BIO-Key International Inc (BKYI) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Incorporated fourth quarter and FY 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, March 25, 2010. I would like to now turn the conference over to today's host, [Glenn Weiner], a partner at JMR Worldwide. Sir, you may begin.

I did it again. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Incorporated fourth quarter and FY 2009 conference call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to a participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, March 25, 2010.

I would now like to turn the call over to today's host, [Glenn Weiner], a partner at JMR Worldwide. Sir, you may begin.

Good morning, everyone. Thank you for joining us today for our 2009 year end conference call and webcast. With me this morning are Mike DePasquale, BIO-key's Chief Executive Officer; and Ceci Welch, BIO-key's CFO.

I will begin the call by reading our customary Safe Harbor statement and will then turn the call over to Mike who will provide an overview of our core business today and highlight some of our more recent milestones. Ceci will then address our financial and operating results in greater detail followed by closing comments from Mike, after which we will then take your questions.

This morning BIO-key issued its fourth quarter and year end results. The press release is available in the press release section of our website at www.bio-key.com. Additionally, the call is being webcast live on our website and the replay will be available beginning one hour after the completion of this call until 9 A.M. Eastern Standard Time on April 26, 2010. The replay may be accessed by calling 412-317-0088. The access code for the replay is 438913 followed by the pound key.

And now for our Safe Harbor statement. Today's conference call and webcast may contain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements.

The words estimate, project, intend, 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 these and other risk factors that may affect the future performance of BIO-key International, Inc., see Risk Factors in the Company's Annual Report on Form 10-K SB 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 revision to these forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. Thank you again for joining us. At this time I would like to turn the call over to Mike DePasquale. Mike?

Thank you, Glenn. Good morning. As I mentioned in our January letter to shareholders, throughout our history dating back to the founding of SAC Technology in 1993 and the formation of BIO-key International in 2002 and up to the latter part of this decade, we have never been more optimistic about the future of the biometric industry and in particular the opportunity for BIO-key to prosper.

I say this as today BIO-key is a vastly different Company from years past and is standing at the forefront of innovation in the biometrics industry. In the fourth quarter, our first true reporting period with only biometrics as our core business our sales nearly doubled sequentially to over $1 million.

What is most encouraging is that the growth was a result of contracts with our commercial customers exclusive of any significant government order such as the initial FBI NGI contract that we closed back in fiscal year 2008. With our lean overhead structure,, strong and stable gross margins, and many of the development related investments behind us, we envision 2010 as the year we begin to see wider spread adoption of biometrics resulting in higher sales and profits for our Company and our shareholders.

I will add that with many of our non-marketing expenses fixed, we anticipate reaching break even at about $1.1 million in sales per quarter. BIO-key remains intensely focused on its core goals to develop and provide the best commercially viable finger biometric technology available.

We provide the only finger biometric solution that's compatible with virtually any infrastructure hardware platform or scanning device. And our universal software offerings integrate with all common security architectures used by government agencies and commercial entities across the globe. Our patented and proven technologies continue to differentiate us amongst other biometric offerings.

Providing software to application providers and integrators that have embed our technology into their respective solutions which are subsequently distributed through each of their sales channels is beginning to pay off and should lead to growth and profitability in the years ahead. Having high performance globally recognized OEM partners like McKesson, Radiant Systems and Lexis Nexis use BIO-key solutions to enhance their key products and sharing in the success that they have had to date is what has me most encouraged about both our near and long-term prospects.

Some industry data to support my optimism. Recently reports issued by Javelin Research and Experion confirm that identity theft reached an all-time high in 2009, jumping between 12% to 20% over 2008. Equally important is where the new fraud is coming from. The Javelin survey found that 29% of victims reported new mobile phone accounts were fraudulently opened.

With mobile phones providing 24x7 access to a wide array of applications organizations must provide a fast, convenient and secure method to authenticate users before granting access to sensitive information such as health care records and bank records. And consumers recognize the need for their information to be protected.

A Unisys study published late last year reported that nearly two-thirds of U.S. citizens are concerned about identity theft. This report also found that fingerprint biometrics was the preferred modality to prevent fraudulent misuse of personal information with 93% of the people surveyed willing to use fingerprint biometrics as compared to 89% willing to provide a password to establish identity.

This represents a paradigm shift in consumer perception in recognizing the value that fingerprint biometrics offers over passwords which can be easily forgotten, lost or compromised. Think about it. Biometrics is the preferred security mechanism over passwords.

Access to social programs, banking and health care and to protected facilities requires positive identification and authentication. BIO-key provides the most convenient form of authentication developed for the most recognizable and widely used technology platforms of the world.

