BIO-Key International Inc

NASDAQ:BKYI

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone. Thank you for standing by and welcome to the BIO-key International Second Quarter 2024 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, August 15, 2024. I would like to turn the call over now to Bill Jones with Investor Relations. Please go ahead.

[William Jones]

Thank you, Rocco. Our hosts today are BIO-key's Chairman and CEO, Mike DePasquale; and CFO, Ceci Welch. 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 generally express and idea forward-looking statements.

Such forward-looking 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. 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.

Listeners are cautioned not to place undue reliance on forward-looking statements, which speak as of today's date only, BIO-key undertakes no obligation to revise or disclose revisions to forward-looking statements to reflect circumstances or events that occur after today. Now let us hand the conference to Mike to begin.

[Michael DePasquale, executive]

Thanks, Bill, and good morning, and thank you for all joining our call today. I'm pleased to report our Q2 results on time this quarter, issuing our Q2 release and filing our 10-Q after the close yesterday. I feel we are back to our normal reporting cadence and I'm really happy to report that. After my remarks, Ceci will provide a brief overview of our financial performance, and then we'll open the call to investor questions. Due to factors outside of our control, Q2 revenue of $1.1 million fell below year ago revenue of approximately $1.9 million. Principally as a result of delays we experienced and the completion of approximately $450,000 in software license contracts in our EMEA business.

Q2 was also impacted by lower services revenue related to customizations and upgrades for one large customer project in 2023 that didn't occur in 2022 -- in 2024, Q2. Importantly, our PortalGuard Identity and Access Management franchise continued to grow, supported by deployments and project expansions in health care and the public sector as our installed base and new customers take advantage of the unique technical advances we've made over the past year. Recent deployments include the City of Williamsburg, Virginia, which enhanced its Zero Trust framework with BIO-key's identity bound biometrics or IBB.

For those who are not familiar, Zero Trust is a security paradigm that challenges the traditional notion that people and devices within a network can be inherently trusted. Instead, Zero Trust emphasizes continuous verification of trustworthiness in order to ensure maximum security. That's where BIO-key's cutting-edge biometric technology comes into play. IBB puts each individual user at the center of cybersecurity. IBB is used for authentication and identification centrally storing biometric data in a secure way preventing it from being stolen or reused in order to create a unique biometric identity that is used in an ongoing basis to verify identity of the person taking action.

Generally, we're talking about biometrics in the form of fingerprints or palm scans, but our systems are also compatible with facial voice and Iris recognition as well. The core benefit of IBB is that it establishes trust and accountability that are rooted in a person's biometric identity so that organizations can be assured of each individual's genuine presence. With full transparency and more importantly, audit capabilities. By developing a Zero Trust framework that uses BIO-key IBB, enterprises benefit from decreased susceptibility to attack because our IBP authentication factors cannot be forgotten, shared, exchanged stolen or Ford.

Enterprise controlled enrollment prevents account handovers and ensures only approved individuals can use account privileges. BIO-key IBB also eliminates the potential for a single point of failure by removing physical devices as potential vulnerabilities as it is possible with local or device-based biometrics such as those used on most cellphones. Importantly, we believe our patented technology and systems also provide superior flexibility and ease of use as well as a lower total cost of ownership for 0 trust environments and other use cases, which include [indiscernible] workflows remote workforces, customer IAM, roving users and shared workstations, such as in call centers. And in any workplace environment where mobile devices are not permitted.

Given these advantages, BIO-key has built a strong niche in highly regulated environments such as health care, banking, defense and the government or public sector. In Q2, two notable clients, the University of Iowa Hospital and Dayton Children's Hospital, both expanded their BIO-key PortalGuard deployments the Los Angeles LVT Center implemented a bio badge tap authentication solution, further demonstrating the versatility and flexibility of our systems to meet specific needs and use cases. Underscoring the strength of our solutions, BIO-key received the global InfoSec Hot Company multifactor authentication Award from Cyber Defense Magazine during the RSA conference this May in San Francisco.

On our last call, we discussed our latest product innovation, past TU. We launched this product in the second quarter and initial customer reaction has been very favorable with a number of Fortune 500 prospects interested in the solution. The beauty of past to you is that it specifically addresses underserved workplace scenarios that involve roving users who share workstations and more importantly, supports passwordless homeless and tokenless authentication. Mainstream authentication methods are based on something you have such as your cell phone that receives a pin or host an authenticator app or a phone-based pass key or hardware tokens such as a UBC.

