BIO-Key International Inc (BKYI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BIO-key International, Incorporated second-quarter financial year 2011 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 15, 2011. I would now like to turn the call over to today's host, Scott Mahnken, BIO-key's VP of Marketing. Sir, you may now begin.

Good morning, everyone, and thank you for joining us today for our 2011 second-quarter conference call and webcast. With me this morning are Mike DePasquale, BIO-key's Chief Executive Officer; Ceci Welch, BIO-key's Chief Financial Officer; and Eric Talbot, President and CEO of S.I.C. Biometrics. I'll begin the call by reading our customary Safe Harbor statement after which Mike and Ceci will review second-quarter results and milestones before opening up the call to questions.

This morning BIO-key issued its second-quarter fiscal year 2011 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 completion of this call until 10 a.m. Eastern Standard Time on September 14, 2011. The replay may be accessed by calling 877-344-7529 or 412-317-0088. The access code for the replay is 452169 followed by the pound key.

I'd like to remind everyone that today's conference call and webcast may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. 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 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-K and its other filings with the Securities and Exchange Commission.

Participants are cautioned not to place undue reliance on these forward-looking statements which only speak 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. At this time I'd like to turn the call over to Mike.

Thank you, Scott. Today is one of the most exciting days in BIO-key's recent history as I share with you two transformational events introduced this morning and a third that took place late in the last quarter. First, we've announced plans to acquire S.I.C. Biometrics, a Montreal-based provider of advanced biometric hardware and software. And second, you may have noticed as you logged on to this call that we've also introduced our new state of the art website.

Third, late in the second quarter we were paid early by InterAct911 and subsequently paid our principal debt holder leaving us for the first time in our history with a clean balance sheet. Even more exciting, along with the expiration of warrants this past week, we've reduced the number of fully diluted shares outstanding on our cap table by almost $20 million over the past three quarters.

Before I comment on what we believe to be ground-breaking opportunities for our customers, employees and shareholders, let me quickly review the results of our recent quarter. This morning we released our second-quarter results reporting net sales of approximately $1 million. This was a 31% decrease over the second quarter last year. The decrease can be attributed to a spending freeze in the blood bank industry which is under consolidation.

Blood banks have contributed significant revenue in the past quarters, yet most of our prospects are being asked to curtail purchases until the fourth quarter or Q1 of 2012. We're also experiencing slightly longer deployment cycles with our large international project that we announced last quarter. However, in healthcare we are making tremendous progress.

During Q2 BIO-key was awarded its fifth hospital contract in the state of Ohio, a testament to our performance and service. One of the most recent contracts awarded was as a result of our successful deployment at a neighboring facility. On the financial front, two transactions took place in Q2 that were key to providing a sound financial platform for BIO-key to expand on.

First, InterAct911 Mobile Systems exercised its option to pre-pay the balance due BIO-key from the acquisition of our former law-enforcement division. InterAct paid BIO-key $3.222 million against our note receivable. This payment was issued to BIO-key nearly 20 months ahead of the scheduled final maturity date in December 2012.

Second, in conjunction with the prepayment we received from InterAct, BIO-key exercised its prepayment option and paid the outstanding debt owed to its principal investor on its secured promissory note in the amount of $3,157,759, leaving BIO-key with a clean balance sheet and only one class of common shares on our cap table, a monumental event for the Company.

Although gross profits fell marginally in Q2, the Company feels that it's due to the evolution of a preferred ordering process that we are witnessing with many projects. We're recognizing a trend within the industry of prospect companies that prefer to establish a working relationship with one vendor that supplies complete and total solutions. We predict that this evolving trend will continue to gain momentum and ultimately become the traditional buying behavior.

Since a BIO-key is interoperable with all of the fingerprint scanners in the market, customers are looking at BIO-key as a consultative partner. As I briefly mentioned earlier this morning, we also issued a press release announcing the acquisition of S.I.C. Biometrics, a Canadian-based provider of biometric hardware and software technologies.

S.I.C. is the first company through direct collaboration with Apple in 2009 to create an add-on fingerprint scanning device for both the iPhone and iPad product lines. Also, we will now have a series of access control, time and attendance and Smart Card technologies, including the first proximity card to include an embedded finger scanner reducing the need for expensive scanning hardware to be located at points of entry.

Overall with S.I.C. we will have the capability to provide a full and complete high-quality solution for virtually any application in both logical and physical access for mobile security, utilizing the most advanced technologies. This is ground breaking for our Company and will provide a pathway for significant growth in revenues in the coming quarters. We believe this transaction will be accretive in the fourth quarter -- calendar quarter of this year.