Oracle Access Manager, CA Siteminder, NVIDIA [bull] SSO, IBM Tivoli for ESSO form the core with many other access solution offerings. It has taken years to develop these assets and we are now ideally positioned to take advantage of market opportunities that didn't exist five years ago or even last year.

In addition, because other security technologies such as tokens, PKIs, smart cards and PINs are not inherently linked to the individual, the most convenient and secure solutions will over time include biometrics and more importantly only those biometric solutions that will easily integrate with the leading infrastructures mentioned above.

This strategic direction and the time we have invested in developing various patents and performance improvements will serve our customers and our investors well both now and into the future. Coupled with the rapidly growing mobility market that advocates use of smartphones, PDAs and tablet computers for access to all types of enterprise applications, it is clear that convenient finger biometric technology with the accuracy and scalability that BIO-key brings to the table we believe the security methodology of choice as finger scanning appliances are embedded into those devices.

Turning our attention now to some of our key highlights for the fourth quarter and year. In the fourth quarter, IBM released TAM E-SSO version 8.1 with BIO-key biometrics as a standard part of the product. IBM has had 100% growth in the number of customers for this product over the past two quarters, and 50% of their customers are asking for two-factor authentication. This situation presents a perfect opportunity for our convenient secure finger biometric solution.

Important to note, is that we also won our first significant contract with NVIDIA ESSO for over 10,000 users in the pharmaceutical market. If proved that reader interoperability is a key requirement in the successful rollout of biometrics in the enterprise.

We were able to show the interoperability of tablets from Lenovo with embedded [authentic] sensors interoperating with older laptops and separate keyboards with sensors from [UPAC]. [Albasis], our biometric logon partner, successfully integrated our biometric software into their platform and has also released support for the Passlogix product, an active identity SSO, with BIO-key biometrics.

Internationally, we continue to work with large system integrators and credential management companies to integrate our solution into bids for large scale ID projects. While not a large percentage of our business today the opportunity for a biometrics across the globe is tremendous. And we will seek out business where we believe we can add value and generate returns.

We closed orders with Intercede for the use of our technology to ensure that there are no duplicate credentials issued for a number of government contracts. And we continue to bid deals with 3M in Asia as well as track our involvement in the upcoming India UID program.

In the fourth quarter, we renewed two key OEM contracts, one with Radiant Systems who was incorporated our technology into their POS solutions for the retail and convenience store market, and another with Lexis Nexis who integrates our BSP finger ID solutions for a number of high profile global deployments. These long-term contracts validate the quality and usability of our finger matching software and the traction they are seeing for the use of biometrics.

As I mentioned earlier, the over $1 million in revenue generated in the fourth quarter was mostly from our run rate commercial customers that continue to grow with us. In the fourth quarter, we also experienced continued growth and orders with McKesson as they continue to sell their AcuDose line of drug dispensing equipment on a global basis.

Revenue has grown dramatically since the start of the year and they are becoming a $1 million run rate customer for us as well. We retained Tom Bush, a former senior FBI official, as strategic adviser and consultant. Tom brings 30 years of experience with the FBI including large scale biometric systems expertise. He has been a welcome addition to our team and I believe we will add significant value to our core technology solutions and our marketplace position with government agencies and commercial entities alike.

We were awarded a biometric contract with the Federal Probation and Pretrial Services Office of the U.S. courts as part of a project that deploys fingerprint biometric enabled identity management kiosks nationwide. We announced with our partner, Healthcare-ID, the integration of our biometric software and to help Healthcare-ID's donor ID Web application used by blood collection centers nationwide including the American Red Cross.

Minnesota Counties deployed a new criminal charging system with BIO-key fingerprint biometrics, a paperless eCharging solution that significantly saves time and increases efficiency. In the January 8 edition of This Week In Consumer Electronics, we were profiled including AT&T regarding their nationwide deployment of tablet PCs secured with BIO-key fingerprint biometric software to identify in-store customer representatives.

And as most of you are aware, by BIO-key was selected as part of the Next Generation FBI AFIS System which features the fusion of BIO-key and MorphoTrak biometric algorithms. This fusion was a key component to delivering the speed, accuracy and reliability of the solution chosen by both Lockheed Martin and the FBI.

On the technology front, we were granted a U.S. patent for our Trusted Biometric Device, a security solutions patent that digitally secures private data in transit from the capture point and protects the privacy of users. We broadened our software platform support to include Microsoft Windows Terminal Services, Citrix® Clients and Wyse CE terminals. And we were selected by SC Magazine as the 2009 industry innovator in biometrics.