However, device-based solutions are not ideal for workplace applications like on the manufacturing floor in retail environments, call centers, health care, hospitality or anywhere where roaming users require secure device access, particularly as workplaces often prohibit the use of phones due to safety data privacy or personal distraction. This leaves BIO-key as an other option. However, outfitting hundreds or thousands of workers with a $25 to $80 per user Vito token that have a 25% annual replacement rate can be cost prohibitive and impractical for many enterprises. Taste brings BIO-key biometric authentication to a hosted pass Key in the form of software, not hardware, allowing users to unlock their hosted pass key with a touch of a finger at any of those shared workstations.

Workers carry nothing and Passkey:YOU to provides unmatched secure foamless tokenless and password less authentication. Passkey:YOU also easily integrates into existing Zero Trust frameworks and including our competitor and partner IAM platforms, such as Microsoft, Entra, Okta, Ping and Duo without requiring any special configuration of high- and includes high margin annual recurring revenues. In 2023, we began a strategy to partner with larger IAM providers like these as well as sell point and Forge Rock. Passkey:YOU represents a powerful differentiated tool we can bring to these large platforms to better serve their customers' needs. So again, we believe Passkey:YOU has enormous market potential due to its ability to solve some of the most challenging IAM use cases and the fact that it fits with already installed security infrastructures that I just mentioned.

We fully expect that it will take time for our partners and customers to bet this new solution. So while we don't expect any significant contribution to our results this year, we are excited about the potential for this unique solution going forward. Today, we made an announcement that brings our PortalGuard ides platform in IBB authentication solutions to the Amazon Web Services marketplace, and that solution has gone live today. The marketplace provides a digital catalog where customers can discover, purchase and deploy software solutions designed to run on the AWS cloud services.

By making our solutions available on the AWS marketplace, prospective customers will be able to quickly and seamlessly purchase PortalGuard and our IBB solutions from anywhere around the globe. This is a force multiplier with a captive audience and great expectations to generate strong recurring revenues in the coming quarters. I've mentioned in the past solutions are increasingly eventual for enterprises who want or require cyber insurance or to meet new SEC cybersecured risk management and reporting rules and government-mandated CS regulations. These frameworks are really driving enterprises to prioritize spending on securing access to their IT systems and their data and information. So despite our lower-than-expected revenues this quarter, we remain very encouraged by the growing enterprise awareness of the importance of implementing secure Zero Trust deviceless IAM solutions which form the core of BIO-key offerings.

We remain focused on driving revenue growth and progressing our business to profitability and positive cash flow over the next several quarters. Importantly, we continue to grow our business of high-margin annual recurring revenues that have solid potential to build on our base moving forward. Given our size, our financial performance will likely remain variable on a quarter-to-quarter basis and on a year-over-year basis due to the size and timing of customer contracts and commitments. And I'll make a comment here our average sales value prospects adverse sales value is going up significantly.

And so that's a good thing in the context of larger deals, greater revenue opportunity, but sometimes, it also means a lengthy or a longer sales process. And so despite quarterly variability, we remain confident in our ability to drive sequential growth on a full year basis in 2024. We and we continue to seek and implement cost reduction opportunities to support our path to profitability and positive operating cash flow. We're also working to identify potential strategic opportunities to leverage our core expertise, products and corporate assets and create value for our shareholders. We're spending a fair amount of time in this regard, and given that we do not believe that our market cap of approximately $20 million -- $2.5 million adequately reflects the value of our technology, products and customer base of approximately $6 million in high-margin ARR, our strategic value is much higher.

And so again, even just the strategic value of our NASDAQ platform is significantly higher. For these and other reasons, we are optimistic regarding the future of our company, and we are grateful for the patience and support of all of our shareholders. Now let me turn the call to Ceci to review the financials before we take questions.

[Cecilia Welch, executive]

Thank you. As Mike referenced earlier, we are -- we have filed our 10-Q yesterday and issued our earnings release. Now I'll review some of the financial highlights as compared to our restated 3 and 6 months ended June 30, 2023 results. BIO-key Q2 '24 revenues were $1.1 million, down from $1.9 million in '23. The current year period was impacted by software license orders from our domestic and domestic business and European subsidiary sliding into the third quarter. The prior year period had benefited by approximately $200,000 for nonrecurring services related to customizations and upgrades for one large customer.

