BIO-Key International Inc (BKYI) 2009 Q2 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Inc. second-quarter 2009 conference call. During the presentation all participants will be in a listen-only mode. After the speakers' remarks you will be invited to participate in a question-and-answer session.

  • As a reminder, ladies and gentlemen, this conference is being recorded today, August 14, 2009. I would now like to turn the call over to today's host, Bud Yanek, BIO-key Vice President of Marketing. Sir, you may begin.

  • Bud Yanek - VP, Marketing

  • Good morning, everyone. Thank you for joining us for BIO-key International's second-quarter 2009 conference call. Joining me today on the call are Tom Colatosti, Chairman and Interim CFO, and Michael DePasquale, BIO-key's CEO.

  • The agenda for today will be as follows. Mike will provide a review on BIO-key's financial and operating results, speak to the strategic announcement that we made last evening, then offer some comments on general industry trends and developments within the Company's businesses as well as closing statements, and then open the call up for questions.

  • Today's conference call 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 basis of these statements. The words estimate, project, intends, expects, believes, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are made based on management's beliefs as well as assumptions made by and information currently available to management pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

  • For a more complete description of these and other risk factors that may affect the future performance of BIO-key International see risk factors in the Company's annual report on Form 10-KSB and its other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date made. The Company also undertakes no obligation to disclose any revisions to these forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

  • BIO-key issued a press release and its 10-Q earlier this week providing details on the Company's quarterly financial and operating results. The press release is available in the Press Release section of our webpage at www.bio-key.com.

  • A replay of today's call will be available beginning one hour after completion of this call until 11:59 a.m. Eastern Time on September 11. This replay can be accessed by calling 412-317-0088. The access code for the replay is 433024 followed by the pound key.

  • Please note that information reported on this call speaks only as of today, August 14, 2009, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through the Internet webcast system and can be accessed on our webpage at www.bio-key.com.

  • Now I would like to turn the call over to Mike DePasquale.

  • Mike DePasquale - President & CEO

  • Thank you, Bud, and thank you, ladies and gentlemen, for joining us for our second-quarter company update call and earnings call as well.

  • As we announced earlier in the week total revenue from continuing operations for the quarter ended June 30, 2009, was $2.7 million representing a decrease of 12.2% from the $3.1 million reported in the first quarter of 2009. Gross margin was 83% for the second quarter of '09 compared to 86% for the first quarter of '09. The Company's continued emphasis on cost containment enabled operating expenses to decrease by 12% to $2.1 million for the second quarter of 2009 compared to $2.4 million reported in the first quarter of 2009.

  • Net income from continuing operations for the second quarter ended June 30, 2009, was $139,770. This marks the third consecutive quarter of profitability. We are proud of this accomplishment. We were profitable for the full year of 2008 and we were able to follow through with back-to-back profitable quarters in 2009. Remaining profitable, even with lumpy revenue growth, ought to give our investors great comfort with the seriousness, discipline, and commitment of our BIO-key team over the past year.

  • First-half consolidated results. Total revenue from continuing operations for the six months ended June 30, 2009, was $5.8 million reflecting a revenue decrease of 5.2% from the $6.1 million reported for the six months ended June 30, 2008. Gross margin for the first half of 2009 was 84.8% compared to 85.9% for the first half of 2008. The Company's commitment to controlling costs resulted in operating expenses decreasing by 24.2% to $4.5 million for the six-month period ended June 30, 2009, compared to $5.9 million reported for the corresponding period in 2008.

  • Net income from continuing operations for the six months ended June 30, 2009, increased to $362,000 as compared to a net loss of $747,000 for the corresponding period in 2008, a profit turnaround of more than $1.1 million. Consolidated cash and cash equivalents at June 30, 2009, were $600,000, down from $1.7 million at December 31, 2008. Liabilities were reduced by $1.5 million in the first six months of 2009 from December 31, 2008.

  • After the close of the quarter the Company announced that it had entered into a settlement and mutual release agreement with Longview Special Finance Inc. and Longview Fund LP in order to resolve all matters relating to the litigation initiated earlier this year by the Longview entities. The agreement will reduce the Company's total obligation to Longview from $2.9 million to $2.2 million assuming the remaining cash settlement payment of $1.1 million is made by the Company on or before October 30, 2009.

  • Now I would like to turn to the exciting news that we released yesterday after the market closed. We made an important strategic announcement yesterday that we have reached agreements with Interact Public Safety to sell our Law Enforcement Division for $11 million. This transaction will allow us to completely redeem all outstanding preferred equities, eliminating all dividend payments by year's end.

  • What is most important about this transaction is that we will focus 100% of our resources on the growing government and commercial biometrics and identity management business, which we believe has explosive growth potential. We have a number of pending contracts that can impact our second-half operating results including two federal government initiatives that have been in play for quite some time and are expected to come to conclusion in the current quarter.

  • The sale of our Law Enforcement Division, pending customary review and shareholder approval, is expected to close in the fourth quarter of this fiscal year and will reduce our fully diluted shares outstanding by 25% or 35 million shares. Our Law Enforcement Division has great runway and a robust pipeline of opportunities that we expect will close in the next two quarters. You will hear more about this in the coming weeks and months as these contracts already in process will impact our cash flow and cash position in a positive manner as we approach the anticipated transaction close with Interact 911.

  • Four years ago we bought the Aether Mobile Government Group for $10 million. When this transaction is completed we will have sold that business for $18 million. This profitable transaction has enabled us to develop and enhance our biometric technology, invest in market development like sales, marketing, and partner management and partner development, and it has provided us the resources to remain viable while the nascent biometric market is developing and maturing.

  • Interact Public Safety Systems is a leading supplier of fully complete communications and management solutions for public safety agencies and the integration of our two companies will result in the largest install base in the industry with over 3,000 customers worldwide. It will also offer our employees an incredible opportunity to be part of a rapidly growing, international public safety company with over 150 employees that is totally focused on bringing the most advanced solutions to the market.