Biometric technology, and by extension, our solutions are gaining traction momentum and recognition by the government, big business and the media. And lastly, of course, we completed the sale of our Law Enforcement division to InterAct Public Safety Systems for $11 million giving the Company a net debt free balance sheet and liquidity to sustain and invest in biometric technology and the future of our business.

Now I would like to turn the call over to Ceci Welch, BIO-key's CFO, who will review our financial results for the fourth quarter and full fiscal year. Ceci?

Thank you, Mike. I'm here. As we announced this morning and clarified for reporting purposes, the financial results for BIO-key now include the recent sale of the Law Enforcement business. Total revenue from continuing operations for the quarter ended December 31, 2009 was $1,014,052, a revenue increase of 93% from the third quarter of 2009.

Gross margin was 90% for the fourth quarter 2009 compared to 63% for the third quarter 2009. The Company's ongoing emphasis on cost containment enabled operating expenses to remain flat at $1.1 million for the fourth quarter of both 2009 and 2008. Loss from continuing operations for the fourth quarter ended December 31, 2009 was $188,000 compared to a loss of $794,000 in the third quarter ended September 30, 2009.

During the quarter, the Company finalized the sale of the Law Enforcement division resulting in a gain of $4,483,902. Net income for the fourth quarter ended December 31, 2009 was $4,401,141 which includes the income from the discontinued operations and the gain on the sale compared to a net income of $911,560 in the fourth quarter ended December 31, 2008 which included the income from discontinued operations.

Revenue from operations for the year ended 2009 was $2.4 million, a revenue decrease of 30% from $3.4 million reported in the year ended December 31, 2008. The results in 2008 reflected revenues from a large project for the FBI. Excluding that large transaction revenues grew year-over-year by 71%.

Gross margin was 79% for 2009 compared with 90% for 2008. Again, adjusting for the large transaction in 2008 gross margin improved by three points from approximately 76% in 2008 to 79% in 2009. Expenses decreased by 9% to $4.3 million for 2009 compared to $4.7 million reported for 2008.

Continuing operations for the year ended December 31, 2009 was $2,456,806 compared to an operating loss of $1,685,686 for the year ended 2008. Including other income and expenses, net loss from continuing operations for the year ended December 31, 2009 was $2.7 million compared to a net loss from continuing operations of $1.5 million for the year ended December 31, 2008.

Net income for the year ended December 31, 2009 was $4,693,549 which includes the continuing operation loss, $2.9 million from discontinued operations and the $4.5 million gain on the sale compared with $119,179 for the year ended December 31, 2008, which included continuing operations and a $1.6 million income from discontinued operations.

Profitable operations on a combined basis and the gain on the sale of the Law Enforcement division provided the Company with sufficient cash flow to strengthen its balance sheet by retiring $7.5 million of preferred stock. The Company ended 2009 with substantial liquidity of approximately $800,000 in cash and about $850,000 in receivables.

Further, the Company's remaining preferred stock is approximately $1 million less than the notes receivable owed to the Company. For the first time since the early years of the Company's inception, the Company achieved positive stockholder's equity. Now I will turn the call back over to Mike for closing comments.

Thank you, Ceci. We have never been more optimistic about our future and the ability to grow and be profitable on a go-forward basis. BIO-key has the technology, the customers and the resources to build a significant business in the growing commercial identity management industry applying our finger biometrics in the most convenient and secure method for application authentication. Our distribution model of selling through OEMs and integrators provides leverage to generate revenue with low fixed costs.

Our product model to be in the software licensing business, therefore, our business model is to have low cost high margin, highly profitable business. It's now about sales and adoption. Through the years, we have seen fits and starts in the industry, yet despite that BIO-key has survived and is now positioned to thrive as a leader in the commercial markets.

We were partners to the largest solution providers in the government sector. Our award winning BSP and Web key technologies continue to perform at levels beyond is what currently available today as depicted by our recent NIS test results. We operate in a very specialized segment of the security sector and when competing for business it's not about quantity but rather quality and innovation, most of which generally comes from small businesses with big expertise and a handful of capable resources.

Although our revenue stream in biometrics is what we consider embryonic, we believe our validated technology and our pipeline of sales opportunities has us poised for significant revenue growth over the next two to three years. Large government opportunities will begin to generate revenue and we are confident in our ability to realize continued growth with our existing OEM accounts while closing new and exciting opportunities in the future.

Through our many partnerships with the simple swipe of a finger BIO-key technology can validate one's identity from the moment user logs into 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 welcome in the economic climate.