We also had one large recurring maintenance contracts that did not renew in Q1 '24, which negatively impacted the current year top line revenue. Our gross profit and gross margins comparison improved in the current year period primarily due to the $1 million hardware reserve that was taken in Q2 '23 and the higher gross margin from services realized from Q2 '24. Excluding the impact of the reserve, the gross profit would have been higher in Q2 '23 because of higher revenues, but gross margins would still have improved to 77% in Q2 and from 69% realized in 2023, and this was due to the gross margin of services of 74% in Q2 24 versus 42% in Q2 '23.

On the expense side, we reduced total operating expenses by $168,000 in Q2 '24 relative to Q2 '23. Due to reductions in administration and sales personnel, as well as marketing show expenses, lower headquarter expense. These were partially offset, however -- sorry, partially offsetting lower SG&A a $33,000 increase in our research development and engineering related to new product development. reflecting lower costs in the year ago high-water IoT net loss improved to $1.7 million or $1 per share in Q2 24 from $2.6 million or $4.71 per share in Q2 '23. We Similarly, the net loss for the first 6 months of 2024 was reduced to $2.2 million or $1.33 per share compared to $4.3 million or $7.4 million per share for the first 6 months of 2023, including a hardware reserve of $1.5 million through June 2023.

We will continue to focus on increasing revenue and controlling costs for the remainder of 2024 and in support of our path to cash flow breakeven and profitability. In terms of our balance sheet and cash as of June 30, 2024, BIO-key had current assets of approximately $3 million, including $1.3 million of cash and cash equivalents, $932,000 of accounts receivable and do from factors and $433,000 of inventory, net of reserves. Recall that in 2023, we had written down over $3 million in inventory slated for a project in Africa to 0. We are expecting to convert some of the hardware to inventories to cash shipments in the current quarter to support our growth initiatives and our operations.

We also have several large projects with new and existing customers that are in request for proposal and proof-of-concept stages with financial and public sector companies and a foreign defense force that's an existing company which could potentially benefit our results in the second half of 2024 in addition to existing partnerships and relationships with Mike discussed. That concludes our prepared remarks, and I'll ask the operator now to prepare for Q&A.

[Operator]

[Operator Instructions]. And today's first question comes from Jack Vander Aarde with Maxim Group.

[Jack Vander Aarde, analyst]

Okay. Great. I appreciate the update. So Mike, you got to ask just on the -- just from the revenue results kind of this year -- this quarter and in the first half of the year. License revenue was down year-over-year, even if that 450,000 order wasn't delayed. In the first half, total revenue looks like it was down year-over-year from first half last year. So you've talked about kind of ramping growth in your recurring revenue base and ramping channel partner programs. So I guess, can you just help us understand why reported revenue hasn't picked up substantially if that's the case? And what needs to change for meaningful revenue growth to start kicking in going forward?

[Michael DePasquale, executive]

Jack, thank you. The answer to that question is pretty simple. It's really about closing more of the opportunities that we have in our pipeline. And as I mentioned in my prepared remarks, the average sale value that we're pursuing directly now and through most of our partner through our partner network is a larger sale, and it's with a higher profile customer, and the timing on those deals is significantly different than the smaller ones that I mentioned, like the city of Williamsburg or some of the installed base customers that we have, where we have them capped it.

So I think it's what we're going to see is we're going to see significant revenue growth in periods that may not necessarily be repeatable every period. I mentioned that our variability will continue. We're pursuing and have been pursuing a number of very, very large opportunities with notorious companies that are considering our solutions for all the reasons I described. Our Pass Key-U solution in and of itself is creating significant interest because there's no infrastructure interruption.

There's -- it's a very simple overlay, independent of the infrastructure that you have in place or the vendors that you have in place, perhaps securing your higher level identity and access management or securing your data and your IT infrastructure. So I mean, the simple answer to that question is we just need to increase the number of opportunities and we need to shorten the sales cycles and we need to get our close ratio up. That's really what we're solely focused on now. And we recognize that as much as we have been pushing to sell through partner networks and our partner infrastructure, which is building significant has been built significantly over the last 2 years.