  • The Company is partially owned and operated by Flip Filipowski, who is regarded as one of the most highly successful high-tech entrepreneurs, philanthropists, and industry visionaries. Flip founded and grew Platinum Technology in to the eighth largest software company and sold it to Computer Associates for $4 billion.

  • BIO-key will be in a position to focus all of its resources on finger biometrics, which after years in the making is emerging as the most critical and important technology to protect our valuable assets and ensure the most convenient authentication for all enterprise applications. We will launch the Company from a position of strength given our growing account base and the partnerships that we have forged with both government system integrators and leading commercial entities in every segment of the economy.

  • We may still see lumpiness in our business as we proceed forward, but we will have the cash and resources to invest in marketing, in expanding our sales footprint, and support to establish BIO-key as the leader in finger biometrics.

  • I would like to highlight a number of initiatives that lead us to be optimistic about the future of the business including, but not limited to, our pending participation in a number of large federal programs that are yet to be decided.

  • As mentioned in our press release last evening, there are two particular projects that have been widely discussed by every competitor in this space and we believe that along with our technology partners we are well-positioned to compete for. BIO-key's advanced VST finger matching solutions can enhance the accuracy and scalability of most finger biometric application, and a win in one or both of these programs will validate our technology. There should be more news on this and these opportunities in the coming weeks.

  • Moving on to healthcare. This sector continues to be fueled by the federal stimulus plan and is focused on electronic health records and healthcare infrastructure. Two announcements by the Fed in Q2 helped to generate momentum for biometric authentication in healthcare. The first announcement was the FTC's extension of the deadline for red flag rules compliance.

  • Under this policy plans to detect identity theft must be submitted by any healthcare provider that extends credit to its patients. Not only does this announcement provide a compelling event that BIO-key can satisfy, it underscores the broader identity theft issue across all industry segments. The second announcement, the much-anticipated meaningful use statement by Health and Human Services, defined eligibility requirements for stimulus funds which allows providers to move forward with electronic health record projects where BIO-key biometrics deliver a unique value.

  • Additionally, it is widely anticipated that HHS will now turn its attention to two areas where our fingerprint biometric solution can thrive. First, we will be the enforceability of HIPAA privacy within healthcare information exchanges followed by health information security. The increasing need for fast, accurate patient and clinician identification prevents clear and attainable opportunity for BIO-key.

  • Let me explain a few of the positive steps we have taken in that direction. BIO-key continues to develop relationships with its key current healthcare customers, McKesson and AllScripts, by an expanding deeper and broader within these industry-leading companies. BIO-key recently participated in two high profile AllScripts events, the first of which was the annual AllScripts sales kick off where BIO-key conducted informational sessions for the entire AllScripts sales team.

  • BIO-key was also invited by AllScripts to display our biometric solution in the AllScripts booth at the annual AllScripts Customer Experience event. This opportunity provided us with direct access to 2,700 AllScripts customers where we determined an addressable market alone at AllScripts to be well over $5.5 million for BIO-key Biometrics.

  • Additionally, BIO-key solution has been added to the AllScripts hardware e-store which enables AllScripts customers to purchase our biometrics with just the few clicks of a mouse.

  • McKesson provider services continue to experience demand for its BIO-key-based pharmaceutical cabinets with significant wins at large hospitals that came off lease from competitive products. Their selection of BIO-key-based cabinets is due to our one-touch authentication that requires no additional input of a user ID, which was required by the prior vendor. We are extremely pleased to be the trusted partner at such a major player in healthcare.

  • Our relationships with AllScripts and McKesson underscore our successful strategy in the OEM market by exposing BIO-key solutions to hundreds of locations that we might not otherwise be able to touch. In late Q2 BIO-key initiated a 60-day pilot with the Commonwealth of Massachusetts for patient identification at Bridgewater State Hospital.

  • Once successful this pilot will provide opportunity for patient ID projects at additional state hospitals as well as serve as a proof point for other applications within the Commonwealth.

  • Healthcare-ID is a blood donor registration and screening software provider with some of the largest customers in the blood collection industry, including the American Red Cross, Gulf Coast Blood Center, and the Oklahoma Blood Institute. Healthcare-ID announced in June and has just released its latest software version that has fully integrated BIO-key's fingerprint biometrics.

  • Healthcare-ID standardized on BIO-key because our platform allows them to go beyond ID verification to pure identification adding simplicity to the donor check-in process. This important integration is expected to shorten our sales cycle at blood centers that are currently evaluating our solution.

  • In May BIO-key was again featured in Dr. John Halamka Life as a Healthcare CIO blog in which he discusses the use of fingerprint biometrics to meet the FTC's new red flag rules that I mentioned earlier as well as for patient identification. We are very pleased to have the support and interest of such a luminary in the healthcare IT ecosystems. John's position as chairman of the HHS Healthcare ID Standards panel and as a member of the Social Security Administration's Future Technology Advisor panel will give important exposure to our groundbreaking capabilities.

  • Another major opportunity for BIO-key is the general identity and access management market where our approach is quite simple -- enhance the biggest player's solutions with our biometric technology. These vendors are faced with customers and prospects asking for stronger, more convenient authentication solutions to augment the strengths of their advanced access control systems.

  • Whether it is a leading enterprise single-sign-on vendor in a market such as healthcare or more broad-based Web single-sign-on vendor with hundreds of millions of users worldwide, BIO-key's custom authentications give scale to exceed customer requirements.

  • One example is IBM which will be releasing a new version of their Tivoli ESSO platform, which has BIO-key's BSP support built in. IBM markets this world-class product to hospitals and enterprise customers around the world through their massive salesforce and partner networks. We consider IBM's exclusive selection of BIO-key's biometric platform a priceless endorsement of our strengths and cross device support, greater accuracy, and vision for combined web and network login biometric identification services.