In summary, we feel good about what we have accomplished in bringing BIO-key from a pre-revenue money losing Company to a point where we have been able to sustain ourselves until the biometrics market developed. So with an emerging market ahead, affirmation by being selected by the most premier fingerprint user in the world, marquee customers with exciting applications, a clean balance sheet we believe we have a bright future going into 2010 and beyond.

Thank you for your continued support. We cannot do it without our investors and you are the prime reason we continue to work towards building the best Company in the business.

We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. Our first question is from Dan [Camhis], a private investor, please go ahead.

Nice quarter, guys.

Thank you, Dan.

The standards are often critical in developing the critical mass necessary for a technology to go mainstream, can you give us the current status of biometric standards and BIO-key's stance regarding such?

That's a great question. Standards are absolutely critical for not just our industry but in any industry to prosper. Standards allow for the adoption of technology across virtually any environment and they create a universal development platform for all participants in the industry to aspire to and to work with it.

In our industry, there has been a standards group called the BioAPI Consortium which was really founded to develop a biometric application programming interface that would bring platform and device independence to application programmers. The Consortium was a group of about 120 companies and organizations that sort of have a common interest in promoting the growth of the biometrics market.

Unfortunately -- that group was formed in 2001-- and unfortunately that has kind of fallen apart. Since BIO-key's mantra since the early days has been to develop a device independent universal platform we always believed and espoused that if customers were going to adopt technology on a widespread basis especially for enterprise applications, that this would be required.

I think given again that that group in that organization is kind of crumbled and fallen apart we have a terrific opportunity to create standards and to almost force or compel hardware providers and other software providers in this space to kind of build this universal platform. That is what's going to drive adoption.

If you are, for example, General Motors or AT&T or any large Fortune 100 company, you may be using hardware, for example, laptop computers, that may have finger scanners in them manufactured by one company or another and all you care about is that there is interoperability. Your users can enroll once and identify independent of what computer they are on or what keyboard they may be using or what other device they may have in front of them.

And I think that if we don't continue to drive standards in our space all of that will fall apart. The world needs today an interoperable environment. It needs a hardware/software solution that again will be tightly coupled, that has extra accoutrements to make it even more secure, but at the end of the day we have to be able to operate in any infrastructure and on any platform.

Okay. Actually, I'd like to ask a question or two on Sagem. The $2 million Sagem agreement was announced in August of 2008, I believe. Is this contract open ended in terms of timeframe or does it expire or can you give some color?

No. We have a long-term contract in place with Sagem, and, of course, the original or initial order back in 2008 was for a particular project. It was for the FBI NGI project which we won.

And that was announced, I guess, as a success in 2009 and that is now being deployed and obviously again our contract will allow for other deployments as well, other opportunities with other customers. And, of course, as you know, Sagem and MorphoTrak is a global company. They do business all over the world and large scale identification projects are really their expertise.

We feel comfortable that we will have an opportunity to compete with them in going after business around the globe in the long term. So all very positive for the Company.

Okay. Further, recent conference call of Cogent, it looks like Cogent is cutting back on their DHS estimates for 2010. Does this imply DHS cutbacks and less opportunity for competitors as well?

That's a great question and one that I'm not necessarily sure I can answer in a definitive way. For sure, we are seeing cutbacks at the government level not only in the federal space. We are seeing it also at the state level and down now even into the local level. One of the reasons that we were very high on the public safety business at the early part of this decade was that the funding was relatively stable.

I think since the financial crisis that is no longer the case. And there is a good chance that you will see cutbacks across the board. But what I believe you will not see significant cutbacks with is large federal programs that are put in place to really protect our country.

In fact, just this past week after the health care scenario kind of settled down, although I'm not sure it will ever settle down, but it settled down at least at a very high level now, the next push is going to be for immigration reform. As you know, Chuck Schumer and Lindsay Graham from South Carolina are really pushing immigration reform including a biometric.

Now, again, the concept that was articulated last week was some sort of a card and no link to some back end database or the like. I think that will be debated. I think we all have, including BIO-key, have solutions that could work in that environment.

As much as you may see cutbacks here or there I think immigration, I think anything that has to do with border management, border control, anything that has to do with the criminal justice and forensics that will again protect our country and in particular as it's related to homeland security and managing terrorism. I think the money will be there. It may be lumpy. But it certainly will be there and those projects will continue.

All right. Let me ask one more question and I will get back into queue on NGI, per the Lockheed NGI program manager, on a little conference he did, NGI (inaudible) involving latent fingerprints in (inaudible) Is BIO-key involved in any way in that study with Sagem or otherwise?

