BIO-key International (NASDAQ:BKYI) Q3 2021 Earnings Call

0:00 Good morning, ladies and gentlemen. Thank you for standing by and welcome to BioKey International's third quarter 2021 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, Tuesday, November 16th, 2021. I would now like to turn the call over to Kimberly Johnson, BioKey's vice president of product. Please proceed.

0:31 Thank you and thank you for joining our call this morning. With me on today's call are BioKeys Chairman and CEO, Mike DePasquale, Chief Revenue Officer, Fred Corsentino, Akintunde Carlton Jeje, Managing Director of Africa, and our CFO, Cece Welch. I'd like to remind everyone that today's conference call and webcast may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. Words such as estimate, project, expect, anticipate, believe, think, plan, may, or will, or similar words typically identify and express forward-looking statements.

1:20 Such forward-looking statements are made based on management's beliefs and assumptions made 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 risk factors that may affect the future performance of Bio-key, please see Risk Factors in the company's annual report filed on Form 10-K and in other filings with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward-looking statements which speak only as of today's date. The company undertakes no obligation to revise or disclose revisions to such forward-looking statements to reflect events or circumstances that occur after today. With that, I'll turn the call over to Mike DePasquale.

2:11 Thanks, Kim. Good morning, everyone, and thank you for joining our Q3 call. After my prepared remarks, I will turn the call over to Fred to review some of our sales initiatives, followed by Kim again to discuss marketing. and Tunde, our Managing Director of Africa, is on the call. He will discuss the current status of our African business, and then CeCe will provide some financial highlights. We are very pleased with the growth of our core business in Q3, driven by increasing demand for our cloud-based portal guard IDaaS identity access control solution. We also continued building out our channel alliance program including a master agent referral partner program with Intellisys, which we believe can contribute substantial new market opportunities, as Fred will speak to momentarily.

3:07 As I mentioned, I've invited our Managing Director of Africa, Tunde Carlton Jeje, to speak on today's call and to provide an update on our large-scale ID projects in Africa and why we remain very optimistic about the future contribution of these projects as well as other opportunities throughout Africa. As reviewed in our Q3 release, with the timetable of material revenues from Africa pushed forward to 2022, we've revised our full-year 2021 revenue guidance to a range of $5.5 million to $7 million from our prior estimated range of $8 to $12 million. The midpoint of this range would represent growth of 120% over 2020 revenue.

3:57 Considering the success we are achieving in building our base of recurring, high-margin, software-as-a-service revenue, along with our expanding base of hardware solutions supported by a strong financial position, we are very optimistic about our prospects going forward. On our next call, we plan to provide our outlook for our revenue and profitability goals for 2022. Before turning the call to Fred, I did want to mention that last year's acquisition of PortalGuard's parent company, Pistol Star, has proven to be truly transformational for our company, providing a major boost to our management and engineering teams, our growth and base of recovering revenue, while also opening cross-selling opportunities for our biometric solutions.

4:51 We have the pieces in place to rapidly accelerate our revenue in a very high margin business, and I am razor focused on ensuring the momentum we have garnered over the past quarters continues into 2022. The valuation multiples in the identity and access management business, especially multi-factor authentication, are far greater than in any other segment of the technology markets in general. Our strong balance sheet, patented technology, and experienced management team provide significant upside for the company this quarter and beyond. We continue to look for favorable tuck-in opportunities to further enhance our growth potential and financial performance.

5:39 With that, I'll turn the call over to Fred.

5:42 Thank you, Mike. For the past year or more, we have been focused on building out a recurring revenue model that leverages our technological strengths. What we refer to as identity as a service, or IDaaS, is our software as a service model. It's really just in recent quarters that we are starting to see the real potential of this model in our revenue performance. We launched the cloud version of our PortalGuard IAM solution about a year ago, and it's been a strong growth driver for our business. Most new customers prefer the low upfront cost that IDaaS offers. We also continue to migrate existing on-premises software customers to the attractively priced cloud solution. Approximately 10% of about 200 active on-prem portal guard customers will be migrated to the cloud solution this year and we expect this percentage to continue to increase going forward in 2022.