  • Through our partnership with CA our ID Director product, which was developed to complement CA's SiteMinder, now allows BIO-key to address the authentication concerns 45 of the top 50 Fortune 50 companies not just for employee authentication, but for partners, suppliers, and most importantly consumers who access thousands of applications that are protected by SiteMinder.

  • To give you an idea of the magnitude of this market a large telecommunications customer is currently piloting BIO-key's finger biometrics for potential use by their 400,000 employees and 30 million external users who access SiteMinder every day.

  • Our expanding relationship with Oracle and in particular the custom authentication scheme we have developed for their identity and access management platform has opened the markets we would never have been able to penetrate on our own. Anywhere an application is leveraging Oracle's identity access manager platform for security BIO-key solution can slide right in and enhance the identification or verification process. When used by provisioning solution companies our biometrics eliminate duplicate and fraudulent IDs and let the customer know exactly who is accessing an application and/or completing a particular transaction.

  • Through our many partnerships with a simple swipe of a finger BIO-key's technology can validate one's identity from the moment the user logs on to a computer and for each and every application that previously required a user name and password. Each of our identity access management partners has installed base populations in the millions and our simple, cost-effective add-on modules offer them an immediate upsell to new and existing customers and provide them with a source of revenue not previously forecasted, but welcomed in this economic climate.

  • BIO-key has also been able to leverage many of our strong partner relationships to create tighter partnerships with the hardware manufacturers. We recently helped Dell close a large laptop deal with a customer who refused to purchase until Dell could enable their embedded fingerprint sensor to function with the customer's deployed enterprise single-sign-on solution.

  • BIO-key worked with the enterprise single-sign-on vendor and in a short period of time we were able to demonstrate and deploy a biometric add-on to ensure the Dell hardware contract was consummated along with a license for BIO-key software. This is just one example of the traction that we are seeing and the changing role of strong authentication in large hardware software deals.

  • In summary, we continue to be optimistic about both our short-term law enforcement opportunities as well as the potential for growth in the emerging government and commercial biometrics business. The announced sale of our Law Enforcement Division is a great event for BIO-key and our employees as Interact Public Safety Systems is a leader in the market and will have a combined installed base of over 3,000 customers at closing.

  • BIO-key purchased the Public Safety Business from Aether for $10 million in 2004 and has now sold both the fire safety and law enforcement groups for $18 million. This will leave us with a clean, net debt free and common share only balance sheet and cap table with adequate cash to invest in building our marketing and sales capabilities while focusing our attention investing in this high-growth, higher-margin, high-multiple biometric business.

  • This financial stability, if not strength, along with our competitive positioning and large federal programs, our strong partnerships with some of the largest companies in the world, our diverse biometric install base and emerging biometric market makes us very excited about the future as a pure biometrics company.

  • Before we begin taking questions I would like to remind you that a replay of this teleconference will become available beginning an hour after we conclude the call. We will provide that number again at the end of the call.

  • Now let me turn it back to the operator for questions and answers.

  • Operator

  • (Operator Instructions) [Dan Cammis], private investor.

  • Dan Cammis - Private Investor

  • Morning. It sounds like the law enforcement deal was about one-time sales. But I thought I just heard you say that the deal was worth $18 million, you would have 35 million shares outstanding. Did I miss something?

  • Mike DePasquale - President & CEO

  • First of all, we sold the law enforcement business for $11 million and I believe we generated about $9 million in revenue or sales last year in law enforcement, maybe a little bit lesser in that range. So it values this transaction somewhere around 1.2 times revenue. So that answers the first question.

  • The second part of your question, I mentioned that this transaction, since we will retain all our preferred shares, will reduce our fully diluted share count by about 25% or about 35 million shares.

  • Dan Cammis - Private Investor

  • Oh, I see. Okay, and I thought I heard a number of $18 million the deal would be worth. Did I --?

  • Mike DePasquale - President & CEO

  • What we said was we purchased the Aether Mobile Government Group back in 2004 for $10 million. And if you combined the sale of the fire safety division, this old data, approximately two years ago at a little over $7 million and this $11 million deal, we will have turned the $10 million acquisition of Aether Mobile Government into an $18 million sale for the combined businesses.

  • Dan Cammis - Private Investor

  • I see. Can you provide the rationale on $0.30 warrants? Why was that included with the deal? Is that good for both companies?

  • Mike DePasquale - President & CEO

  • Absolutely. I think what it does is given that -- two things one, Interact is going to be a partner and we will be reselling our biometric technologies, because we began to incorporate our access solutions as part of our law enforcement offering. So they are going to be a strong reseller and partner. They are going to have the largest installed base that exists in public safety in the market, so that is very positive for us.

  • The second thing is these warrants they would require, again, a cash exercise. Could bring in an additional $2.5 million in cash to BIO-key should they be exercised at some time in the future. So I think again it provides a strong connection for us to continue to do business and it also provides an opportunity for BIO-key to see additional cash down the road if the Company is successful.

  • Dan Cammis - Private Investor

  • All right. Just clarifying another point here, can you tell me what is guaranteeing the secured note and when to due and are you getting any interest?

  • Mike DePasquale - President & CEO

  • The answer to the question is, yes, on all fronts. The note is secured by -- they are a private company as you know. Interact is currently a private company and so the note is secured by the business as well as their investors.

  • Dan Cammis - Private Investor

  • When is it due and are you getting interest?

  • Mike DePasquale - President & CEO

  • Yes. This is a three-year note and the note will bear interest over a three-year period at I believe 6%.

  • Dan Cammis - Private Investor

  • Okay. One last thing here and I will get off. Feel free to correct my math, but between the preferreds and Dataradio I figure there is about $9.5 million to be paid off. If BIO-key has about $600,000 in cash and hangs on to the $4 million note it seems like there is an extra $2 million to pay off the preferreds fully by the time the deal closes. Do you see any problem with that?

