BIO-Key International Inc (BKYI) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the BIO-key International Incorporated fourth quarter, full fiscal year 2011 and preliminary first quarter results 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 the question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, April 16, 2012. I would now like to turn the conference call over to today's host, Scott Mahnken, BIO-key's Vice President of Marketing. Sir, you may begin.

Good morning, everyone. And thank you for joining us for our fourth quarter, full fiscal 2011 and preliminary first quarter fiscal year 2012 conference call and webcast. With me this morning are Mike DePasquale, BIO-key's Chief Executive Officer and Ceci Welch, BIO-key's Chief Financial Officer. I'll begin the call by reading our customary Safe Harbor statement, after which Mike and Ceci will review our results and milestones before opening up the call to questions. This morning, BIO-key issued its fourth quarter, full fiscal year 2011 and preliminary first quarter results 2012. The press release is available in the Press Release section of our website at www.BIO-key.com. Additionally, this call is being webcast live on our website and the replay will be available beginning one hour after completion of this call, until 10.00 AM Eastern Standard Time on May 16, 2011. The replay may be accessed by calling 877-344-7529 in the US, or 412-317-0088 internationally. The access code for the replay is 10012270, 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. 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. At this time, I would like to turn the call over to Mike.

Thank you, Scott. Although our business performance year over year was basically flat, late in the fourth quarter of 2011, we saw an increase in the adoption rate of our technology, which is reflected in our first quarter 2012 preliminary results. It is clear, as large technology companies such as IBM and AT&T publicly state that passwords no longer meet today's security requirements, biometrics come front and center to replace them for authentication and secure access to important information. Our partners are starting to sell biometric technology as part of their standard product offering and our secure, convenient fingerprint option is being selected more frequently than ever before. By refining our sales strategy and incrementing our sales headcount, in the first quarter of 2012, we are positioned to support our partners in selling BIO-key fingerprint technology in greater volumes which will lead to more consistent revenue growth and profitability going forward.

Let me expand a bit on where we have come over the past few months. BIO-key made a few very significant decisions during the fourth quarter of 2011. Decisions that will have a long-lasting impact on the future of the Company. In December, we decided to terminate plans to acquire SIC Biometrics, a Canadian mobile device hardware developer. BIO-key elected to withdraw from the negotiation in favor of entering into a reseller partnership with SIC. Why did BIO-key change our position? After further discussions with our customers, prospects and industry thought leaders, we concluded that in order for a mobile fingerprint ID solution to gain universal and ubiquitous acceptance, that it must really be imbedded within the device. Although many contacts that we spoke with were intrigued by today's accessory solutions, most said they would hold off from purchasing in large volumes until the technology was included within the device. Certainly, there is a market for the attached device solution. And that market is mostly in the government agency and healthcare space. Both markets which BIO-key is pursuing very aggressively.

Also in December, our VP of Sales left the Company to pursue other interests. Moving forward and for the foreseeable future, I will be directly managing our sales team. In that regard, one strategic change I have implemented relates to how we manage our channel partners. Each vertical is assigned a dedicated sales director, a dedicated tech support engineer and a branded marketing support program is developed. In the past, there was a co-mingling of responsibilities. Although we just launched this new strategy in December, we are already witnessing an increase in communications and partnering opportunities with our large partners, including IBM, CA Technologies and Allscripts. To support the new plan, we added two new sales directors. Dennis Wilcox joins the Company with over 20 years experience selling software and technology solutions to enterprise and government agencies. Ed Black, formally with PNC Bank, joins BIO-key with over 15 years of providing solutions to the banking and financial industries. At the same time, we are recruiting an additional sales engineer to support the growing demand for integration services from our customer base. To summarize, the fourth quarter of 2011 was one of transition. A transition which includes new personnel, new strategies, and as we are about to discuss, new outcomes.