6:39 Portal Guard IDAS supports a wide variety of MFA or multi-factor authentication options, including BioKey's core biometric and patented capabilities. We continue to see strong demand in higher education, county governments, and enterprise verticals that are dealing with dramatically increased security challenges related to remote access demands. Today, more than ever, users are working or studying from home and outside the organizational firewall, creating a range of security and access control challenges that are well served by our solutions. Earlier this year, we expanded our Channel Alliance Partner program, seeking to significantly broaden our global partner ecosystem and deliver substantial new revenue opportunities. We now have 110 partners representing over 100% growth so far this year. Our CAP program extends our reach into both new and existing markets, leveraging the established relationships and unique expertise and specialization of our partners.

7:45 Given our partners' long and close relationships with many of their end customers, they are in an excellent position to introduce and resell value-added bio-key security products, particularly if we make it easy and incentivize them. This program is really starting to deliver results and we believe it is an important growth driver for Bio-key going forward. We are particularly excited with the Master Agent Referral Partner Program we put in place during the third quarter with Intellisys, the nation's largest provider of technology services and solutions. Our IAM platform is now the first such solution that Intellisys has agreed to provide to their very substantial network of partners. As Mike mentioned, We believe the Intellisys partnership is a major milestone for us as it positions BioKey to substantially increase our access to customer opportunities across a broad variety of end customers.

8:42 Innovation and product development remain a core tenet of our growth strategy. In Q3, we launched several new products, including our new mobile POS Pro and a handheld, biometrically-enabled, durable Android point-of-sale terminal. The device enables mobile in-person commerce ideal for banking, social, and aid workers, healthcare users, providing secure ID verification for fraud-free transactions. We also introduced an all-new line of BioKey cryptographic FIDO2-compliant security keys, further expanding our range of multi-factor authentication options. Our third significant launch in Q3 was our next-generation EcoID2 Compact USB fingerprint scanner embedded with new technology, including our latest NIST-tested algorithms for improved scanning, image capture, and user experience.

9:41 Mid-year, we launched our mobile app called BioKey MobileAuth, which is equipped with Palm Positive, a touchless palm scanning technology for iOS and Android mobile devices. This app uses a device's camera, Finally, BioKey was recently certified by Great Place to Work, which is a great honor because the award is based upon current employee feedback, and we recognize that employee satisfaction is critical to our success and growth. On October 1st, We launched a new employee stock purchase plan to offer additional opportunities for employees to participate in our growth.

10:28 Now, I'll turn the call over to Kim Johnson to review other recent customer wins and marketing initiatives.

10:36 Thanks, Fred. As mentioned, we've had several significant customer announcements in Q3. Florida's Orange County Supervisor of Elections Office selected our PortalGuard IAM platform to provide secure, multi-factor authentication and access to voter data files in the state's fifth largest county, which builds on the office's earlier deployment of BioKey's fifth compliant fingerprint scanner solution. Within the higher education sector, the University of Denver selected PortalGuard and Oklahoma Wesleyan University also added PortalGuard for secure and efficient access control to enterprise-wide applications. PortalGuard IDaaS addresses significant IT security challenges posed by studying and working remotely. Our IDaaS solution allows customers to move their IT off-premise and benefit from the elimination of CapEx and resources required to host and maintain a secure authentication system.

11:36 Subsequent to quarter end, we announced that America's Auto Auction, a complete auto dealer service company based in Texas, selected BioKey's PortalGuard IDaaS platform America's Auto Auction is one of the fastest-growing auctions in the U.S. and selected BioKey to enhance access security and support delivery of cloud desktops, applications, and workstations from the public cloud. During the third quarter, we ramped up our off-site sales and marketing activity, attending industry events including the 2021 National Association of Counties, or NACO, Annual Conference and CIO Forum, where we participated in a panel discussing the importance of multi-factor authentication, and at ConnectID in Washington, D.C., where we had three speaking engagements.

