BIO-key International (NASDAQ:BKYI) Q4 2022 Earnings Call

0:00 Good morning, ladies and gentlemen. Thank you for standing by and welcome to Bio-key International's 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, Friday, March 31, 2023. I'd like to turn the call over to Bill Jones, Investor Relations. Please proceed.

0:30 Thank you. Thank you for joining today's call. Participating today are BioKeys Chairman and CEO Mike DePasquale, CFO CeCe Welch, VP of Channels for North America Galen Rogers, and myself. I remind everyone that today's conference call and webcast, as well as answers to questions, may include forward-looking statements, which are subject to certain risks and uncertainties that may cause actual results to differ from those projected. Words such as anticipate, believe, estimate, expect, plan, project, and similar words generally identify and express forward-looking statements.

1:15 These forward-looking statements are made based on management's beliefs and assumptions today using information currently available pursuant to the safe harbor provisions of the private security 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 as filed on Form 10-K with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on such forward-looking statements, which speak only as of today's date. BioKey undertakes no obligation to revise or disclose revisions to such forward-looking statements to reflect events or circumstances occurring after today. And with that, I will turn the call over to Mike.

2:09 Mike?

2:10 Thanks, Bill. Good morning, and thank you for joining our call today. After my remarks, I want to let one of our new senior sales executives, Galen Rogers, introduce himself. and review sales and channel initiatives for 2023. CC will provide financial highlights, and then we'll open the call to investor questions. From a high level, we had a strong close to the year, achieving full year revenue of $7 million, which met the low end of our revenue guidance. More importantly, we made tremendous progress in 2022, solidifying our global reach and brand, while continuing to expand our base of high-margin annual recurring revenue. We now serve tens of millions of end users across 600 customers globally, leveraging our PortalGuard platform in North America and Swivl Secure in Europe and the Middle East.

3:07 We've evolved our business to a software-as-a-service or a SaaS-based model, or more precisely, what we refer to as ID as a service or IDaaS. Our 2022 net loss increased due to added expenses from the acquisition of Swivel Secure, our PortalGuard iDAS sales and marketing build, and the active development of enhanced features for our solutions, including mobile auth. Additionally, our personnel and other costs reflected general inflation-based increases that were experienced by most companies in 2022. In response, We have been taking steps to reduce costs wherever possible, including streamlining our headcount and overhead.

3:55 We are also looking to enhance our financial liquidity by working to reduce hardware inventories, which were increased to navigate potential supply chain challenges back in late 2021 and early 2022. We had $4.8 million of inventory at year end, and we have a goal to reduce that by at least half in the first two quarters of 2023. Importantly, during 2022, BioKey achieved higher software revenues in North America, Europe, the Middle East, South America and Asia. Given ongoing funding and rollout delays for government-sponsored Civil ID programs in Africa, it was the one region that did not achieve growth. However, we are cautiously optimistic that things could begin to turn around in Africa, in particular Nigeria, as we progress through 2023.

4:51 Innovation remains critical to BioKey's growth and competitive position. And during 2022, we made significant progress expanding and enhancing our solutions, including our passwordless and mobile solutions, which include our proprietary identity-bound biometrics, or IVB capabilities. We launched enhancements to our mobile authenticator app in Q3 2022, and we also developed and launched an updated admin panel that delivers an improved user experience for PortalGuard users. These successful launches received excellent feedback from customers and prospects. Our PortalGuard iDesk franchise continued to build momentum in 2022.

5:38 further expanding penetration of customers across higher education, county governments, and business enterprises. Customers prefer PortalGuard for its effective security, ease of use, scalability, and attractive value proposition. In 2023, we will look to increase PortalGuard's penetration of these verticals while also pursuing opportunities in new adjacent markets. To enhance the global reach of our solutions and sales, we have expanded our direct sales team, which is supported by both traditional and digital marketing campaigns. In conjunction with a management transition announced in January 2023, we recruited Galen Rogers as VP of Channels and Chad Carter as VP of Sales, both in North America.