  • Mike DePasquale - President & CEO

  • No, actually not. I believe that our current balance -- and maybe I can have Tom chime in -- our current balance with Dataradio is around $150,000. So we have a very small balance due with them. Is that correct, Tom?

  • Tom Colatosti - Chairman & Acting CFO

  • Yes, that is correct. It's actually $120,000 and I think the key issue of the $4 million in the note -- it's a three-year note, $1.3 million a year. And we believe that note will be assigned, therefore, it will be like getting the $11 million up front. So we will get $7 million at closing; we will assign the note because it is interest-bearing, it is secured.

  • And we think between the transaction, this transaction, our cash at hand and the additional cash that we will get before closing will leave us with $3 million to $4 million in cash.

  • Dan Cammis - Private Investor

  • That is good data. I will get back into queue. Thank you.

  • Operator

  • [John English], private investor.

  • John English - Private Investor

  • Good morning, everyone. I just read recently that IBM and Sagem have just gotten a seven-year contract with the United Kingdom and we are partners with those guys. Is there anything you can tell us about BIO-key's connection?

  • Mike DePasquale - President & CEO

  • No, I really can't. As you know we do have a relationship with Sagem. We have integrated our technology to be used for a number of federal large-scale programs. Certainly that relationship is going to continue to expand, but I have no particular comment in relationship to that particular opportunity.

  • John English - Private Investor

  • Okay. Are we expecting any revenue from Sagem in this quarter?

  • Mike DePasquale - President & CEO

  • Our relationship with Sagem is dependent on a couple of large contract wins. We have already received a significant contract award, approximately $2 million from them for advanced purchase of licenses, so we believe that relationship is going to continue to generate revenue for us on a long-term basis. If the projects close in the timeframe that we believe, the answer is yes.

  • John English - Private Investor

  • Okay. With all these great contracts we have had over the couple of years, especially Radiant Systems -- everybody thought that was on to create a lot of revenue for as us here eventually. Seeing there was only like $280,000 in revenue from biometrics on this quarterly report, how is things going with Radiant Systems? Are we expecting a little more coming in there in the near future?

  • Mike DePasquale - President & CEO

  • We are. In fact, it's interesting one of our strengths, or we believe not only our strengths but a great opportunity for us, is what we call the embedded OEM business. Similar to what McKesson has -- the relationship we have with McKesson where they import our biometrics, they incorporate them into their pharmaceutical cabinets, and they go off and sell those to their large installed base.

  • Similar in Radiant Systems scenario where they have incorporated a finger scanner into their point-of-sale device and that is sold as an option when they go out and market their systems worldwide. They bought licenses from us about a year and a half ago and we believe that the inventory of licenses, especially with a number of the large contracts that have won recently that include the finger option, are being depleted so we would expect that they would reorder from us. And, again, that is kind of annuity business.

  • The McKesson relationship has been -- actually has exceeded our expectations. We have had a number of reorders from them over the last year and that continues to grow, and their business is actually growing. I think Radiant in the context of the retail space over the last year business has been slow, so to speak for them. They have done well and they have held their own. In fact, I think they were recently upgraded by the analysts as business is going to begin to perk as the economy turns around.

  • So I think we will move in concert with them. As their business gets better, our business will get better.

  • John English - Private Investor

  • On this Dell relationship, that is great news. I hadn't heard anything about that before. I hope something is going to be released publicly about us having this contract with them. But I have a lot of Dell information -- I have WAVE stock as well -- and that TPM, trusted platform module, they are using that heavy in their business computers. Now they have even got it in their smaller business computers.

  • How is your ITPM working? I am hoping it's going to be incorporated with Dell in their fingerprint reader, is anything there?

  • Mike DePasquale - President & CEO

  • It's interesting, they buy fingerprint scanners from multiple companies and they incorporate them into the device. And that allows a user to access the personal computer itself similar to what TPM is really in place for and what WAVE offers. What we provide is a level beyond that. We provide the capability for a user to access an enterprise application.

  • This example that I gave of the Dell single-sign-on vendor who, again, really has responsibility for access to all the enterprise applications required a stronger authentication scheme and that is what we provide. So we provide the ability to use that finger scanner that is in the embedded device to access various applications that the end-user itself is required to do. So we kind of take it up a level, John, and I think you are going to see significant business for us.

  • We believe the identity management players -- the Oracles, the IBMs, the other large players, Computer Associates -- who are in that business in a big way are now beginning to incorporate biometric options and that is where we fit really, really well. The other thing that you are going to see is -- this is predominant already in Asia -- cell phones and handsets already have finger scanners in them in the Far East and they are moving into Europe now. We are going to see that moment move here into the United States.

  • Once that happens if you have a cell phone handset device with a finger scanner in it you then have the capability to incorporate stronger authentication to access enterprise applications. And I think that is another big opportunity for us. We have very strong relationships with not only the carriers through our law enforcement division, but also the handset manufacturers and the vendors that provide the finger scanners to them. So we see that as kind of the next wave.

  • And what we are hearing is that our handsets and our phones today, like the iPhone or the Blackberry, are going to more of -- it's a little bit bigger devices. So smaller than a netbook but bigger than a cell phone. They will incorporate finger capability and they will be able to do a lot more than we can do on a standard cell phone because the screens, we are limited to side. So I think this whole mobility market and this whole enterprise sign-on, enterprise access market in general is a very strong opportunity for our biometrics.

  • John English - Private Investor

  • Well, wouldn't that ITPM be connected with them because that is a trusted platform type deal where it really does authenticate you 100%? So I would think that your patent on that would play a big part, is that right?

  • Mike DePasquale - President & CEO

  • Yes, it can. Keep in mind, though, that that is used today fundamentally to authenticate to the device. We are talking about taking it to the next level. We are talking about authenticating to an enterprise application or to another vendor security platform.