12:25 In recent weeks, we participated in several other events, including the 2021 Channel Partners Conference and Expo, where we exhibited with Intellisys. We showcased PortalGuard and BioKey's higher education expertise at the 2021 EDUCAUSE Annual Conference in Philadelphia. and we sponsored the 2021 National Association of State Chief Information Officers Annual Conference in Seattle. In addition to these events, we also participated in a policy working group with the International Biometrics and Identity Association. IBIA is fighting pro-fraud groups and targeting legislative and other groups in support of the biometrics and security industry. This working group has met with staff of Homeland Security to engage support for our industry.

13:15 Other recent marketing efforts include offering four lead-generating educational webinars. We also authored a white paper on cybersecurity and government with content syndication on govtech.com. And we've initiated a Google Ads program. Through these and other efforts, we've been able to increase search engine optimization rankings for our website, yielding more and higher quality traffic. Fred covered our Channel Alliance Partner Program. But I'd just like to mention that we also recently launched our Partner Web Portal to support the program. This will give our CAP Program partners a central location for resources, training, and a new deal registration process. We try to optimize the ROI of our continuous marketing efforts with clearly defined quarterly goals and analysis to keep focused on driving new business, customer retention, and brand awareness. For example, Recently, we've increased inbound leads by 63%, doubled our overall lead generation, and made process improvements to maintain a high conversion of leads into sales engagement.

14:21 Through these and other strategies, we believe we are making solid progress in expanding our brand and positioning BioKey for continued growth and success. At this time, I will hand the call to Tunde for an overview of BioKey Africa.

14:39 Many thanks, Kim. Our large-scale ID projects in Africa have finally gotten off to a start, with huge support from Nigeria's banking sector in providing equipment finance to mobile agents across the nation, thus allowing for the at-scale adoption of BioKeys hardware and software technology for civil ID enrollment and financial inclusion of rural, unbanked, and underserved populations. Having now overcome the slower-than-anticipated progress, Our two large ID projects remain a tremendous opportunity for our company. The National Daily in the month of October just published that the Federal Government of Nigeria has, through its National Social Investment Program, NSIP, began training 1,850 youths across the country on using mobile point-of-sale terminals and fingerprint scanners for business, which is related to contracted hardware and services provided and services BioKeys is providing to help create jobs for one million young Nigerians over time.

15:46 1,850 is just the beginning. We are planning to supply 50,000 points of sale units, which would represent 16 million U.S. dollars plus in recurring revenue from transaction fees. We had delivered initial hardware shipments in Q1 of this year and now expect more shipments this quarter with the project expected to gain traction in 2022. We have been receiving cash payments for our initial deliveries and remain in close contact with the relevant government agencies and our private sector partners and thus have the assurance that our contracts are supported by strong commitments to national programs with guaranteed co-funding by the World Bank and widespread support of the United Nations Sustainable Development Goals through financial inclusion.

16:35 We are pleased to finally be getting the traction in terms of business activity and revenue. In addition to these projects, we continue to pursue other opportunities in Africa, both related to government civil ID projects, identity-based payment services, and other business enterprise opportunities through our contacts and partners in the region. We believe that we are strongly positioned for these opportunities in Africa, which according to the World Bank and other experts, represent one of the largest, and most significant regions in the world for socio-economic growth and developments. Thank you all. These are my prepared updates regarding Bio-key Africa. I will now turn the call to Cece Welch who will review Bio-key's financials.

17:21 Thank you, Tunde. Bio-key's Q3 21 revenue increased 38% to $1.3 million from $943,000 in Q3 20. The increase is primarily attributable to a $524,000 increase in license fee revenues. Sequentially, revenues increased 31% from $922,000 achieved in our prior quarter, Q2-21, as our core business has gained momentum. For the first nine months of 2021, revenue increased 136% to $4.2 million from $1.8 million in the first nine months of 2020. The nine-month periods are less comparable due to the acquisition as well as the COVID-19 disruption in 2020 with the onset of the pandemic.

18:14 Q321 gross profit increased to $1 million from $732,000 in Q320, principally reflecting the growth in software license revenue. Gross margin remained strong at 77.3% in Q321 versus 77.6% in Q320, with the majority of revenue coming from license fees, which tends to carry a higher margin than hardware and software revenue. Operating expenses grew at a much slower pace than revenues coming in, at $2 million in Q321, or 10% above Q320. The increase is mainly due to research and development and engineering costs, reflecting BioKey's commitment to invest in new products.