6:30 I will turn the call over to Galen in a moment. But let me first say that we are very excited to bring their experience, skill sets, and leadership to our company as they each have decades of valuable sales experience within larger organizations in our industry and space. It cannot go unnoticed that cybersecurity challenges continue to grow in both the number of episodes and their severity. To counter this trend, Industry forecasters expect another record level of cybersecurity spending in 2023, and we believe BioKey is well positioned to benefit. To date, nearly a third of all organizations have launched passwordless authentication solutions, which is up from 22% last year, but still leaves a very substantial sales opportunity on the table.

7:25 We think our multi-factor solutions, with identity-bound biometrics offer a unique and cost-effective solution for organizations across most verticals and use cases, especially for those looking to implement passwordless or zero-trust solutions, which are critical in today's environment. I could go on, but let me just say that we believe our substantial direct sales and partner distribution footprint positions us well around the globe. We are working a solid pipeline of customer opportunities, including several that are very substantial in scale, while we also continue to build this pipeline through our sales and marketing outreach. The true force multiplier for us is our Channel Alliance program, or CAP, that is being spearheaded in EMEA by our Managing Director, Alex Rocha, and here in North America by Galen.

8:22 As a result, we feel confident for continued growth in 2023 and beyond. We disclosed today that we expect Q1 2023 revenue will be at a record level, getting us off to a strong start for the year. And rather than attempt to project a specific revenue range for 2023, we've instead indicated that we expect 2023 will be a period of substantial top line and bottom line improvement. This outlook is supported by our strong start in Q1 along with our growing base of high-margin contracted annual recovering revenues, which we currently estimate to be at approximately $7 million in run rate.

9:08 Based on these factors, we feel very confident in substantially exceeding our 2022 top and bottom line performance, reducing our cash burn and moving towards break-even and profitability. Before I turn the call over, I'll note that a recent report by Houlihan and Loki showed median valuation multiples for public companies in the cybersecurity software industry range from a low of three to seven or eight times revenue on an enterprise basis, depending upon expected growth. Obviously, BioKey is trading at much less than that based on 2022 results, and we are off to a strong start in 2023.

9:54 which can meet solid appreciation for all of our stakeholders. I'll now turn the call over to Galen Rogers who joined us in early 2023 to briefly review how he is working to take BioKey's sales reach to higher levels in 2023. Galen?

10:13 Thank you very much, Mike. First about myself, I have 23 years in this business with 16 years in technology sales with the majority of my time have been in channel sales. Most recently, I was Director of Strategic Channel at Ping Identity. From a channel perspective, our mission is building scalable, dependable, and collaborative avenues that contribute to revenue growth and value while expanding our market presence globally. More specifically, what this means is that we have focused on the core objectives of reaching new markets, building pipeline-generating partnerships, and increasing our deal size. and then tacking specific higher value opportunities. Higher value opportunities in cybersecurity would include such things as established cybersecurity systems integrators, large account resellers and technology partnerships.

11:08 From there, we manage and analyze what's working and not working so that we can continue to enhance our process and performance. We currently have a great base of partners in our channel alliance partner program with over 500 partners globally. We have key distribution partners such as Intellisys, 3i, and DOT, a TD Cinex company, and our SLED partner. We have key value-added reseller relationships that we have certain important tech alliances with firms like AWS, Beyond Trust, and ForgeRock. We also have key cyber-managed security service provider relationships, and one of my initiatives in 2023 is to roll out our new enhanced partner program to new and current partners.

11:57 This will provide structure and incentives to evangelize, sell licenses, and provide services to the market. This program will reward cybersecurity partners differently from the previous program by training partners to implement our solution, and in turn, provide additional sourced opportunities which I believe is low-hanging fruit to drive the business. From a numbers perspective, our plan includes 1 million of channel-sourced bookings in 2023 and an addition of 3.5 million in future opportunities to the sales pipeline from channel-sourced deals. We have a number of new partners we are targeting, and obviously I won't discuss those for competitive reasons. However, we have a comprehensive list of prime targets.

12:47 I'm very excited for the opportunity to be part of the BioKey team, and I'm looking forward to taking our channel development and productivity to the next level. With that brief overview, I'll provide an update from the VP of Sales, Chad Carter, who has joined the BioKey team. Chad has been in the industry for 25 years, specifically in network and security sales. He recently finished six years with European cybersecurity software provider, Wallex, building their US team. That team was up to eight people and primarily self-sufficient. He made the move to Bio-key because he really liked their products, biometric differentiation, and market opportunity, and he was ready for a new challenge.