  • John English - Private Investor

  • Yes, but that is a hardware chip type security --

  • Mike DePasquale - President & CEO

  • That is correct.

  • John English - Private Investor

  • -- so I would think that would be a little different and a little more secure than just --. Of course, the enterprise also has these hardware chips built into their servers and stuff with WAVE and (inaudible) so maybe that works out all right.

  • Mike DePasquale - President & CEO

  • It does. And, again, all this really needs to come together for customers in kind of a holistic fashion. No one yet is really driving and pulling together that kind of a solution. We think we are in a great position to do that.

  • John English - Private Investor

  • Are we going to get any publicity on this Dell relationship?

  • Mike DePasquale - President & CEO

  • I think you will see announcements in the near term not only on that, but on a number of these single-sign-on opportunities.

  • John English - Private Investor

  • Okay. Are we connected with -- in private in any way being the bought that was identified? Was that the company that bought them because they are a private company?

  • Mike DePasquale - President & CEO

  • That is correct. It's Imprivata, by the way.

  • John English - Private Investor

  • Is that how you pronounce it? I wasn't sure about that.

  • Mike DePasquale - President & CEO

  • It's Imprivata and, yes, they purchased the assets of which was formally Safelink Identify. We do have a relationship with them because we -- our product, our BSP, our biometric service provider, is incorporated into these SafeLink and Identify solution. We also, of course, work with a number of companies like Imprivata that also provide the same kind of single-sign-on solution in different markets. So we have a very strong presence in that space.

  • John English - Private Investor

  • Now see that is great news. We don't get that over the Internet. I guess that is because they are a private company and they don't have to tell anybody about their relationships. But that is really good news. Thank you.

  • Operator

  • [Matt Chambers], private investor.

  • Matt Chambers - Private Investor

  • Congratulations on the sale. As far as Citrix, are you seeing any traction in the Citrix client market and in general the corporate security market?

  • Mike DePasquale - President & CEO

  • That is a great question. The answer is, yes. In fact, over the last 12 months we have worked very closely with Citrix and we have actually ported our biometric platform to operate in a Citrix environment.

  • One proof point was a sale that we had with a transportation company. We have also significant opportunity in healthcare with a provider that is a leader in that space that operates in a Citrix environment and we are integrating our technology for them right now. You will hear more about that in the next week or two.

  • Matt Chambers - Private Investor

  • Speaking of transportation, how is the status on the TSA system that is being piloted right now for the flight crews?

  • Mike DePasquale - President & CEO

  • That system -- in fact there was an announcement made about a week ago, I don't know if we posted it up on our website, but the TSA not only approved the application, but the Airline Pilots Association also stood behind it and has very strongly endorsed that solution for flight crews such that they can go through the security process much faster, much easier than they currently have to today.

  • Matt Chambers - Private Investor

  • Is that called CrewPASS?

  • Mike DePasquale - President & CEO

  • It is. It's called CrewPASS, and it's a program that is managed at a high level by ARINC and also through one of our partners. We believe that that solution again that it finds the appropriate funding will wind up getting deployed nationwide.

  • Matt Chambers - Private Investor

  • I will get back in the queue for now.

  • Operator

  • [Michael Hamblin], private investor.

  • Michael Hamblin - Private Investor

  • A couple of questions. I was listening to you go through the AllScripts and the McKesson and then you talked to about Massachusetts, the Bridgewater pilot. Can you just go through -- you did mention in AllScripts you mentioned a figure of $5.5 million is what it could mean to BIO-key. And is that is total or is that on an annual basis?

  • And regarding all three, you are just going to be selling licenses. Really the revenue model going forward is going to be mostly license and there will be less reliance on service or recurring revenue?

  • Mike DePasquale - President & CEO

  • Both actually, Michael. First of all, AllScripts what we have identified is short term. They have a very large installed base and in the one division that we operate in and work with we have identified about $5 million in target opportunity for us. That will be sold by them and through them. It will be licenses, but we also -- as you know, we charge a maintenance fee on all of the licenses that we sell and that is and will create a recurring revenue stream for the Company.

  • That is the way we operate today. So if customers want support, need support, require support going forward, which they all will, they will pay us a maintenance fee. So not only will our license base grow, but as our license based grows so does the maintenance base.

  • Michael Hamblin - Private Investor

  • But on the basis of -- on a percentage basis, it's much lower than the law enforcement. There was a lot of service revenue, maintenance revenue on law enforcement whereas biometrics it's almost inverted.

  • Mike DePasquale - President & CEO

  • Keep in mind that the law enforcement business has been in place for 20 years. That started with Cerulean, morphed over to Aether, then over to BIO-key so that very large installed base represents 1,000 customers. So as our business base grows so will our maintenance base grow.

  • Michael Hamblin - Private Investor

  • Okay. So going back to Bridgewater, the pilot, if the pilot becomes a real order what size order would that be for the Company and would it be -- would it hit on one quarter or a period of several quarters?

  • Mike DePasquale - President & CEO

  • No, I think if this is a small opportunity it would hit of course one quarter, and it's not in the hundreds of thousands of dollars. I think what it is is a proof point that our technology can be used for patient identification. So that is the most important part of that particular scenario.

  • But in terms of healthcare, we are going to get -- most of our traction is going to come from the AllScripts, the McKessons, and the other targets, by the way, that we have -- and we have many of them -- that sell electronic health record solutions. They already have large installed bases. They have huge incentives right now to market and sell, and tremendous upside because as you know the stimulus money that is available down to the doctor level represents $65,000 per practitioner to implement and deploy electronic health records.

  • So all of these companies -- Athena Health, you name them -- they are going after this market in a big way and providing a more convenient, stronger authentication platform like our biometrics is a very attractive option for these physicians.

  • Michael Hamblin - Private Investor

  • But the amount of revenue you are going to be generating is really only a couple of hundred thousand from each vendor going forward. It's not -- you are not going to have $1 million from any one group in any one quarter.