You know, we aren't in the latent fingerprint business. That's a very specialized segment of this industry where you can, at a crime scene, lift the fingerprint off an item, it could be a door, a table or glass or whatever. It may be a partial print and you can run it through a system to determine if in fact you have someone in the database that matches it.

That's a very specialized area. There are terminals and all kinds of software that enhances images and does all kinds of manipulations and that's not an area that we focus on.

Okay. You also mentioned combined modalities coming down the road. Is there any chance that BIO-key's device (inaudible) platform will be used for any of that kind of work?

Absolutely. In fact, I think going forward it's pretty clear from all the -- well, from where we are today in terms of enrolled population and data sets and databases both on the criminal justice and background check side, commercial side, fingerprint is certainly the modality of choice now.

I think as we evolve through this decade it's likely that other modalities or biometrics will come into play. I think IRIS, as the cameras get certainly sized down, as they become more affordable, as the quality and optics goes up, will be a technology that could have a great promise and integrate well into a security infrastructure. And so, yes, our open Web-key platform will enable us to drop in or add an additional modality of biometric for a full and complete solution. So the answer to that question is yes.

Thanks. I will get back into the queue.

Thank you, Dan.

Our next question comes from John English, a private investor. Please go ahead, sir.

Good morning.

Good morning, John.

My question is on the pilot project that's been going on for over a year with TSA for the Port of Miami-- MorphoTrak's involved in that, of course. I'm hoping that our technology, or BIO-key's technology is involved in that and if they do win that pilot program or award that we are part of that. Can you tell us about that?

John, I can't. We are not working with Sagem on that particular opportunity.

Darn.

Although, again, keep in mind we fused our respective technologies together for large scale identification programs. Things that are significant and big because the increase in accuracy that we get when we combine really puts us in a class by ourselves and on our own.

So if you start looking at matching in populations in the tens of millions, there is a big advantage to that technology. For some of the smaller projects or programs around there isn't necessarily that significant a benefit. I'm not aware we are working with them on that particular project.

Okay. Now MorphoTrak can sell worldwide or is it just Sagem Security that will do the worldwide promotion of fingerprint technology?

Well, MorphoTrak is their U.S.-based division and Sagem Security is the global security company under the SAFRAN Group which is the holding company. So our arrangement is with both MorphoTrak and Sagem Security.

Both, okay. Good. They have a rapid ID mobile device. Are you familiar with that one?

I am. There are a number of companies that have the ability -- that have hardware that allows for the capture of fingerprints. In fact, again, that is, I think, a very opportunistic scenario for the forensics and the criminal justice environment where you could have someone in the back of a police car, you could scan their fingerprints and run them against the FBI data set to see if they are actually there.

In fact, one of the reasons that the NGI was put into place was to allow for more realtime matching of fingerprints given, again, that they will be coming in from all kinds of -- they will come in from police departments and also come in from police cars and in remote locations around the world.

We don't have any customers that are doing -- or using us now in that way?

Well, keep in mind, again, we are already -- we are part of the NGI installation that does the back end matching. Anyone who captures a fingerprint in the back of a police car will be matching that fingerprint against the Sagem MorphoTrak/BIO-key solution.

Okay, that's good. Now what about Dell? Have we got any more business from them?

Interesting. We were doing quite a bit with Dell. And we will be doing a lot more. We were able to leverage a couple of contracts for them with our, again, device independent software. And I think you will see more from us and them in the near term.

Okay. Overhead, are you going to be reducing your overhead at all expenses because of the selling of the Law Enforcement division?

Well, think we have, John. We said that our break even now is just about $1.1 million per quarter. Our expenses are -- we are very, very lean and again with the operating margins at the low end in the 80% range, as high as 90% or 92% we should be in good shape.

We are running a lean operation, but we certainly have the resources that we need today to grow our business through this year. Now, as the business grows, obviously, we will be adding and incrementing our head count or our resources as is appropriate. Right now we feel we were sized right at the right level.

That's great. Thank you very much.

Thank you.

Our next question is from Jay Meier with Feltl & Co. Please go ahead, sir.

Yes, thank you for having me. I have a few questions. First of all, you referenced the $1.1 million quarterly run rate for break even, I assume you are talking about cash break even or does that imply GAAP earnings per share break even?

We are talking cash because one never knows, right. We have there is all kinds of other items that are in the number below the line. It could be stock option expense and the likes. We are talking cash break even.

Right. And that's fine. That's the most important part obviously is cash. Looking forward, you haven't really offered any guidance, but it sounds like you have, your installed basis is somewhat recurring.