13:32 Our team is focused on some core goals for 2023, which include increasing average deal size, better prospecting, a targeted selling of enterprises with bigger budgets, and most importantly, channel enablement. We believe that the channel needs to be involved in almost every deal and involved early. This is how channel and field sales work together. We will assign a partner as often as possible when it makes sense because to gain their mind share and focus, you need to be feeding the deals into the channel and get deals in return. It's really a symbiotic relationship when it works best. When talking about increasing deal size, it really involves several factors that start even before you engage with the customer. We are focusing on longer-term opportunities like three-year deals that are paid up front.

14:24 This is achieved through better prospecting, targeting companies by revenue, targeting larger prospects, targeting prospects near current customers, focusing on key verticals outside of what we internally call SLED, which is state and local counties, municipalities, and education, which has been PortalGuard's sweet spot. Chad's theory with bigger prospects has always been land and expand, meaning let's get our foot in the door and we can grow the relationship over time. In this regard, we have been focusing on $500 million to $5 billion companies, implementing account-based marketing, taking a narrow focus and going deeper. By thinking bigger, we can increase our average selling price quite substantially, as much as 50% in the first year.

15:13 All these things can lead to larger deal size. In line with our partner strategy, we're doing account mapping to align with our channel partner sales teams to drive new opportunities, and we're implementing a more formal referral selling program, as we found that customers are often open to giving a referral versus being a case study. Again, some of this is basic, but as previously mentioned, We see some low-hanging fruit. Strategies and tactics need to be communicated and executed, and we're in that process. This is what the team is working on in North America. And with that, I will turn the time over to our CFO, T.C. Welch.

15:54 Thank you, Galen. Please let me review some of our financial highlights. Q4 22 revenue rose 88% to $1.8 million from $9.9 million in Q4 21. reflecting higher software license and service fees, including the benefit of the civil secure acquisition in March of 2022. Likewise, 2022 revenue rose 37% to $7 million versus $5.1 million in 2021. Both current year periods, higher software license and service fees were partially offset by lower hardware revenue. Revenue from software licenses increased 92% Thank you for 22 and 79% to 4.6 million in fiscal year 2022, reflecting the addition of civil secure and new portal guard customers and existing recurring revenue contracts.

16:53 Service revenue increased 104% in Q4 22 and increased 41% to 1.8 million for the full year 2022, with the majority representing recurring maintenance and software. and support. Recurring service revenue increased 13% to 1.2 million in 2022 due largely to increased maintenance related to software licenses. Non-recurring customs services increased 216% to 546,000 in 2022 due to increased new customer installations, swivel service fees and the conversion to cloud platform. As our customer base continues to grow, we expect service revenues to continue to increase.

17:41 Highway sales increased 25% in Q4-22, but decreased 50% to $646,000 for the year. The annual decline was due to the sales to an international government agency in Nigeria in 2021 that did not recur in 2022 due to delayed rollout of the government project. Strength in Q422 was attributable to new customer orders in addition to expanding existing installations. Gross profit increased to $1.2 million in Q422 versus $0.6 million in Q421 due to higher revenue for a better realized gross margin of 67% versus 60% in the prior year period. For the full year, gross profit margins improved to 71% in 2022 from 67% in fiscal 2021.

18:33 Total operating expenses increased to 5.9 million in Q4 22 from 2.6 million in Q4 21. The full year 2022 operating expenses increased to 14.7 million from 8.4 million. The 2022 period reflects the addition of a civil secure operation, non-cash impairment charges, to Goodwill, and $1.8 million of the higher SD&A in research and development and engineering expenses. Higher SD&A costs include the marketing expenses, legal and professional fees, and other expenses incurring the connection with the acquisition of Swivel and our ADB capital loan, bad debts, and allowance for doubtful accounts.