Moving forward through the end of the year and into the future, BIO-key plans on taking the leadership role in the mobile biometric space and our announcement this morning with S.I.C. Biometrics will place us in the forefront of what could be the single largest opportunity in the biometrics industry.

In healthcare the Apple iPad is clearly the device of choice and this along with our S.I.C. add-on finger technology creates a significant technological advancement for the healthcare industry by enabling secure compliant and convenient log-on access for physicians and staff.

In government where security is paramount and more and more projects require remote access, we believe that our ability to provide strong identification, authentication and security using this new state-of-the-art biometric technology for mobile devices will be eagerly embraced. At this point I would like to ask Eric Talbot, President and CEO of S.I.C. Biometrics, to offer his thoughts and comments.

Thank you, Mike. Combining with BIO-key and their world-class finger matching software used by many commercial and government entities worldwide will open an incredible opportunity to market our unique snap-on biometric reader for the iFamily of products.

Also it will rapidly expand the visibility and market reach for our older unique identity control solution on a level all bases. The S.I.C. European and Canadian operation will add to BIO-key's stellar marketing footprint and we will now offer the highest quality full and complete solution for mobility on the most popular platforms used by enterprise and consumers alike.

At the [initial] introduction of the production version of the iFMID device last week we received a sizable order from one of Canada's largest hospitals to provide biometric capability and for iPad and iPhones valued at $1.5 million. Integration will allow hospital staff members to access enterprise applications without the inconvenience of inputting lengthy passwords.

Traditionally physicians have to log in using their password 40 to 100 times per day. The transition to the biometric solution will vastly improve their efficiency. In summary, I would like to say that I'm extremely excited about joining forces with BIO-key and we look forward to revolutionizing the biometric industry. At this time I will pass the call back to Mike. Mike?

Thank you, Eric. Our pipeline is healthy and diversified which allows us to maintain momentum even if there are subtle changes within any one industry or another. Equally important, as we enter the second half of the year we expect continued add-on business for many of our healthcare customers and channel partners including McKesson, Epic, Allscripts and Radiant Systems.

Lastly, we are starting to gain traction from our marquee partnerships including IBM and Allscripts. Their resellers and partners are starting to point opportunities, both domestic and international, to BIO-key. Looking ahead we anticipate the same type of referral base to germinate from our exclusive partnership with Oracle initiated in Q1.

From a control standpoint we continue to trim internal costs while improving processes. During Q2 we launched our new customer relationship management tool. The new tool offers BIO-key the opportunity to create an ongoing marketing touch campaign with every single prospect. We recognize that we are clearly in a business that is not a one call close that requires educating and building relationships with customers.

We have also witnessed that customers that have made their initial purchase over one year ago after receiving a sales presentation, therefore it's a necessity to maintain a presence with every prospect. This weekend, as I mentioned before, we also launched our new state-of-the-art website that will provide a very targeted user-friendly experience for the visitor and become a catalyst for selling our new hardware and software offerings.

As we point to the future we are confident that our solutions for healthcare and government will be eagerly embraced and create growth opportunity during the second half of 2011 and early 2012. I'm going to turn the call over to Ceci now for a recap of our financial performance and will then make a few closing comments before opening up the call up for questions. Ceci?

Thank you, Mike. Total revenue for the three months ended June 30, 2011 was approximately $1 million representing an overall decrease of 31% from the $1.4 million reported for the quarter ended June 30, 2010. The decrease can be attributed to an order received in 2010 from a new healthcare customer specifically and the blood bank sector, as Mike discussed earlier.

Embedded in the overall decrease, the Company reported an increase in the service revenues of approximately 34%, which was driven by a mix of some new accounts and renewed maintenance agreements from legacy customers. BIO-key's gross margin for the second quarter of 2011 was 70% compared with 93% of the same period in 2010 due to costs associated with the increase in third-party hardware revenue.

Operating expenses for the second quarter of 2011 decreased 21% to approximately $926,000 compared to $1.173 million in the comparable quarter ended June 30, 2010. Operating loss for the second quarter of 2011 was $234,039 compared to an operating increase -- income of $156,633 reported in the quarter ended June 30, 2010.

After all the entries for fair market valuations and discounted acceleration receipt and payment of the nodes net loss for the three months ended June 30, 2011 was $594,244 compared to net income of $234,766 for the comparable period of 2010. Net income for 2010 period included approximately $191,000 in income related to derivative and fair market adjustments no longer applicable in 2011.