Can we assume from your comments that you expect to maintain a break even run rate as we move forward? How should we expect your cash consumption going forward?

I think you can assume that. We will maintain that. As I just mentioned and answered in the previous question, we feel we have the right level of resources to manage our business at this point and we have OEM relationships that are growing. I mentioned one happens to be McKesson.

Each quarter their business continues to grow and as it grows our business is growing with them. We are going now almost to a $1 million run rate on an annualized basis with them right now, that could go higher. Radiant Systems, our work with Lexis Nexis. The work with the identification access management partners in my opinion is very significant.

Work that we are doing with IBM. The ability to incorporate with all the other SSOs, like [Avideon], [Alfacis], CA, Oracle, we have been working with Oracle for a long time. Having that universal capability just brings opportunity to the table.

IBM, of course, they are a global company, and we, since we participated and this was really a Q1 event, but since we participated in the [Pulse] event with them back in February, we've had a number of international opportunities surface where biometrics, as I mentioned, second factor of authentication is being requested. Our run rate business is going to continue to grow and it will continue to grow all the way through the end of the year.

Health care, I have to tell you, I think there is a tremendous upside opportunity, as you know. We do work in the blood bank business. You will see more from us there. Shortly. We launched the first, and again this was Q1 event, but we launched the first hosted cloud identity management solution in the industry.

We're starting here in the blood business but quite frankly that could travel to virtually any industry and we can provide as a hosted basis identification management for a customer and integrate that into their existing infrastructure. If they are using one of the software platforms that I mentioned before, it's fine. We can integrate directly into that.

Mobility, I think mobility is a huge growth opportunity going forward. It's pretty clear when we saw the LG Expo launched on the AT&T network in December. First phone in the United States with a finger scanner in it, that is the beginning of what will be a trend. As we start to see these phones, they are gigahertz phones.

These are phones that are as powerful, if not more powerful, than some of the laptop computers we are using today. We will be using those devices to access all kinds of enterprise applications. Security will be a huge issue and our biometrics and our enterprise platform are a perfect solution in that venue.

So those are the growth factors. Those are the things I believe will drive this business going forward. And by providing, again, tightly coupled fully integrated solutions are another great opportunity. As I mentioned to you, standards in this business have been okay. Now they are kind of falling apart.

I think it will be very important for an industry leader to come together with a full and complete solution to address the mobility market. And we are definitely keen on that and looking very aggressively at that.

I understand. That's great. You know, in terms of visibility then, I recognize your building out a pipeline. And much of that relies on other, someone else to sell your product for you which has its tradeoffs.

You referenced Oracle, no offense but you have been working with Oracle forever. And it hasn't added up to very much. What gives you the confidence that your relationships in Tivoli at IBM or CA or the others are going to start to generate meaningful revenue growth?

Simply put, just the number of opportunities that have surfaced in the last 90 to 120 days. That's the only thing that will give us encouragement. Years ago we had, certainly, the solution in place. It certainly wasn't as elegant as what we have today, but it was in place and we had been working with Oracle a long time. In fact, they helped us mature our indexing technology so we worked together on that.

We have been working with them a long, long time even just on a pure technology basis. But what we are seeing today is the opportunities surface. We are seeing more and more appliances in the field on laptops. We were seeing the cost of a USB connected finger scanners come down. We're seeing the quality go up.

We are also seeing in the studies a more accepting public and a more accepting consumer willing to use finger biometrics as opposed to passwords because they are concerned about, number one, identity theft and fraud, but they are looking for a convenient way to access their infrastructures. Passwords are very secure. I mean if you have an eight-digit password that is letters and numbers and you change it every 30 days it's very, very secure.

The problem is you can't remember it. And with the swipe of of a finger we know who you are, especially with our one-to-many technology. And we know that short of someone forcing you put your finger down that it's you who consummated a transaction.

And I think again as the appliances become more ubiquitous and they will in the mobility market we are feeling pretty bullish about the opportunity to serve that market. So it's based on the quantity of opportunities that are surfacing.

Okay. That's great. I appreciate that answer.

Ceci, maybe you can take the next one. We talked, you talked a little bit about the cap structure and the retirement of certain preferred issues. There is still a small amount of preferred out there. Do you have any type of plan to retire that as well? Can you give us some details of that? And what about the remaining capital structure, the stock shares outstanding and do you have any plans to try to address that?

Well, we are working, obviously, to continue to strengthen the balance sheet. We have cash coming in from a note. It's timing of the market, timing of the cash flows in. Obviously, the plans are to do what's best for the Company short-term, long-term, and take care of the shareholders at the same time.