19:24 Moving forward in 2023, we do not expect bad debt and allowance for doubtful accounts to recur. Higher R&D expense reflected increase in personnel costs and product development activity, including the Q3 launch of significant enhancements and updates in our mobile app. We expect lower R&D expenses in 2023 as outside resources for 2022 product development activities are no longer required. As such, BioQ recorded a Q4 2022 operating loss of $4.8 million. versus an operating loss of $2 million in Q4-21, with the increase due primarily to the Q4-2022 non-cash goodwill impairment charge.

20:11 Bio-key's 2022 operating loss increased to $9.7 million from $4.9 million in 21 due to higher costs and the goodwill impairment. Likewise, Bio-key reported a net loss of $5.1 million to $0.62 per share, in Q4-22 versus a net loss of $2 million or $0.26 in Q4-21. The company reported a 2022 net loss of $10.2 million or $1.26 per share versus a net loss of $5.1 million or $0.65 per share in 2021. Aoki ended the year with current assets of $9.7 million, including $2.6 million of cash and cash equivalents. 1.6 million accounts receivable and 4.8 million of inventory.

21:02 IOT has a current note payable. The current portion of the known loan due is 2.2 million.

21:08 That concludes our remarks.

21:10 Now I'm going to turn the call back over to the operator for Q&A. Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. Anytime your question has been addressed and you'd like to withdraw your question, please press star then 2. This time we'll pause momentarily to assemble the roster. First question will be from Jack Vander Aard from Maxim Group. Please go ahead, sir.

21:51 Okay, great. Good morning, guys. I appreciate the update. Thanks for taking my questions. You know, I think as I did this last time, I'll just start with some fourth quarter questions and move on to your outlook. But Cece, I will finish with the question on what stock comp was in the quarter and what the current total shares outstanding is as I wait for the 10K. So let me start with a question then for Michael. First on the fourth quarter OPEX, You mentioned you expect OPEX to be reduced sequentially as you head into the first quarter, or at least the overhead. But SG&A expense in the fourth quarter, it was $3.3 million. So that was up pretty substantially. It was up $800K from the third quarter and well above any other prior quarter. So can you just help me understand what is normalized SG&A expense on a quarterly basis as you kind of enter 2023?

22:50 Good morning, Jack, and good question. So for sure, just at a high level, and then I'll have CeCe chime in, but at a high level, based on what we said in our prepared remarks here, we've made significant investments in development for really in two areas for IDAS, you know, building out and scaling out our SaaS solution and also our mobile auth technology. So, you know, you're going to start to see expenses Normalize and come back down to a lower level that, again, because most of the initial development is complete. So, you know, that's one area. We also, and again, I'll let CeCe address the specific Q4 SG&A increase, but why don't I let her do that now?

23:38 I think that's appropriate. This way we'll directly answer your question.

23:43 Okay. Thanks, Mike. Yes, Zach, as we indicated, we wrote off some of the things that had been outlying as far as things we had on receivables that we didn't consider collectible. We paid some substantial fees for the loan and for acquiring shrivel. And then due to a lot of factors, we wrote the goodwill we had on the books off. You know, as you can see, there were just some good little loans, $1.8 million, and then we had over another million in other miscellaneous, you know, non-cash, basically, expenses that, you know, we could just consider that were not viable assets on the books.

24:34 Okay. I guess, yeah, excluding the impairment charge, though, I'm not referring to that. I'm just talking about your actual SG&A expense. It was $3.3 million, roughly? Is that kind of a normal baseline then? The highest quarter before that was $2.5 million in the third quarter.

24:55 Right, right. And as Mike said, yeah, we've been streamlining it, and we expect going forward that, you know, SG&A and R&D will be under $3 million per quarter. That's what we are budgeting towards.

25:08 Okay. Okay. Excellent. I appreciate the color there. Let me switch gears then quick to your outlook, Michael. It's good to hear you expect, you know, sequential revenue growth in first quarter 23 and then substantial growth for the full year of 2023, even despite what sounds like, you know, limited visibility into the after contract contribution. But maybe just for clarity, as far as your first quarter 23 revenue outlook for sequential growth, Does that assume anything from those two Africa contracts, or is this just mostly from the strength of your recurring license business?