Today's call is a bit unusual, as we are reviewing both the end of 2011, and the start of the new 2012 fiscal year. Some may say the start of -- really the new BIO-key. Many of you that have joined us today on the phone or Internet have been following BIO-key for a substantial period of time. During this period, the Company has experienced several up moments, what we have come to refer as events, and there have been downtimes as well. Those have typically been driven or have been driven by market influences such as the new economy, shrinking budgets or really the lack of understanding of biometric technology. I think we're in a different place right now. And we believe all of the hard work and time that we have invested in developing our marquis partnerships is beginning to pay dividends.

This morning, we also announced preliminary first quarter results which show significant revenue growth over fourth quarter 2011, which has returned the Company to profitability, establishing a strong start to the new year. What are some of the contributing factors? Well, first, we have a market now that firmly understands the demise of the current authentication schemes is eminent. As I mentioned earlier, a number of our larger partners have publicly decried such. Frankly, we understand the market better today than we have in the past. And because of that, we are doing things different. We are also managing decisions in a different manner. For example, BIO-key recognized that we could provide development, streamlined integration, expedite deployment, increased opportunities and enhance our partner relationship if we offered our technical resources and intelligence to our premiere strategic partners.

Initially one might ask, why would industry giants such as IBM, or CA, or Allscripts want help from our humble Company; but to the contrary, they are very excited that we are willing to help and eager for us to start. Although the strategy is newly in place, we've already provided support for development projects in Canada, Africa, Malaysia, Taipei and Singapore through our large partner network. With new understanding and new strategy comes new results. In January, BIO-key was awarded a sizable contract to provide our technology for the British Columbia Department of Justice. This project includes providing fingerprint biometric solutions to create an inmate identification process to replace their existing system. Our integration partner, CA Technologies, is forecasting that once this system is integrated and proves successful, it could be duplicated in other provinces around Canada.

In March, BIO-key was also awarded a sizable contract from a large blood center located in the southeast that provides services for over 1 million donors. And this becomes the fourth independent large blood center to use our technology for donor identification. We are once again confident that other blood centers will continue to join the fold in 2012. In regard to the future, recent reports forecast the growth of the biometric technology industry at 21% through 2014. As we stand here today, I can say with confidence that BIO-key is stronger than ever. Our understanding of the market and the challenges it presents, continues to improve. Our sales team is the best it's ever been. Our pipeline is as robust as it's ever been. And everyone at BIO-key is excited about the future of the Company. I'm going to turn the call over to Ceci now for a recap of our financial performance and then we'll open the call for questions. Ceci?

Thank you, Mike. Total revenue for the three-months ended December 31, 2011, was approximately $545,000, representing a decrease of 4%, from the $565,000 reported for the quarter ended December 31, 2010. There was an increase in the service revenues custom software and for maintenance and support contracts which was driven by a mix of new accounts and renewed maintenance agreements from legacy customers. The increase was offset by a decrease of the core license software revenue. BIO-key's gross margin for the fourth quarter 2011 was 65%, compared to 75% for the same period in 2010, due to costs associated with custom software revenue. Operating expenses for the fourth quarter 2011 increased 44%, primarily attributable to the increase for our reserve for doubtful accounts, of $386,000, due to a contract whose payments are behind schedule, to approximately $1.3 million compared to $921,000, in the comparable quarter for the year ended December 31, 2010.

Operating loss for the fourth quarter of 2011 was $970,000 compared to an operating loss of $495,000 reported in the quarter ended December 31, 2010. Net loss for the three-months for the year ended December 31, 2011, was $1,003,286 compared to a net loss of $598,322 for the comparable period in 2010. Net loss for the 2010 period included approximately $88,000 in income related to derivatives and fair value adjustments, no longer relevant in 2011. For total revenue for the fiscal year ended December 31, 2011, was $3.509 million, representing less than a 1% decrease from the $3.520 million reported for the same period in 2010. Although the revenue amounts are similar, the product mix varied with an increase in third party hardware revenues to approximately $926,000, revenue license of $1.6 million, and service revenue of $848,000 for the fiscal year ended 2011. Compared with third party hardware revenue of approximately $569,000, license revenue of $2.4 million, and service revenue of [$444,000] for the same period 2010. Gross margin for the fiscal year ended December 31, 2011, was approximately $2.7 million, representing a 9% decrease from the same period of 2010, of approximately $3 million.