So, yes, we have plans. Definitive timing. Really again relies on what Mike is saying, the timing of the market and when we win the successes, how big the successes are and the timing of the cash that comes in to consummate the deals.

I understand. Okay. And, Mike, maybe -- I'm trying to get an idea where BIO-key, what sets you apart from the multitude of other biometric vendors out there? I know you've integrated with Tivoli and CA and Oracle and other leading security platforms. But why is it that is unique to you? What is it about your technology that allows you to have such an exclusive position out there?

Number one is our rankings in the performance and accuracy test. If you look at the recent NIS test submission that we did we rank in the top three in the world, that's number one. Our focus is really the commercial market. Independent of the folks like [L Warner], [Coach] and the likes that are very focused on government programs and projects.

We believe commercially viable solutions require an open interoperable platform. We have developed that. We support some 60, 70 different finger scanning hardware options. No one in the industry in this space that does that. No one in the industry and space in the commercial market has the accuracy that we have.

No one in the space has the one-to-many scalability that BIO-key brings to the table. We can differentiate ourselves in many, many different technical ways. But more importantly, and this is critically important, what you just mentioned, the marketing, the connections, the ability to work in existing infrastructures in large corporate America is really what differentiates BIO-key from all the others.

And that's absolutely critical if we are going to grow, if this industry is going to grow. It's absolutely critical to be able to work with what exists today and what is in place today and to provide an option, a finger biometric option, to existing authentication solutions. That's what differentiates BIO-key.

I understand. Okay. Thank you very much.

Thanks, Jay.

Our next question is from [Faisan Kumcarie], a private investor. Please go ahead.

Hello. With the success of AT&T's use of tablets and recent iPad fanfare, are tablets another potential niche market for BIO-key?

Absolutely. I think any device that will access enterprise information, and today that's mostly desktops, laptops, notebooks, netbooks are coming with finger scanners in them. Definitely tablet computers are coming with finger scanners in them and there will be more of them.

I think the iPad will drive that revolution. Absolutely they are a market and an opportunity for us to, as we did with AT&T, to load our software on those tablets and to provide access to the corporate infrastructure, the security infrastructure. The answer is, yes.

Another questions. Congratulations on the IBIA board appointment. Can you tell us why you feel it was important for you to take this post and how it came about that the MorphoTrak CEO's elevation to the board was time coincidence?

That's a good question. I thought the timing was perfect to join the board. I have been a member of the organization for better than seven years, but I thought the timing was perfect to join the board because the organization in general has been focused on lobbying.

It's been focused on mostly these large government opportunities and the biggest, biggest opportunity for biometrics in the future is the commercial market. And BIO-key, because of our representation in the commercial market, I thought would be a great catalyst. I thought me working with the organization could be a catalyst to bring more visibility to the commercial market, so that's why I joined.

Daniel Vassy, who is the new CEO of MorphoTrak, is replacing the previous CEO, Bernard Gauthier, who was a board member on the IBIA back a couple years now. Daniel was replacing Bernard and I am a new member of the board coming in this year.

And the [Shaw] preferred payment of $3 million is due at the end of the year. Do you see any issues with being able to pay this off nine months from now? Or do you believe these shares will be converted?

Okay. Good question. As Ceci mentioned before, we have a note receivable. We sold the Law Enforcement business to InterAct for $11 million. $7 million in cash and a $4 million note that is due over three years. Pay 6% interest. We receive quarterly interest payments from them.

And the first tranche, which is a third of that note, is due I believe on December 8 or December 12 of this year. So we will take in about $1.4 or so million on that payment. The outstanding preferred is about $3 million. So half of that certainly will be covered by the note receivable and I think as we get to the end of the year we will make a decision if in fact we will use our own operating cash to pay the balance or we will do something else.

Certainly, the size of that preferred will be reduced by a minimum of a half as we approach the end of the year and maybe all of it will go away as well.

All right. One more question and then I will get back into the queue. Regarding BIO-key's recent NIST scores, can you clarify how a 23% improvement in performance was computed?

That is computed based on the average of a series of tests that are run by NIST. NIST has a standard operating platform of tests that they run. Different data sets from different devices. From real world fingerprints that are captured in the DHS data sets.

So when they run these tests, they run a series of tests. The 23% improvement was an improvement in, over our last submission in 2007. So fundamentally our technology has gotten more accurate and has risen higher in the tables over the last three years since our last submission. That's how it's calculated.

Thank you.

You're welcome.

Our next question is from Richard Pugh with Richard Pugh Investment Counsel. Please go ahead.