Total revenue for the six months ended June 30 was $2.398 million representing a 1% decrease from the $2.409 million reported for the same period in 2010. Although the revenue amounts are similar, the product mix varied with an increase of third-party hardware revenue due to approximately $530,000 and license revenue of $1.5 million and service revenue of $309,000 for the six-month period ended June 30, 2011 compared with third-party hardware revenue of approximately $173,000, license revenue of $2.5 million and service revenue of $204,000 for the same period in 2010.

Gross margin for the six months ended June 30, 2011 was approximately $2 million representing a 10% decrease from the same period in 2010 of $2.2 million. Operating expenses for the first six months of 2011 also decreased 10% to approximately $1.932 million compared with the $2.157 million in the comparable period for June 30, 2010. The decline in operating expenses were primarily related to lower legal, accounting and referral fee expenses offset by a slight increase in R&D expenses.

Operating income for the six months ended June 30, 2011 was $49,948 compared with operating income of $37,899 for the same period in 2010. For the six months ended June 30 after all the entries for fair market valuations and discounted accelerated -- and the discounted accelerated receipt and payment of the notes, net loss for 2011 was $345,154 compared to a net income of approximately $1.2 million for the comparable period in 2010.

Net income for 2010's six-month period included approximately $977,000 in income related to derivative and fair market -- fair value adjustments and $426,269 in income from discontinued operations both no longer applicable in 2011.

Working capital at June 30, 2011 was approximately $313,000 as compared to approximately $88,000 at December 30, 2010. The improvement was driven by both a reduction in accrued liability, payment of the current note payable with the receipt of the note receivable and an increase in accounts receivable with lesser amount of associated liability and accounts payable and accrued accounts.

Additional information can be found in our Form 10-Q filing with the SEC. And now I will turn the call back to Mike for closing comments. Mike?

Thank you, Ceci. In summation, although our Q2 numbers did not meet our expectations there were many significant gains during the second quarter. Partners are producing new revenue relationships, the continued re-orders from satisfied existing customers, the success with hospitals and the substantial reduction in our debt as a result of InterAct's prepayment to BIO-key.

We also now have a full and complete solution set with our pending acquisition of S.I.C. Biometrics, in particular for the most popular i-devices in the global market and they are available immediately. We will be generating revenue from these products as early as the fourth quarter and, combined with our world-class software platform, will set us apart from any other biometric company in the market.

We're actively controlling our expenses and are mindful of the economy. But all in all believe we are on the right track to realizing our goals and generating sustainable long-term shareholder value. Operator, we are now ready for questions.

(Operator Instructions). [Dan Comass], Individual Investments.

Hello, I have a couple housekeeping questions first. What is -- for Ceci probably -- where are you at cash now?

Currently right now we're a little over $100,000.

Okay. And there were some preferreds left to be paid off, a few hundred thousand dollars or something like that. Is that -- did that get paid or not?

No, that has not been paid as of yet.

Okay. Can we get some order of magnitude of the cost of the purchase? Is this like hundreds of thousands, millions, tens of millions? Anything like that?

Dan, this is Mike. The cost of the purchase of S.I.C. Biometrics?

Yes.

Okay, we haven't announced any of the terms. Obviously, pending our definitive agreement, at that time we will disclose of course all the details and terms and conditions of the sale. But suffice it to say, it will be a combination of cash and equity as well.

Okay. Will a shareholder vote be required on that?

No, it won't.

Okay. Can we get any kind of estimate of the amount of dilution that might occur?

Well, I would -- again, can't give any specific details. But I will say I did make a statement in my script before and I believe we also had a paragraph in our press release earlier that over the last three quarters we've basically reduced our shares outstanding by nearly 20 million shares. Some of that was a forfeiture of warrants with the InterAct transaction and some of it has been the expiration of warrants through time that were issued by the Company through our older financings dating back into it the mid-last decade.

So it's likely that our cap table is going to be probably around the same as it was a year ago and we're going to basically have a business that is in one of the most strategic and significant areas of mobility adding on to the Apple product. So I think from a dilution perspective this is going to be insignificant.

Okay. If Apple develops, by some chance, a built in reader would that be a net positive or negative or neutral for what you guys are trying to do here?

I think it would be a net positive and I'll tell you why for two reasons. First, take the opportunity on our website to view a demonstration of the combined BIO-key/S.I.C. products. You'll see there's a YouTube video, I think it was just posted up last night so it's new and it demonstrates both the iPad and the iPhone version of the solutions.