  • Mike DePasquale - President & CEO

  • We think that the opportunity to generate revenue from these electronic health records providers is in the millions per year, not in the hundreds of thousands.

  • Michael Hamblin - Private Investor

  • No, per quarter.

  • Mike DePasquale - President & CEO

  • Well, obviously that depends on close time and so forth and so on. But these are not small companies; these are companies that have thousands of customers and in some regards tens of thousands of customers.

  • Michael Hamblin - Private Investor

  • I understand. It's hard to get every part of the organization on board. It's really a snail's pace in a lot of instances.

  • Mike DePasquale - President & CEO

  • Michael, this takes time. We are talking business development here. We have had a relationship with AllScripts for probably going on now almost two years and we have had customer deployments with them and we have generated revenue. But now that the whole EHR scenario has presented itself there is a much more significant driver to offer stronger authentication. And I think we are in the right place at the right time.

  • Our relationship with McKesson will generate seven figures for us going forward. There is just no question about it. These are significant relationships; they are recurring revenue. They are royalty-based, meaning that it's license only with, of course, a maintenance fee, and the gross margins on that business are very high.

  • Michael Hamblin - Private Investor

  • So McKesson will generate $1 million for the Company going forward on an annual basis?

  • Mike DePasquale - President & CEO

  • Absolutely, and those are the kinds of relationships that we need. You have 10 of those or 15 of those and you can -- paint the picture and you can realize what the potential is. But this is a lot of work.

  • What the sale of the law enforcement business is really going to allow us to do is to invest and expand our marketing capability and our sales capability. Quite frankly, we just didn't have the resources to invest heavily in both businesses. This now gives us the opportunity to really go off and build out our platform.

  • We are launching from a significant position of strength here. Leave our federal business on the side for the moment, there is significant upside in the commercial market. We are very focused there. Right now we probably have more focus in that space than anyone else in this industry. And having the cash and the resources now to invest there and grow out and develop the business is really going to put us in a different position I think going forward.

  • Michael Hamblin - Private Investor

  • Okay. And the transaction needs shareholder approval, correct?

  • Mike DePasquale - President & CEO

  • That is correct. There will be a proxy, shareholder approval, shareholder meeting, and the likes coming up.

  • Michael Hamblin - Private Investor

  • Okay. Does need the preferred get to vote? And if they do, do they vote as a separate class?

  • Mike DePasquale - President & CEO

  • The preferred shares do not vote. The common shareholders vote.

  • Michael Hamblin - Private Investor

  • Okay. And so what is the Company's revenue? I know you mentioned the word lumpy a couple of times. What is it going to look like going forward?

  • Mike DePasquale - President & CEO

  • We don't provide guidance, Michael. I think you have asked that question before and we are not providing guidance going forward.

  • Michael Hamblin - Private Investor

  • Okay. Even though upon the sale you are going to be removing a good chunk of the quarterly revenue?

  • Mike DePasquale - President & CEO

  • That is correct.

  • Michael Hamblin - Private Investor

  • Okay. Have you in the past quarter or any of the insiders purchased any shares in the open market?

  • Mike DePasquale - President & CEO

  • No one inside the Company has purchased shares on the open market and, quite honestly, with the transaction pending it wasn't appropriate.

  • Michael Hamblin - Private Investor

  • Okay. Now that it has been disclosed, the quarterly report is out you mentioned last quarter that when your hands are tied you couldn't purchase. Does this release your hands with the disclosure of these large pieces of material information?

  • Tom Colatosti - Chairman & Acting CFO

  • Mike, let me jump in. This is Tom. The answer to that question is, yes, we have intended to buy shares in the open market. We have done it in the past. Because this negotiation has been going on and frankly it has been going on for more than six months and also because of the overhang of the large federal contracts, we are prohibited from insider trading.

  • It would be pretty difficult if we made the purchases and then there was a run up of stock afterwards. But our intent is to buy as soon as the window is open.

  • Michael Hamblin - Private Investor

  • Okay. Thanks, Tom. Thanks, Michael. I will get back in the queue.

  • Operator

  • [Gary Seronin], private investor.

  • Gary Seronin - Private Investor

  • Good morning, guys. Great news this morning. It's nice to see BIO-key come back to its original roots as a biometric company. That is where many of us invested originally because of the potential and I am glad to see us heading back there.

  • Mike DePasquale - President & CEO

  • Thank you, Gary.

  • Gary Seronin - Private Investor

  • My question, a competitor recently mentioned a number of DHS opportunities with some funding already approved by the House including interoperability, unique identity, and mirroring the US database to the DHS data centers. No mention was made of [two to ten print work]. Can you tell us which specific projects the Sagem BIO-key team is competing for at DHS and which you believe have funding, and when you expect the contract awards on US business? That is a mouthful, but --.

  • Mike DePasquale - President & CEO

  • Yes, it is, Gary, thanks. That is a tough question to answer because first of all there is funding at DHS for most of what you just discussed, those projects. So I believe the money has been appropriated and the funding is there.

  • There is obviously some competitive, I will call it positioning, and discussions in review there. Certainly our partner Sagem is a very large partner. They play in virtually every significant, large-scale identification program and are likely competing in that venue.

  • I believe that there is a lot of pressure right now, especially with US-VISIT but not exclusively US-VISIT. There is a lot of pressure to move forward with these projects and programs.

  • I think you are going to see something by the end of the year out of DHS in a significant way, just because I think the Obama administration wants to be able to make a very bold statement about securing our borders and making our country safer from potential terrorist threats.

  • So there has been a lot of bantering; the solutions have been out there. US-VISIT has been out a long time, fingerprint readers have been installed in virtually every kiosk and entry point. It's just a question now of really ramping up that project and program, and I think it's going to happen before the end of the year.