Good morning.

Good morning, Richard.

The preferred dividends, are they being paid in stock still or can you pay them in cash these days?

First of all, I don't think we have paid a preferred dividend yet on the new Series D instrument. Obviously, we are getting a dividend payment in from our interact note which I think in the $60,000 or $70,000 range on a quarterly basis. And then we will have the dividend payable on the $3 million preferred instrument which is 7%.

I think we will be figuring all that out in the next week or two. I believe that dividend payment is due probably at the end of this quarter.

So your -- you don't know yet whether you will be paying it in stock or in cash?

I'm really not sure. I think we have the ability to pay it either way. We certainly, again, have the money coming in from InterAct to cover that. I think we would like to pay it in cash so there is no further dilution.

Yes, we would like that, too.

I'm sure everyone would.

Okay. What about the -- I'm sorry, that other question was already answered. The note receivable was answered, but I had one other question. The top three in this survey that you did, the competitors, who were those two other competitors and I'm guessing that you don't consider them much of competitors based on what you stated earlier about BIO-key's abilities compared to your competitor?

You are talking about the NIST results?

Yes.

In the NIST results, I believe NEC has been number one in the NIST test results for a number of years in terms of their algorithm. And you are right, we really don't see them as a competitor to us. And I think in the number two position it depends which tests you look at. It it may be Cogent or L1 and again, really on ar the government side we don't sell direct, as you know.

We work through partners. MorphoTrak happens to be one. We have others, Northrop and 3M and so forth and so on. We really don't necessarily see them as a direct competitor what we do as well because our focus really is building out our business in the commercial market.

Those are the players. If you really look at our technology, there is no question that we can provide a full and complete solution for large scale ID. We can provide one-to-many in the commercial market. We can provide a full interoperable security integrated solution for Fortune 500, Fortune 1000 companies. We really have the ability to cut across the whole gamut.

Okay. My final question is we are, what, less than a week from the end of the first quarter. You certainly must have an idea whether or not you are going to exceed the performance of the fourth quarter at the end of this quarter. I know you don't like to forecast, but these must be numbers that are almost in at this point.

Well, as you know, Richard, we do not provide guidance. So I really can't comment on that.

I had to try.

Yes. Well, I understand. It was a good try. We just don't provide guidance at this point in time. I think, again, let me address that, though.

As our business continues to grow. As our business gets more predictable, we will begin to do that. And we think we have the planks in place to do that because we have a number of OEM accounts that are run rate kind of business customers for us.

It's going to be more predictable for us over time with our business. As that happens, we will provide the guidance. Until then, I think we were better off managing the way we do today.

All right. Thank you.

I think we have perhaps time for one more question.

Okay. Our next question is with [Deborah Caulk], an investor. Please go ahead.

Yes, hi. With the increased financial stability of BIO-key, are you looking for potential acquisitions or more interested in concentrating on the organic growth?

Right now we are very focused on our organic growth. We really just kind of remade ourselves with the sale of the Law Enforcement division. So we are very, very focused on organic growth.

But as I mentioned as kind of a common thread in not only my script but in the answer to a lot of these questions, I believe there could be strategic opportunities for, especially in the commercial market, to bring full and complete interoperable solutions that would really create a dynamic in our industry that doesn't exist today. So girth, substance, maybe visibility.

So we are always open to the strategic options. But we really are at this point growing our organic business. We are very comfortable with that and we have a good strategy. We have very good relationships in place to do that. But one never knows what strategic opportunities may present themselves in the near term.

Just one other quick question with that. Since last conference call would you say the seven-figure opportunity list has been expanding or reducing?

No, I would say it's expanding. And as I answered one of the other questions, what gives us a really good feeling about the future of our business is the number of opportunities that we have surfacing, and the fact that, again, as Jay Meier, the analyst from Feltl mentioned, on one hand we don't sell direct so we have less control. But on the other hand, we have a lot more irons in the fire with these partners. So if you close a percentage of them, even a smaller percentage of them, you can be wildly successful. I think our list is growing.

Thanks so much.

You're welcome.

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

Thank you, again, for participating in today's call. We hope you will join us again for our next conference call to discuss our first quarter 2010 results. Thank you very much.

And I will add, thank you again for participating on our 2009 fourth quarter and full year fiscal 2009 conference call. As a reminder, the call will be available for replay beginning an hour after the call has ended and may be accessed until 9 A.M. Eastern Time on April 26, again, by dialing 412-317-0088. And the access code for the replay is 438913 followed by the pound key. Thanks again. Have a great day.

The conference call has now concluded. Please disconnect your lines.