Operating expenses for 2011 remained flat, to approximately $4.153 million, compared to $4.161 million in the comparable period for December 31, 2010. The decline in operating expenses were primarily related to lower legal, accounting and referral fee expenses, offset by an increase in R&D expenses and the reserve for doubtful accounts. Operating loss for the fiscal year ended 2011 was approximately $1.455 million, compared to an operating loss of $1.2 million for the same period in 2010. Net loss for the fiscal year of 2011 was approximately $1.898 million, compared to a net loss of $307,000 for the comparable period 2010. The net loss for the 2010 period included approximately $1 million of income related to derivative and fair value adjustments and $343,000 in income from discontinued operations. Both no longer applicable in 2011. Preliminary revenue results for the first quarter 2012 will be in the range of $1.3 million to $1.4 million and the Company is projecting to be profitable. As always, additional information can be found in our Form 10-K filing with the SEC, which will be filed later today. And now, I will turn the call back over to Mike.

Thank you, Ceci. And operator, now we're ready for questions.

(Operator Instructions) Irene McGrath.

Mike, can you just expand a little bit on the relationship with Edelman and how that is going, and what benefits thus far and are in the pipeline of using them? And then I just have one question for Ceci.

Okay. Yes, I can. We continue to work with them on strategic initiatives that obviously are going to be important for the Company. As I mentioned in my comments, it is pretty clear that the industry has changed dramatically over the last 4 to 6 months. And the larger technology companies are really declaring the demise of the password and it's opening up all kinds of opportunities for us. So I think there is going to be a lot more messaging, a lot more strategic presentation capability. I think we're going to see ourselves in the media, more as a result of not only that change in the industry, but the relationship that we have with our PR agency.

And so far, what media venues have they been able to get you in and -- are there any near-term and planned for right now?

There are. There is quite a bit in play. If you go to our website, you will see that there has been quite a bit of pickup in the print media, in the online media as a result of -- again the visibility that we're getting in the marketplace. I think that's going to increase as the demand and the adoption rate for biometrics really moves forward very aggressively. Especially -- there are two areas where I think you can read a lot, see a lot, and we have a lot of proof points. One is certainly in healthcare, for sure. Our hospital deploys are continuing to increase and the adoption rate is continuing to increase aggressively. We're heavily engaged in events with our partners -- so for example, with Allscripts, just in April, we'll be in two events, well two of four events that are launched around the country that bring together their users, their user group conferences. We're doing one in Des Moines this week, on Thursday and Friday. Then the following week, we go to LA, I think Wednesday, Thursday, Friday, in LA, for their user conference on the West Coast. Then we come back to the East Coast in Boston, sometime in the middle or the end of May. So those are the kinds of things that I think are going to spawn much more, I would say media opportunities.

Edelman has facilitated that and coordinated those types of things?

They are. They're working with us.

Okay, great. Okay, I interrupted you, I apologize.

Oh, no, that's fine. I think I said enough. You get the message.

Okay. Great. And just for Ceci, how do you define a doubtful account?

A doubtful account for us right now, we have had a long outstanding receivable due. We've been revisiting it at the end of the last two quarters. So we felt that although we expect to collect this, it's a big project, and it's got a couple of different players in it and one of the players is behind schedule. So until they're back on schedule, we cannot really predict when that's going to come in. And so at the end of the year, we had to just say - okay, it's behind schedule, we're not quite sure when, and we think it is going to turn around soon. But until we can really give that a good firm date, then we're going to have to just reserve it for now.

Dan [Chemis], Private Investor.

Is that doubtful account related to the large scale foreign identity project?

It is a large international project, Dan. And again, it is not in jeopardy. It's being deployed. It's just going slower than we anticipated. And technically, as Ceci just mentioned, it was moved to reserve until we actually collect that money. We anticipate, we will collect that soon. But it certainly was working with our auditors, it was technically the right thing. We were closing out the year, and we wanted to be sure that everything was ticked and tied. So I think we did the right thing.