19:02 As a result of the revenue growth, outpaced expense growth, the company reported a reduced operating loss of $1 million in Q321 compared to $1.1 in Q320. Through the first nine months of the year, the company's operating loss was $3 million versus $3.8 million in the comparable 2020 period, which is an improvement of 22%. We reported a net loss available to common stockholders Q321 of $1 million as compared to a net loss of $3.3 in Q320. Through the nine months ended September, BioKey's net loss available to common stockholders improved 64% to $3 million from $8.4 million during the first nine months of 2020 due to reduced interest expense in 2021 and a reduced operating loss.

19:55 We ended the quarter with current assets of $7.3 million, including $9.6 million of cash and cash equivalents and no debt outstanding. The companies, our prior quarter end, June 30, 2020, when we had $17 million, sorry, 2021, had $17 million of current assets and $11.5 of cash and also no debt outstanding. We've also invested about $5 million in networking capital through the first nine months of 2021 to support our growth. These investments are primarily in inventory as we have prepared for increased business volumes and also try to mitigate supply chain issues. Supply chain issues are not specific to BioKey but rather impacting many businesses throughout the general economy, certainly any business that imports components.

20:48 And with that, we can turn the call back to the operator for any investor questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jack Vanderaard with Maxim Group. Please go ahead.

21:30 Great. Good morning, guys. Appreciate the quarterly update. Just a couple questions from me. Michael, I'll start with a question for you. I see that you guys doubled your inventory levels, I think, to about 4.6 million at the end of this third quarter, which is exactly double from where you were last quarter. I imagine this is because of the supply chain environment. Just wondering if you could share your thoughts on your inventory on hand, and also if you could quantify the impact that the supply chain is having on your business, just like it's having on every company in any industry.

22:06 Thank you. Yeah, so first to start with inventory, for sure we've had to commit to a certain minimum of product in order to get it on the timelines that we believe were required and will be required to fulfill our obligations for our Africa contracts in particular. Now, that's one part. There's another part. We launched a new fingerprint scanner called the EcoID2 back last quarter, and we're building inventory for that product as well where we believe there will be very, very strong demand. It's a very high-quality, new, updated fingerprint reader It's a personal device and we think the demand both in retail as well as in enterprise will be significant.

23:00 So we've made some investments to be sure given the chip shortages that we've seen that we'll have the product that we need to generate the revenue for our business plan this quarter and into 2022. So that's for sure the issue. As it relates to the impact for us, well, you know, the majority of our revenues You know, our software, right? The hardware business, at least the significant hardware business that we expect in Africa, hasn't really turned on yet. So, you know, as it relates to the chip shortage, it's exactly as I just described. It's not impacting us from a software perspective. We're not feeling any issues in that regard, but certainly on the hardware side, we have to be prepared and we have to have the product to fulfill our obligations and our requirements going forward. If we want to grow our business, we've got to continue to be that full-service supplier, which we are, and certainly we have the resources to be able to do that.

24:07 Okay. I appreciate the color. That makes sense. Then, you know, obviously, I want to turn to the 2021 guidance. It was lowered significantly. Just wondering if you could talk about the drivers of that. Obviously, there's less revenue from the Africa contracts, at least, that you were expecting. But then again, I also thought it was – you had mentioned previously that Africa-related did not contribute a significant portion to that guidance. So if you could just clarify that, and then maybe does this imply that the rest of the business – Underperforming or in line with your expectations? Just any color around the guidance, please.

24:46 Yeah, actually, I believe that our IAM business, our Identity and Access Management business, which includes our core biometric business as well as the portal guard business that we combined this past year, is doing very, very well. It continues to grow quarter over quarter. It's providing significant growth for us year over year. and so it's doing very, very well. And it's very much in line with our expectations as we started the year and we provided, again, guidance around the year. I think where we're coming up short is the deliveries in both product, services and software for Africa. And, you know, that's where the shortfall is right now.