  • Gary Seronin - Private Investor

  • Okay, great. Sagem took first place in the recent NIST multi-level Multiple Biometric Grand Challenge test. Sagem has improved its facial and iris recognition technology. Should we be concerned that fingerprint technology could get displaced or do you see that this has a net positive for BIO-key in its partnership?

  • Mike DePasquale - President & CEO

  • I think it's all positive because many of the very, very large-scale programs like even, for example, the NGI will incorporate multiple modes of biometrics over time. But the predominant biometric technology that is 70% of the market today and likely into the future is finger biometrics. And so what we have been able to do in our relationship with Sagem is an enhanced, actually enhance through our fusion the accuracy and the scalability of the core technologies. So combined we are more powerful than they were stand-alone.

  • I don't see their dominance in iris or face at all taking away from the finger biometrics business. If for anything else it gives them a stronger position when they are competing for very large programs that will incorporate multiple biometrics.

  • They really are a force to contend with. They have a very strong resource set. More importantly, they have a strong global presence. They have resources in virtually every country, significant country around the world and they are able to the compete effectively around the world. We are very happy to be basically working with them.

  • Gary Seronin - Private Investor

  • If you have got to hitch your wagon to someone they are certainly the ones to hitch it to.

  • Mike DePasquale - President & CEO

  • They are.

  • Gary Seronin - Private Investor

  • The FBI NGI award is now over by two months by some accounts. Can you shed any light on the delay in announcing the biometric component winner?

  • Mike DePasquale - President & CEO

  • The only thing I can say is welcome to the federal contract world. I think it's imminent, but who knows when that actual announcement will happen. But certainly the FBI -- if you just look in general about their capability today, they have the about 80 million records currently up and running in their system. I believe the current infrastructure is about to break and so they have got to move forward with NGI, the next generation of it. Not only to continue to work or operate on the forensic side, but to be able to handle the commercial requirements that are coming at them very quickly.

  • Background checks are becoming almost mandatory for many, many professions today. If you are in banking, in finance, in healthcare, in education, everyone is getting a background check. Well, when you get a background check the records they are taking -- that is taken they are compared against the datasets. So the next generation has to happen and I believe it has to happen pretty quickly. So there is no doubt that that announcement is going to happen in the near term.

  • Gary Seronin - Private Investor

  • Okay, great. All right, good. I will jump into the queue if I have more questions. Thank you, guys. Good job.

  • Operator

  • Richard Pugh, Richard Pugh Investment Council.

  • Richard Pugh - Analyst

  • Good morning, Mike. Congratulations on the good news. I think most of my questions have been answered. One question still remained and that is is there any way that you can elaborate -- actually it's a double-sided question. Is there anyway you can elaborate on what these government contracts are that are pending? And number two, is there any way that BIO-key can participate if Sagem isn't the winner? Are you possibly -- can you come in in another way?

  • Mike DePasquale - President & CEO

  • You know, we -- I think because these programs are so big we could never have really competed directly to win them. The core offering that is required is beyond just our finger matching software solution. We would never have really bid any of those contracts direct, but we always do it with a technology partner or an integrator. So to answer that question, the answer is no. We would never have even bid probably playing in those scenarios if it wasn't with a partner.

  • And we have a number of partner options obviously. We do work with Lockheed, we do work with Northrop, we work with Sagem. We work with many other large integrators so we compete that way. In terms of the -- as we talked about before, the size, the timing, federal government contracts are always very, very difficult to precisely nail down.

  • But I will say that we have been able to, we still believe and I think we have proven, that we have built a very, very competitive solution. One that, again, when fused -- technologies come together, ours and theirs, we increase accuracy, we increase speed and performance and scalability. And we do it without special hardware.

  • Today the industry wants platform independence. They want to be able to lay in whatever current hardware infrastructure is the best available at any one point in time, because hardware is a huge commodity today. It is totally a commodity. And so our mantra has been operate on any platform, use any device, and really become the core and central repository that allows finger matching to happen on the latest in innovative scanner technology or the latest or most innovative hardware platform. And that is what we do.

  • Richard Pugh - Analyst

  • One additional comment. I have mentioned banks to you before and you have said the banking industry is in trouble. But there are banks that have paid back their TARP money. One of them is our local bank, it's called Branch Bank and Trust. It goes by the name BB&T.

  • I would think that every bank in the country would love in this environment to attract more deposits. And if they were to install these fingerprint readers, which you say are going out to Diebold ATMs that this would be an opportunity for them to grab market share if a bank felt like they could do that. And it seems to me there are banks that are stronger and perhaps would be very excited about this.

  • Now I don't know if you can allocate sales time to such an endeavor. Maybe you don't, maybe you need to put it elsewhere, but that would seem to be one area to look at.

  • Mike DePasquale - President & CEO

  • Richard, that is a great -- first of all, it's a great observation and it is a very strong opportunity. Finance was one of the areas that we thought three years ago had the biggest promise for the deployment of biometrics. Of course, again, the industry kind of hit the wall.

  • But we stay very involved in the industry associations. What is called FSTC, which is the Financial Services Technology council, that has been working on not only stronger authentication, but they have different entities that focus on different components of the banking industry and banking requirements.

  • We have been working very closely with them. We are still a member of that organization and we have our eyes and ears close to the business to determine where the opportunity will be and where it will emerge. It's interesting that you bring this up because in India and in the Far East we are starting to see significant deployments in the financial services industry. It has not yet, again, evolved here, probably because of the issues that we have seen over the last year, but it is going to happen at some point in time.

  • And I think you are absolutely correct, identification and authentication right down at the branch level, right down at the consumer level is inevitable.

  • Richard Pugh - Analyst

  • All right, thank you.

  • Operator

  • Gary Seronin.

  • Gary Seronin - Private Investor

  • In the last conference call you mentioned a significant pipeline of opportunities including a number of seven-figure opportunities. Can you give us any additional color on which of these opportunities you see hitting in the third quarter?