Okay. Are the revenues from that British Columbia contract and the blood donor contracts to be taken fully in the first quarter?

Yes, those projects were closed in the first quarter, and will be recognized in the first quarter. But as you know, every contract that -- 90% of the contracts that we close include services and they also include maintenance support. We take revenue for maintenance support over time. So we recognize it on a monthly and a quarterly basis.

All right. On your embedded partners, are you starting to collect specific data on attach rates and things like that? Do you have any information you can give us regarding attach rates?

Two things. Maybe you can help me here. When you say embedded partners, you mean the companies like for example McKesson, that embeds our product in their AcuDose line, for example?

I was thinking more like IBM. I think you mentioned IBM as an embedded-type situation. Is that a wrong viewpoint on them?

Yes, I wouldn't consider them embedded. I would consider them an integration partner. They integrated BIO-key technology into their ISAM TAM ESSO offering which is a very large security infrastructure that a majority of the Fortune 100 use today. And so what they now have the capability to do and what we have to take advantage of, is when a customer requires multi-factor or stronger authentication, the biometric option is there and available for them. As I mentioned, they are one of the companies that is taking a very aggressive stance on the password. You can go to our website and you can link to the Bernie Meyerson video, where he makes at the end of every year -- he is their Chief Innovation Officer, makes five predictions for the future of technology. And in that video, you'll see his first -- mobility was going to overtake virtually every form factor of technology, going forward. And that's a no-brainer. I think we get that. But the second was that the password is dead. And it will not survive. It is 30-plus years old. And it's not keeping up with the demand and requirement for advanced multi-factor authentication and security. And biometrics -- he clearly states biometrics are going to replace passwords over time.

So when you start to see that kind of thing happening, when you hear it not just from smaller companies like BIO-key or some of the smaller security companies who are trying to sell their wares. When you hear it from large technology companies that touch all of the largest businesses around the world, it really does have an impact. And I think in healthcare, we've clearly seen that become mainstream today. I would say we're getting near mainstream. Where our biometric option is offered up through our partners, Allscripts, Epic, Eclipsys, working with GE Centricity now, McKesson. They offer that option up. It's not mandatory, but in the states where ePrescribing is allowed and multi-factor authentication is a requirement, the only convenient option is a biometric. And we're really starting to take significant advantage of that. That's why we added resources in the first quarter. That's why we have refocused our selling efforts around supporting these partners in a big way. That's why we're traveling the country with them and meeting with their users, with their customers who are looking for, again that stronger more convenient solution. And that's going to pay dividends for us. I think this year is going to be a very good year for the Company as a result of that.

All right. So in terms of the integrated then partners, do you have specific data on attach rates or is that just not available from --

I think we're in the early phases; right. When you say attach rates.

Okay, so it's too early.

We're early; right? They're bringing deals to the table. They've been doing that over the last couple of quarters and some of them are very, very large, so they take time. And they take time to deploy. But where we're seeing -- especially with IBM, some initial, I would call it serious activities in the telecom space. So anyone who has a large call center and has access to all kinds of consumer information, so for example, if you have social security numbers, credit card information on file, other personal information about individuals and you want to ensure secure access to that information, meaning that -- what if one of your customer service reps breaches the system, steals social security numbers, personal data and the likes. You want to have an audit trail back to exactly who accessed that information. And biometrics are perfect for that. Because it is not -- it's very easy and convenient to basically scan your finger between each contact in each account. But if you have to enter a 12 or 16 digit password, if you had to use a token, it could be very, very cumbersome.