25:47 Thanks. Right now, it's really the strength of our core business. What I mentioned and what was in our press release is that our current, I'll call it recurring revenue stream, which consists of two items, mainly two items, and that's subscription revenue, right? and the second is maintenance from our kind of traditional customers, right, that bought perpetual licenses from us but have to pay maintenance for support going forward. So if you take those two buckets, that business right now is contracted, meaning it's committed, and it will generate approximately $7 million in revenue. So that's our base. So we're starting fundamentally where we were at our full revenue picture in 2022. So our base is about $7 million.

26:41 Anything above and beyond that that I'm predicting right now, and again, you'll see when we report our Q1 results that it will be a very strong and record quarter for us, that is not including anything from the African business right now. We are cautiously optimistic that that business is going to start and ramp up again, There was an election in Nigeria that was held in February. The National Identity Management Commission has been fundamentally shut down in the context of making payments to the agents that were doing all of the enrollments for that World Bank initiative. All of that is again starting to bubble up again. In fact, the World Bank is contemplating directly paying for the enrollments and paying the agents who were doing the enrollments because it's been just a debacle there to get the project moving at the pace that they want to see it move.

27:44 So in general, everything that we're projecting is less Africa, and I consider Africa right now upside for us. Now, that's one piece. The second piece is our EMEA group which is managed by our managing director in Europe, Alex Rocha, has been signing partners in Africa to sell our portal guard solutions. We just made an announcement on Thursday, Wednesday or Thursday, about a new partner that we just brought on board, Ethnos, that focuses on cybersecurity and has a practice across Africa to support enterprises and government agencies to help them strengthen their security infrastructure. So, you know, we do believe that we're going to be selling our traditional products globally, including Africa. But the bulk of our focus right now is clearly on our core business, which is PortalGuard and our biometrics.

28:43 Okay, guys, that's very helpful, Collar. And, you know, of course, you mentioned the $7 million kind of baseline is kind of where you're starting with your recurring revenues, which is very high margin revenue as well. So that's That's certainly a positive. And speaking of which, you mentioned you're working on moving towards profitability. Just given your comments on expected overhead cost reductions and yet substantial revenue growth and bottom-line improvement in 2023, I guess maybe it just makes sense to reassess, do you have an idea of what sort of revenue represents break-even or profitability for you?

29:23 Well, I think on a high level, right, if we're in the $3.5 million range right now with current expense, you know, at the current expense run rate, right, we're going to be certainly at break-even or profitability. So, you know, if you want to look at it on an annualized basis, it's probably around $14 million, give or take. Now, there's some cost savings and advantages that we may see, you know, as we traverse through the course of the year. and we're going to see our revenue grow as well. So, perhaps that point will change. But right now, that's probably the best perspective I can give you.

30:03 Okay, very helpful. I appreciate that color. And then, as I mentioned at the beginning, CeCe, if I could just maybe collect what the total stock op was in the fourth quarter and what the current total shares outstanding are.

30:19 Yes, so I'm just going from the K, which gives me annual. So the stock comp was $388,000. Outstanding shares were a little over $9.2 million.

30:31 Okay, great. And just for clarity, is the 10K going to be coming out today? I don't think I've seen it quite yet, but I imagine it will be filed today.

30:45 Jack, unfortunately, we found out yesterday that it likely will not get filed today. It will get filed next week. Unfortunately, our auditors, and you're seeing this, I suspect you see it as well across the board, just for a shortage of resources and lack of resource, it's been very difficult for the auditors to get through the process with The number of clients they have. Our audit firm was purchased by Markham mid-last year, and so we have been transitioning into the new firm, and it's just taken some extra time the last two quarters to get all of the work done, again, with the transition and resources.

31:32 So we will file, but we will file late.

31:37 Okay, I understand. And yes, I have seen, just to confirm, I have seen that across a lot of my emerging growth companies as well, so that makes sense. Well, good. I'm happy to hear about your outlook for robust growth. That's it for me. Thanks for the questions. Thank you, Jack. Thank you. Again, if you have a question, please press star then 1. I'm showing no more questions.

32:14 Thank you, everyone, for joining today's call. We look forward to updating you on our Q1 call, which will be held in May, so it's not too far away. And as usual, we'll continue to provide regular updates via press releases for newsworthy developments as they happen. Once again, we thank you for taking the time to join us this morning, and have a great weekend, everyone. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.