curious my my guess is that that's probably when you think about all the infrastructure, you know, fiber lines and rent cleaning I would say we're probably saving anywhere from 125 to $170,000 a year, if not more.

All right. Well, I think I've asked a number of questions here. So I'll get back in the queue. I appreciate it. Thank you.

Mike DePasquale

Thank you.

Operator

Jack Vander Aarde, Maxim Group.

Jack Vander Aarde

Okay, great. Good morning, BIO-key team. Thanks for taking my questions. So So Michael, or maybe just two more quick housekeeping questions. As we kind of wait for the 10 K on, I guess first one, can we expect to see in the income statement balance sheet kind of complete financial statements? Is that something we have to wait for the 10 K or is that something you can provide in a press release?

Mike DePasquale

I know we're going to wait for the 10 K. We just felt it made more sense. The auditors are that just weren't at a point where we felt comfortable publishing those numbers. So we within the next two weeks, that's our expectation is that we'll file the K and we'll have the full financials available at that time.

Jack Vander Aarde

Okay. Okay. And then in terms of the front page of the 10 K, it kind of gives an updated exact or share count. How many shares are outstanding if maybe CC. has and turnover?

Mike DePasquale

Yes, it's it's just about 1.9 million shares, maybe a little bit less OCC in that range. Yes, you're right. That's a little bit less than one per minute.

Jack Vander Aarde

Okay. Got you. About 1.9 inches. Okay.

Mike DePasquale

And then so okay. So that being said, I guess in terms of the fourth quarter revenue by segment.

Jack Vander Aarde

It just it's helpful for trying to dig into this, just to understand the moving parts here. If I if I kind of back into the fourth quarter on license revenue for 4Q seems like it was just about just over $1 million maybe and kind of flat, maybe down slightly year-over-year. And in services revenue may be about $450,000. down kind of year over year and sequentially, I believe, I guess does that sound about right, 4Q license revenue just over $1 million and services revenue, about $400,000?

Mike DePasquale

I see. Unfortunately, Jack, I can't answer that question. I don't know if CC has that data.
I don't have that data, but it's not open but I know it was a big quarter for our hardware. Yes.
Okay. I can go back to you on I guess.
Yes, of course, the only thing I can comment on Jack, is that we had a of a large large. I just want to get back to you on the finance ministry. I had had to place a very large order for our both our software and the hardware to facilitate it. So it was it was it was a big hardware quarter for us in Q4.

Jack Vander Aarde

Okay, understood. I'm in this year, I think that's it for me on five anymore. I'll follow up offline.

Mike DePasquale

Thank you.

Jack Vander Aarde

Thank you.

Operator

(Operator Instructions)
[Sam Chang], private investor

Oh, hi, about beauty and combined. Um, the first question I have is the gross margin on the gross margin for off control is a lot higher. And the mobile out of Patoka are we planning on selling the marketing, the protocol in on Middle East and Europe and I think yes, let me repeat the question just make sure I understand it.

Mike DePasquale

So I think you said that the gross margins on our BIO-key software are higher than the gross margins on some of the software that we sell in Europe. Is that was that your question?

That is correct.

Mike DePasquale

So the answer is yes, we sell both in the US. We will secure product in Europe and the gross margin on that product is 50%. Obviously, the gross margins on the products that we sell that are BIO-key related are higher and so the answer to that question is yes, we sell both. And our plan is obviously to grow both of those segments. But yes, certainly that's that's our mission and objective Okay.

And the I think you have, David, the second question is the on for the last couple of years, we do see revenue increase. And if you look at the breakdown by region and the North America is pretty flat. But we do have increase in Middle East, Europe and Africa.
Is there a particular reason why the North America is pretty flat for the last couple of years on, I would say some of the larger opportunities that we've closed, like with the international defense ministry and a very large bank in Africa, have certainly from a just from a revenue perspective, those larger strategic deals have contributed more to the overall growth in our business.

Mike DePasquale

Our transaction count seems to be higher in North America the deals are smaller and that's what we're very, very focused on right now. Some of the larger strategic opportunities that we have in our pipeline are North American-based Southern their household name companies. And I think you're going to start to see to see that grow here in 2024. So so I think it will grow across the board in each of those key regions in 2024.

Thank you. That's it for me.

Mike DePasquale

You're welcome.

Operator

And this concludes your question and answer session. I'd like to turn the conference back over to Mr. DePasquale for closing remarks.

Mike DePasquale

So well thank you, everyone, for joining us today, and we look forward to updating you on future quarterly investor calls, including our Q1 call on next month and please reach out to our IR team whose contact information is in today's press release with any follow-up questions. And as always, we'll provide news and updates in the interim via press releases. Again, thank you for your time this morning and have a great day.

Operator

Thank you. 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.