So what we're providing really is the most convenient security access option available. And more importantly, what differentiates BIO-key from any of the other companies out in this industry, and this is -- I can say this unequivocally, there is no question, our device inter-operable, platform independent, technology puts us in a wonderful position, because it doesn't matter what device they have. It doesn't matter if they're trying to access from a mobile unit, from a laptop, from a desk top, with a myriad of finger scanners, we make it all work together from one enrollment. That's the BIO-key advantage. And I think that's why the big partners are integrating our technology, because they don't want to have to go and write a separate script for each fingerprint reader, or for one that may be embedded in a Dell laptop versus one that is in a Winova laptop. They want it all to work integrated and seamlessly and we make that available for them. And that's the BIO-key advantage.

Okay. Let me do one more here. Do a little different angle. You mentioned there is a requirement for embedded readers before clients will commit sometimes to large purchases. Did I get that correct?

Yes, you did.

So does that backlog your business to some degree until we get mobile device manufacturers to develop such products or what -- how can you speak to that?

Well, I think in mobility, it certainly is something that could catalyze the business very quickly. We know there are a myriad of handset manufacturers; Motorola again had the Atrix out and available last year, they didn't include a finger scanner this go-around but have plans to do so in the future. So we know they're in the pipeline to have devices available soon. Samsung LG, LG has had a device stopped and then again is reconsidering. So there is a whole myriad of devices that are going to launched and introduced that have embedded finger scanners in them. And it just seems that the market is much more comfortable in that scenario. And that's more on the consumer side than anything else. In the enterprise market, in healthcare, for example, we have a wonderful solution with the SIC biometric iPad attachment. It is fine. It is a case that goes over the iPad. Doctors like that. It is convenient. It is reasonably sized. And so I think, we're going to see that business continue to move on the enterprise side. But when we talk about mass adoption, very large scale adoption with our work, with some of the telecommunication companies, and also some of the larger handset players, we think embedded is probably going to be the ultimate catalyst for driving that business into the tens or hundreds of millions of users, not just thousands.

Okay. Are you actually working with any of these device manufacturers, or is that still a bit too early as well?

No, we've been working with many of them. As well as the carriers and those who provide applications as well. So it is no secret that -- and we've talked about this before, we were very aggressive in our work with Apple and Android. You can download a BIO-key client, that is already there and available on the iTunes store. You can download one on the Android Market. We've had that in place for the last few months. So when the devices are there, we're ready to take full advantage of finger biometric capability. And more importantly, all of what we have available is fully inter-operable and fully integrated. So right now, Allscripts, perfect example of mobility in healthcare. Allscripts has introduced a product they call Wand, which is an extrapolation of their EMR/EHR solution that runs now on the iPad. So physicians who were using -- or providers who were using their solutions in the hospitals, or at the enterprise level, now have access on a mobility device. We have the perfect security option with, again our SIC iPad wrap-around, our fingerprint biometric technology. With them already using our software in the hospitals, it is a natural extension to authenticate themselves from a mobile device, like the iPad, all the way up through the enterprise. So very, very positive.

(Operator Instructions) Richard Pew, Richard Pew Investment Council.

It sounds like things are turning around here in an exciting way. I have the feeling that BIO-key has been on the taxiway for a long time and finally we're on the main runway and ready for takeoff. I have a question. You mentioned hiring someone from the banking industry. Actually from my former employer, PNC. Are you seeing opportunities in banking? And have you not addressed that at all. Would you address what those opportunities might be?

Yes, interesting. Banking was an area we were very focused on back in 2006, 2007, because we saw -- you've got a huge compliance requirement in banking that lends itself very nicely to biometrics. Then the financial crisis hit in 2008 and fundamentally everything that was innovative and new in the banking industry just really screeched to a halt. I think the new opportunity in banking, Richard is clearly around payments. It is around payment processing. It is around access to accounts and information. It centers around mobility. I think as the world really moves mobile, and we see these embedded -- finger scanners embedded in phones and smartphones, tablets, devices, and the likes, I think there is going to be a huge opportunity in banking. And there have been a number of test cases where some of the larger banks already declared that they have to have multi-factor authentication and it is not just soft tokens and text messages. There is a lot of that out there today. That doesn't provide for a positive ID behind a device or someone who is behind a transaction or behind an access request. So I think that is where the next big wave of biometrics really stands in banking and we're ready to take advantage of that. As I mentioned before, I won't repeat myself, but we have the clients already available to run on these mobile devices, and can immediately take advantage of any business opportunity that presents itself there.