25:37 That could turn on very, very quickly. I think as Tunde described the processes are now in place. It seems as though everything is lining up as it relates to financing to be able to move that business forward. So, no, we're doing very, very well meeting our expectations on the IAM side. And in fact, I think we're going to exceed our expectations as we approach 2022 and beyond in that business. And I tried to provide just a little bit of color in my comments in my prepared comments, but if you look at the valuation multiples and the real, I'll call it shareholder value, that the company has the potential to produce, it's clearly in that space where high margin software, in particular software as a service recurring revenue, is really grabbing most of the high-level multiples in the technology space and industry today, especially in security.

26:41 So I think we're in the right place at the right time. I think we're meeting our expectations. I think we have the opportunity to exceed our expectations as we march to the end of this year and into 2022.

26:56 Okay, great. And then maybe just one follow-up as it relates to Africa. It's good, it's encouraging to hear that, you know, There's definitely training going on, just, you know, it's a small amount of people, just over a thousand, but it's just good to see traction. What does this mean, I guess, for your fourth quarter in early 2022 hardware shipments as it relates to those Africa contracts? Are these, is there a definite, are you definitely going to ship hardware related to these contracts in this fourth quarter, or is it still kind of playing it by ear?

27:32 We've taken a very conservative approach to our Africa shipments for the remainder of this year. As you can see, we lowered our guidance considerably to take that into account. So our expectations for the end of the year are not significant as it relates to shipments. But, again, that could change very quickly. We certainly have the product. As long as the payments are there and the financing is available, we can ship very, very quickly. We have reserves and inventory, some in Africa, and we have some in the Far East ready to ship. Once again, the financing is in place.

28:18 Okay, great. Well, I appreciate the quarterly update and I look forward to speaking next time. Thanks.

28:24 Thank you. Again, if you have a question, please press star then 1. Our next question will come from Dan Comis, a private investor. Please go ahead.

28:36 Hey, guys. Hey, does this mean there's still no payment of the original, I guess it was 680K shipment? I think that was in the first quarter.

28:49 Dan, good morning. No, in fact, I think Tunde mentioned in his prepared remarks that we are collecting cash. So the answer to that question is no, it does not mean that.

29:01 Did you collect the whole 680?

29:04 No, not the entire amount, but the cash is being distributed by the banks on, I'll call it, almost a weekly basis.

29:15 I see. And so those bank guarantees, I think you mentioned last quarter, are they in place and working and you're happy with those?

29:22 Yes. Slowly, but the answer is yes, absolutely. That was our expectation as we ended the second quarter into the third quarter, and that's certainly happening now.

29:37 How much of the $4.6 million in inventory is for Nigeria? Can you say that?

29:45 Probably about three-quarters of it.

29:49 And how much of the AR is from Nigeria?

29:55 AR. I'd have to revert back to CeCe on the Q3 AR numbers. CeCe, maybe you can add some color?

30:07 Yes.

30:08 Certainly not all from Nigeria, for sure.

30:12 No, about a third.

30:19 The hardware margin looked about 45%, if I'm reading it right. Is that reasonable going forward?

30:27 I think I could answer that. Yeah, we think it depends on the product. So, for example, our eco-ID that we manufacture, design, develop, build, and manufacture ourselves will be higher. Some of the third-party product that we buy and integrate and resell for some of the contracts may be in that range. So we think that's probably a good range.

30:52 Okay. Deferred revenue was up 22%. Just doing some housekeeping questions here. Should I take that as a good indicator?

31:03 Again, I'll let CeCe handle that one.

31:06 All right. Yes, you should take that as a good indicator. are doing a lot of the ARR, and we defer what we recognize ratably over the last of the year, but the first part, we recognize the bulk of it similar to our bio-key perpetual licenses. So yes, the deferred is good. That's a continuation of just the support factor of the recurring revenue.

31:35 Okay. CC, as long as I got you, I noticed $450,000 in prepaid expenses, an increase. Can you tell me what that was for?

31:45 That's just the last bit of some of the hardware that we have that's prepaid to ensure that the delivery is going forward.

31:55 I see. So that's on top of the inventory, I think?

31:59 Yeah, it's the last of it. It's actually... Yeah, just the last of it. And again, some of that, like Mike said, is for our equal IDs. We have some of those in the works. We just have a couple thousand right now that we're expecting to sell off fairly quickly, so we have some more in the kitty.