We need to have more control over some of those larger deals. And so we're also focused on direct selling, which, again, gives us more control but it's the larger opportunities. We brought a couple of new resources on board just over the last 6 months this year who are enterprise-focused who were very, very experienced in the security space, and they're making really nice headway in some of these larger deals. So I think what you're going to see in the future periods is these deals are going to begin to drop. And that's going to help us. The other opportunity, which we introduced announced today, with the Amazon marketplace is also significant for the smaller and medium-sized customers that we're pursuing. So Amazon has about 300,000 customers globally that utilize the platform that can now take advantage of our solutions without -- first of all, they can try them. They can investigate them.

They can basically sign up for evaluations and then they can purchase them right through the marketplace. And we -- the install is a simple slide to get BIO-key solutions up, authenticating, in essence, their front doors. So that's a really powerful, powerful opportunity for us, and we have high expectations about what that means. The other benefit of getting into that program, and it took us a considerable period of time, is that there is joint marketing not only support, but there's joint marketing money, and there's joint marketing relationships that all come with that with that relationship in general. So we're going to be doing joint marketing. We're going to be doing joint events. And you're going to see all of that unfold as we get to the end of this quarter and the beginning of next.

In fact, we've got meetings set up with all of their resources to train them and get them up to speed on everything that we do. and that's going to have a significant impact. So Jack, that's what we need to do. That's what we're working on, and I believe that's going to have a real impact on our business as we get to the end of the year and also into next year.

[Jack Vander Aarde, analyst]

Okay. I appreciate the color there. And just for clarity, with regard to the Amazon Marketplace announcement today. Is this a continuation or related to your announcement from the fall of I think it was the fall of 2023 that you were accepting Amazon's AWS independent software vendor program. Is this a continuation of that? Just help me understand what the nuances are.

[Michael DePasquale, executive]

Well, it is a continuation. So first, we were accepted as a vendor. And then second, you have to develop your storefront in essence, right, to get into or be in the marketplace and you have to be approved and you have to meet all of the hurdles and that's taken us a considerable period of time. And so now this is the extension to that announcement about 6 or 8 months ago. So now we are fully live on their marketplace, allowing as I just described their customers to acquire our solutions very easily.

[Jack Vander Aarde, analyst]

Okay. Got it. So is it fair to assume that you'd expect revenue to -- from Amazon to the Amazon channel this year to start this year?

[Michael DePasquale, executive]

Absolutely. There's no question. We had to go live first and we're live now. And you can click on the link and you can see what it's all about. Next steps are the integrated training of all of their resources and then the marketing and promotion begins at the end of this quarter and into October. So there'll be joint events joint webinar sessions will actually be going to conferences that are funded partially by AWS. So they really get behind the company if they believe the technology can really benefit of their customers, but more importantly, create greater revenue levels for them.

[Jack Vander Aarde, analyst]

Okay. Okay. Great. And then can you help me understand, you mentioned in your prepared remarks and it's quoted in the press release, just kind of regarding your outlook commentary. If I quote you remain confident in your ability to drive sequential growth on a full year basis. Just trying to understand what that means. Does that mean you expect third quarter revenue to be above the second quarter and fourth quarter revenue to be above the third quarter? Or are you talking about you expect full year '24 revenue to be above '23?

[Michael DePasquale, executive]

All of the above. So I think we're still confident we're going to grow our business year-over-year. And we're obviously -- this was a terrible quarter from a revenue perspective for us, right? It's one of the lowest quarters we've had. And I guess we -- Ceci can go back and look and tell me maybe while I'm speaking here, but it's got to be at least almost 2 years. So our expectation is much higher for the second half of the year. And obviously, again, that will lead to a year-over-year increase in revenues. That's our goal and objective, and that's our expectation.

[Jack Vander Aarde, analyst]

Okay. Got it. That's helpful to know. And then -- because I know the third quarter is seasonally slower for you, but it sounds like that larger order that 450,000 order from your European -- I'm taking that simple secure that will land then? Would that be recognized in the third quarter entirely?

[Michael DePasquale, executive]

Yes. Anything that obviously closes in the third quarter will be recognized in the third quarter. And as Ceci said, we've had a number of orders slipped. So yes, our expectation is that the third quarter will be a good quarter.

[Jack Vander Aarde, analyst]

Okay. Great. And just a couple more for me. Just for clarity, I figured I'd circle back on -- I know it's been many years now of delays, but those two large Africa contracts, have they -- I think you've written down the projects. But I mean, are they still -- is there still potential that as things kind of get -- I mean there's a lot of political issues going on over there, obviously. But -- are these contracts dead now canceled? Or I mean, are they still -- is there still an opportunity there? Just looking for clarity on that.