What you'll see there is basically a snap-on solution; there will be a case that goes around the entire product as well that will be an option. But that will include a [PIB] certified fingerprint sensor that can be used for virtually any government application, can be used by any high-security application in healthcare and fundamentally will work with any iPhone 3GS or 4 and iPad 1 or 2.

The newer models that will come out, obviously we'll just retrofit the plastic to ensure that we can work with the newer types as well. The aftermarket alone for these products is in the hundreds of millions. The iPhone 3, 3G, 3GS was a very successful product, the 4 is a very successful product.

If Apple were to incorporate a finger scanner in a version 6 of the iPhone our software platform would clearly run and be available in that venue. And again, the aftermarket or the add-on business for the existing base would be incredible.

Also, the likelihood of Apple introducing a finger scanner in the iPhone or iPad would likely include a swipe sensor, which is not PIB certified today and couldn't be used for any government type applications or high-security applications. So our add-on product, our case, our wraparound, our plug-in would still be tremendously viable in that market.

[Gary Cerunian], private investor.

Good morning, Mike. And Eric, welcome. A couple of questions. First, you've mentioned that there is an order that I believe S.I.C. has secured for about $1.5 million in the healthcare industry. Is or was BIO-key involved in that at the time (inaudible) package with our product?

Actually the order was received by Eric and his team. We haven't obviously closed this transaction, so certainly they've done the work, they've been working on this for quite some time. But, yes, BIO-key's software will be integrated into the solution.

Okay. Is that by chance what kind of brought this together or what kind of precipitated this arrangement, if you don't mind me asking?

Well, I think we have -- I started speaking to mobility maybe two or three quarters ago. I think you're likely aware of that. You know that we have been working to port all of our software to the most popular platforms. We had also been working directly with some of the larger carriers and handset companies.

And we know that cloud security and access to information in the cloud is probably one of the most sought after security technologies in the space. As Ceci mentioned in the press release, we were looking for an acquisition now that our cap table and balance sheet had been cleared; we were looking for an acquisition in probably the most significant segment of the mobility market.

Apple happens to have today the most significant share in its forecast that they will contain to have a significant share of the market going forward. Gartner, JPMorgan -- no matter who you look as a reference or an analyst or who follows the space is basically saying that the i-series of products are going to dominate.

Now this morning there was an announcement that Google is going to acquire Motorola Mobility. So obviously that's going to bring some synergy in the Android space. We run on the Android platform. What Eric has designed and developed here through S.I.C. Biometrics is a universal capability. The electronics that are in the iFMID devices that you see are universal and can be clearly, clearly integrated into any platform.

So Android, Win Mobile, our software already runs there today, so we basically have a universal solution. Apple is the most popular today and one where there's the lowest hanging fruit. But we can clearly integrate into any device that's out there.

I had started to see about two quarters ago that as Apple sales continued to be very, very strong that they were likely not to -- and it doesn't have anything to do with fingerprint biometrics or face or anything like that -- fundamentally they don't need to integrate anything beyond what they already have in to their core product.

But they're very interested in working and this is how Eric basically came to his relationship with Apple. They're very interested in working and adding that capability for certain segments of the market like for the government, for example, that requires strong authentication and access.

So we just looked at the size of this market and said, this is an incredible opportunity. And if you think about the number of iPads and iPhones that are in this space today, if we just grab a small percentage of the market our growth would be exponential.

And it's pretty clear that with the pipeline that S.I.C. Biometrics is bringing to the table today and the relationships we have with our existing marquee accounts that are all porting their applications through the iPhone and iPad, that the opportunity for BIO-key is absolutely amazing.

And I think what we're doing here is extremely unique in the space and when we mentioned two or three quarters ago that we were diving into this business bull force, now with a full and complete solution to be able to provide software, hardware, doesn't change our device-independent architecture, but to be able to provide the device, the software and then the services to help customers integrate, nobody can do that today in mobility.

You can read every day in the paper something about mobile payments about mobile banking about NFC, Near Field Communications, which is the follow on to RFID. We have the capability with our software today and if you look at our demo on sites on our website you'll see we have the capability to do that today in the cloud. With S.I.C. Biometric products we have a full and complete solution. And we expect this is going to be a huge, huge monumental event for the Company going forward.

Okay. A couple of other questions. As far as sales force, does S.I.C. have a sales force that would then integrate with BIO-key? And I guess following on with that, who will actually sell the add-on? Will this be OEM, OEM and retail or retail only?