32:17 Okay. Let me ask some questions about Nigeria here. Would you expect that – maybe this is for Jeje. I'm not sure what your first name is. It's her last name. I'm sorry. Would you expect Nigeria to add like a portal guard web key type platform to the mobile POS when you talk about expanding into some type of mobile payment system?

32:46 Absolutely. That's something that we're certainly looking at. You know, as we deploy these terminals across the nation via aggregators and via agents, You know, we're definitely looking at adding Portal Guard as, you know, the security layer for agents, you know, to access transactions and things like that. Absolutely, yes.

33:07 I mean, that's a lot of – that number you mentioned was sort of astounding, that 60 million in transactions. Is that on top of the already announced 75 million for the contracts, or is that part of that deal?

33:23 That's part of that.

33:25 I see. I see. And what's the chance that a competitor's product can be selected, like other than PortalGuard or WebKey, to operate such a system?

33:36 Sorry, your question again?

33:38 What's the chance that a competitor's product could be selected other than PortalGuard to operate in such a system?

33:45 So what we're – that's absolutely possible, but what we're looking to do is with the terminals that we're deploying – That's supposed to come pre-installed with portal guard solution for the agents that will be using them. So for terminals that belong to other suppliers, there's a remote chance that they will have another solution installed on that. A lot of them are using two-factor authentication for security. So, yes, that's certainly possible.

34:28 I see. Then is that 60 million transactions for the entire ecosystem, or is that like something you might expect BioKey will see?

34:38 That's just from our terminals, from BioKey terminals that are being deployed. It could certainly be a lot more once we start factoring the terminals of other suppliers. But there's no guarantee that they will want to take a portal guard solution from us at this point. So that's just for our terminals.

35:00 Let me ask a couple questions to Kimberly, I guess. Is there any kind of contractual obligation to Intellisys to be the first offered IAM platform?

35:14 That's probably a question for Fred, but Fred is kind of managing the Intellisys relationship, but I'll let him kind of take a shot at that, but I didn't really understand it, but go ahead, Fred.

35:26 Well, the question is, is there some contractual obligation? Do you have to pay Intellisys, or what do you have to do to be the first offered IAM platform?

35:37 There's no contractual obligation or remuneration or anything like that. No, we are just there first to expand into identity as a service.

35:48 Good. And I guess the last question would be on that 500-user call center pilot you guys mentioned. I think that is Kimberly that talked about that last time. How's that going, and is there any chance for some kind of purchase in the fourth quarter?

36:06 Yeah, that might be a question for me as well. Yes, and it's going well on Target, and we expect an ongoing rollout, whether it's in the fourth quarter for next year, TBD. Our next question will come from Richard Arnold with A Private Investor. Please go ahead.

36:31 Yes, this is Richard Arnold. I'm very satisfied with the core business. However, it is still Africa, and I called several times over the last six months trying to get clarification. I'm wondering if someone can tell me, is it a wild goose chase in Africa, and are you betting the whole company on Africa, and particularly Nigeria, known for its lotteries?

36:58 Richard, this is Mike. I'm going to make a comment first, and I'm going to turn it over to Tunde. I think we added an awful lot of color. In our prepared remarks around Africa and why we see it as a significant opportunity. We are by far not betting the entire company at all on Africa, because as you see, our core business continues to grow. Our core business will expand dramatically. And our core business, from a valuation perspective, has far more significant upside than the African business. However, We do believe, given our resources, given our balance sheet, given the fact that we've got the right leadership, including Tunde in Africa, we see being a leader there and taking kind of a first mover position in what is the largest market opportunity on the planet today makes a lot of sense for us.

38:00 And so, no, it is not a wild goose chase, and by no means are we betting the entire company on any one single component of our business. So I hope that helps. At this time, the Q&A session has ended. I will now turn the call back over to Mike DePasquale for closing remarks.

38:27 Thank you. I want to thank everyone for joining and participating in today's call. We look forward to updating you on our next earnings call. And as always, we'll continue to provide news and updates in the interim as significant developments occur. Again, thank you for your time today. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.