  • Mike DePasquale - President & CEO

  • I think again we have already spoken about some of the federal opportunities. We have also a number of large potential deals short-term in our law enforcement group as well. Remember this transaction is going to take approximately 90 days plus to come to closure with everything that we have to do in terms of shareholder approval and so forth. So we will and will continue and obviously will be working very hard to close all of those opportunities which will have an impact obviously on our cash position prior to the transaction close.

  • So those deals are out. They are in play and I think you will be hearing more about them in the coming weeks and months.

  • Gary Seronin - Private Investor

  • Okay. Have there been any significant developments this quarter relative to BIO-key with respect to the Financial Services Technology Consortium?

  • Mike DePasquale - President & CEO

  • Again, we participate in virtually every meeting, whether we are there in person or we are there on the phone. Most of the time we are in person; I think there is one coming up in the next week or so. It's really an evolutionary process. I think if the financial services industry didn't hit the wall about a year ago we would have seen more deployments in the banking industry prior to this.

  • We are seeing some in the investment banking space where people are concerned about transferring large sums of money. We have had some wins in that regard with Credit Suisse and the likes, but I think you will see more of a significant expansion as the industry begins to heal and the business gets better.

  • Gary Seronin - Private Investor

  • Okay. Is it too early to start talking about where the headcount for BIO-key is headed with the sale of this division?

  • Mike DePasquale - President & CEO

  • It is, but I will say this, we definitely will be looking at adding our resources, as I mentioned before, to help us with marketing and sales and expanding our footprint. I think we are at a point where we have matured the technology. There is always going to be something we have to do, that goes without saying -- an integration point here or there. But for the most part it's about getting more visibility for our company and touching more customers and more partners.

  • The healthcare space is a very, very strong space. Of course, we have a number of initiatives that are in play right now, marketing initiatives out to blood banks, out in the EHR providers. That is all in play. Now once you create the demand, you now need to service it so you are going to see more from us in marketing and sales. And I believe that is where the headcount expansion will come from.

  • Gary Seronin - Private Investor

  • Terrific. How about the Marlborough facility does that go with the sale?

  • Mike DePasquale - President & CEO

  • It does. Our Marlborough facility, short of a couple of resources that reside there, is primarily a service point for the law enforcement division. So all our engineers, our technologists, our support infrastructure and management are located in Marlborough.

  • So BIO-key will be left with two facilities -- our facility here in New Jersey, which is our headquarters facility, and our facility in Eagan, Minnesota. In fact, next week we are moving into a new facility in Eagan that after, I believe, seven years is certainly welcome. A nicer facility, one that will give us more space and be more akin to the expansion and growth of our business.

  • Gary Seronin - Private Investor

  • Great. So expenses are going to be dropping significantly I take it?

  • Mike DePasquale - President & CEO

  • They will. They clearly will with the separation of the businesses, but all of that will get worked out in the next two quarters.

  • Gary Seronin - Private Investor

  • Thanks a lot. Appreciate it.

  • Mike DePasquale - President & CEO

  • You are welcome. I think we have time for one more question.

  • Operator

  • [Dan Cammis], private investor.

  • Dan Cammis - Private Investor

  • We have been hearing about additional blood bank business for probably eight quarters now. I understand significant progress has been made in partnering and integrating with OEMs, and even in obtaining FDA approval for your approach. But how close are we really to additional business in this segment?

  • Mike DePasquale - President & CEO

  • We think we are very close. We have a whole host of prospects. We were waiting to get into the budget cycle; the second half was primarily the budget cycle for blood banks for us. Again, given two scenarios -- one the OEM scenario that we have. Healthcare-ID is a significant partner of ours. They provide a donor management solution which is the framework for donors to be enrolled and so forth.

  • They have added our biometrics as a strong authentication option and we are beginning to roll out that software and a number of the blood banks are upgrading the software right now. So we think the second half is going to certainly be a strong half for us in the blood bank business.

  • Dan Cammis - Private Investor

  • Just as a follow-up, are you finding that stimulus money is being made available not only for converting health records to the electronic format, but also for protecting the confidentiality of that format?

  • Mike DePasquale - President & CEO

  • Yes, both. And both of those components are critical in part of the offering. You have got to be able to do both. There are -- here is the play I think with biometrics and the healthcare space. Anyone accessing a record must use some strong authentication means, which means they have to use a password that they change every two weeks and it has got to be eight digits or they have got to use a token or they have to use some multi-factor authentication schema. The convenience that biometric offers is far greater than anything else that exists in the market today.

  • I don't mind swiping my finger 40 times a day because it's easy. But if I have to enter a password that is eight digits long that I have to change every two weeks 40 times a day that is cumbersome, it's problematic. And I think, again, what is going to drive our business in the EHR market is going to be the convenience of what biometrics have available.

  • Very easy to integrate; you can buy computers today with finger scanners in them. You can add USB dongle readers so the conveniences is there. The price has come down on the hardware. I think we are really positioned very nicely to take advantage of that. It's going to be an iterative process and we have to integrate with these EHR providers as we have done with McKesson and AllScripts, but more of that will come. And I believe the business will build.

  • Dan Cammis - Private Investor

  • Okay. Thanks, guys. Good job.

  • Operator

  • At this time the Q&A session has now ended. Are there any closing remarks?

  • Mike DePasquale - President & CEO

  • Yes, thank you. Thank you for participating in today's call. We hope you will join us again for our next conference call to discuss our third-quarter results.

  • Bud Yanek - VP, Marketing

  • Thank you for participating in BIO-key International's 2009 second-quarter conference call. As a reminder this call will be available for replay beginning an hour after the call has ended. The call may be accessed until 11:59 a.m. Eastern Time on September 11. You can do this by dialing 412-317-0088. The access code for the replay is 433024 followed by the pound sign. Thank you.

  • Operator

  • This concludes today's teleconference. You may now disconnect your lines.