No, actually, it will be a combination of everything. Let's answer the first question first. The answer is, yes, there is a sales force that's part of S.I.C. Biometrics. In fact, we're going to be picking up an office in France in Europe. There is a strong network of not only salespeople but distributors that sell more than just the Apple products but the logical access and the physical access solutions that S.I.C. has. And so we're going to pick up that network.

We'll have our office in Montreal in Canada, so we'll have a footprint there. And we expect that the enterprise version of the product is going to be sold through our existing network of customers and accounts and it could be OEM, it could certainly be sold as an add-on or on a reseller basis. But we also mentioned in our press release that later in the year or early next we will have a retail version of the product, a consumer version of the product available and it will be sold through all of the popular retail channels.

So it will basically be a case that wraps around a device similar in nature to any case that you'd buy to put on your iPhone and there will be a finger scanner in the back. And it will integrate into the Apple platform and it will be available for consumers to use on a local basis or obviously they'll have the capability with the BIO-key software to connect into enterprise applications.

Okay, all right. And one last question. I was just going through the new website, which looks really nice, by the way. It's nicely laid out, congratulations. But I was going through and I happened to see something and I'm not sure if this is correct, but I thought I saw it under partnerships or affiliations. And I saw Sagem listed -- or I think it was Sagem and then something with 3M. Is there anything you can elaborate on there?

Well, you know Sagem -- it's actually Morpho now I believe. It's Safran Morpho so we've got to change that. But you know that we worked with them on the FBI NGI Project and a couple of other programs as well and we -- where our software was fused with theirs to increase the accuracy, speed and performance of the total solution.

And so we have a very good relationship with them and we continue to evolve and work with them going forward. So they're certainly on our partner page. 3M same scenario, we have programs and projects that we're working with 3M and most particularly in Asia. But again, we do have a relationship with them. They purchased Cogent, but --.

That's where I was driving is the Cogent relationship with 3M.

Again, we have certain projects and programs that we're working with them and obviously they have their own technology similar in nature to Morpho, Morpho clearly had their own technology, they have more technology than they know what to do with, they just acquired L1. But from a performance and a accuracy scalability performance perspective we were a good fit and again the FBI is getting outstanding results.

Okay. And can I ask one last question? On FBI, how's the licensing going and are they going to be looking for more licenses at some time in the near future?

They will. It's going very well; they have 100 million records in the database, in the data set right now, which is a little over 1 billion fingerprints. We continue to get our maintenance revenue from them on a quarterly basis. And that database will grow.

I can't say when it's going to grow, when they're going to pop in another 20 million or 40 million or 50 million, but the system was designed to accommodate up to 320 million records. So as it grows over time and most of that growth will come from the commercial market, from the commercial sector, we'll get add-on business from them.

Okay. All right, terrific, great, thank you. I appreciate it.

You're welcome.

Dan Comass, Individual Investment.

I'm just wondering how long will this acquisition take to close.

We believe we'll be able to close the transaction perhaps by the end of the third quarter, that's our target date. We'll continue to work on -- begin to work on the definitive agreements and all the details. We're already in in-depth discussions about integration and some cross-selling and all of this will ramp up over the next week to two weeks.

All right. What makes you believe that this will be accretive in the fourth quarter?

Pipeline and the list of opportunities that we have.

Okay, can you tell me, Eric, how many people you have in your company?

Including the France office we are about 15 people working and they are all senior people that have experience in the sales and deep technical experiences.

Okay. Mike, is there any cash that will be out late here or is it shares and licensing only?

I think, Dan, again we haven't disclosed any of the details. As I mentioned, as we get to the definitive agreements we'll do that. But it will likely be a combination of cash and equity. And I think I explained in the context of dilution and the cap table we -- much more different on a fully diluted basis than we were even a year ago.

So I think this is very good for BIO-key, I think it's very, very good for our shareholders. I think it's an outstanding opportunity to bring a world-class company with a very unique technology to the table when the market is really exploding in mobility. So it's just perfect.

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'll join us again for our next conference call to discuss our third-quarter fiscal year 2011 results.

Yes, thanks, everyone, for participating in the BIO-key International 2011 second-quarter conference call. As a reminder, this call will be available for replay beginning one hour after this call has ended and may be accessed until 10 a.m. Eastern Standard Time on September 14, 2011. Again, the replay may be accessed by calling 877-344-7529 or 412-317-0088 and the access code for the replay is 452169 followed by the pound sign. Thank you for your time today, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.