[Michael DePasquale, executive]

Yes. I mean there's still an opportunity there, but there have been significant, significant delays in everything they've done underneath their National Identity Management Commission kind of registering all of in particular, in Nigeria, right, registering all of their citizens, getting them into the database, everything has been just fundamentally delayed with change in administration, finances money, as you know, their economy is so dependent on oil, and there's been a lot of ups and downs, right, over the last 2 years. But the projects are still alive, and we still have aspirations of selling some of our equipment in that market.

We also have another project that we've been working on in the payment space that is continued its under development, but it's more commercially oriented. So not relying on the government, but really relying more on the banking and the finance infrastructure within the country. And so that's another opportunity that we've been working for quite some time. So we're optimistic about that. As you know, we do really, really well in South Africa and we have done really, really well in the financial services space there. And we are creating some new partnerships in other African countries that we're optimistic can lead to greater levels of business.

But we have really downsized our focus in our operation there, given that we've already spent so much money. We again, spent money on that hardware, which we've written down, and we expect obviously to sell that inventory is as fresh as it was when we bought it. Good news is there's no later generation of products. So we're feeling pretty good about that. But yes, it's just -- our -- we spent a lot of money against an expectation that these projects would move forward. But unfortunately, it's a market that just is very unpredictable. And I'm sorry to say, we -- I can't say I regret doing that. But because at the time, it was the right thing to do. But it's definitely a market that's tenuous.

[Jack Vander Aarde, analyst]

Understood. Understood. I appreciate the color there. And just maybe one last question because it is a key part of your existing business. I believe the go-forward growth strategy is the channel line program, the CAP program. How does maybe just help me understand how that is specifically, I guess, contributing to the business. Have you added more channel partners? And how does that how does that channel that cap program compared to the opportunity with Amazon's program from a sales perspective? And just so I have some idea of how the 2 compare?

[Michael DePasquale, executive]

Great. Great question, actually, a really good question. So let me take the first part, which is our CAP program. The CAP program is evolving. And so we signed up a lot of partners. And that's the first thing you want to do. You want to get a lot of attention, and you want to get partners in the program and get them to learn about the product and go out and represent it. At the end of the day, we're in kind of the second phase or second generation of our program, where we're beginning to focus on a select group of partners that are making a more serious investment and are actually bringing opportunities to us or that we're bringing opportunities to them, right, for fulfillment so that they will, again, trust us and create and generate more opportunities on their own.

So we're in the second generation of that program right now, working with a select group of I'll call it, larger partners that really have made a commitment to us and want to do deals. And so that's where you're going to see, I think, better productivity. That's the model in Europe. I mean, almost every single thing we sell in the EMEA region comes through a partner. In fact, everything goes through a partner. But they've evolved a the model is very mature. But they've evolved their model to the point where, again, through a select group of partners, they drive most of their business. So we're moving in that direction.

The second part of your question was, how does that relate to the AWS marketplace. Well, it's entirely different. Remember that on the AWS side with 300,000 client customers on their platform. Those customers can look sideways and look for solutions on their own or they might have a partner or someone who is responsible for security or security infrastructure within their environment, but it's running on the AWS platform. So that might pull the partner into the deal to begin with, right? The partner might recommend to that AWS client that, hey, BIO-key got a really good solution.

And so there is a potential for us to have kind of a bifurcated sale, right, where the partner is working with an AWS customer, and they recommend a BIO-key Solution, but that sale goes through the marketplace. So it's -- I think we're going to see how that evolves over the next quarter to 2 quarters, but they certainly don't compete, but they could be more collaborative.

[Jack Vander Aarde, analyst]

Got it. Okay. That's really helpful color, too. And I think that's it for me. I appreciate the update, Mike, and good luck on forward and look forward to watching us execute.

[Operator]

[Operator Instructions]. And at this time, we are serving no further questions and the Q&A session has ended. I'll ask Mike DePasquale for any closing remarks.

[Michael DePasquale, executive]

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 today's press release with any follow-up questions. We look forward to updating you on our Q3 call, and as always, we'll provide news and updates in the interim by press release. Again, thank you for your time today, 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.