Very interesting. We have talked before about the public awareness of BIO-key. I don't know if this is worth anything, but I just would like to mention that the Romney campaign had some laptops and iPads stolen recently, actually it was at the end of March. I was wondering if there is any potential for contacting them and telling them you have a solution that they won't lose any more data, especially if you offered it at a discount, just to get the publicity?

Yes, we would love to do that. Scott Mahnken, our VP of Marketing, is sitting next to me certainly taking notes. So we'll have to do that. But it's interesting along those lines you just mentioned, I read an article over the weekend and the title of the article was Breaches Epidemic Despite Efforts of Compliance. And this is in particular, in healthcare. We are seeing more and more data stolen.

We're seeing more and more data sets with account information, both personal and private, in healthcare, banking, finance. We're seeing this stuff continue to happen. It is not stopping. We're still, and this is where I think IBM is sitting on this -- we're still using technology to manage authentication and access that is 30 years old. So we are living in a world, in mobility which is really 2012, using an authentication scheme that is 1972. So I really think there is going to be a lot of visibility. There is going to be a lot of opportunity for us to gain more visibility. This is still a nascent business.

As Ceci mentioned, we expect our Q1 results -- revenue to be $1.3 million, $1.4 million. The way that BIO-key is going to become a $10 million, $20 million, $50 million Company is just increased adoption. We have set the framework. We have set the technology ground work in place. We have available, the best technology that's inter-operable. It will work everywhere, any place, any time, on any device. All we need now is to see this adoption rate continue to blossom. And I think if that happens, we're all going to be very, very happy and very pleased.

Matt Chambers, Private Investor.

First of all, will you still have a first quarter conference call or was this it?

We won't. The reason we combined these calls, our results together was it took us really too much time in the first quarter to close out the year. As a result, we just decided that it would be better, instead of having a call at the end of April or the first week of -- actually the end of March, first week of April, and then doing another call perhaps the first week of May, we would combine the calls. So what you will see from us is a press release and an announcement on the final audited results for the first quarter. That should happen in the next few weeks. Then we will do a second quarter conference call. So I don't anticipate us doing another conference call. But you will certainly see a press release and other updates from the Company.

Got it. Thanks. Okay. I know you don't give guidance, but I was just wondering in the final three quarters of 2012 here, do you expect them to be as large as the first?

Well, certainly, we do. We hope they're bigger. And I think we certainly had that aspiration last year as well. What we have different is what I recently described. I think we have a market now that is really accepting of our technology, finally after a number of years. We've been at this -- I've been at this for nearly nine years. And had anticipated this to really blossom and bloom five years ago; nevertheless, today.

But we finally have hit the wall, we've finally stretched the traditional technologies as far as we can. And there is a demand and a requirement and a need right now for a better way. We provide that better way. I'm hoping that the subsequent quarters are going to be very strong, and that our pipeline is going to continue to not only grow but we're going to close deals out of the pipeline and close larger deals out of the pipeline. The one really nice thing that has happened -- again, we had a very nice position in the blood donor industry space. As I mentioned before, we have four of the largest independent blood centers using our technology, representing well over 3 million donors. We're starting to see that market once again, really pick up for us. There was a lot of consolidation over the last 12 to 18 months. That's really set the pace now. It's stable. I think you're going to continue to see BIO-key get more business there.

But our relationships -- our real core marketing strategy and this again -- we've redefined and refocused over the last few months, is to work with these partners, these marquis partners that we have, that have a huge install base, that are selling broadly internationally, to work with them, to incorporate our technology, to help them solve real customer problems, in security and authentication and grow our business. That's our goal. That's our target. That's our mission. That's our objective. And that's our focus right now.

With those blood centers, you closed on four of them. For that size, I thought I read, what is there, like 20 of them nationally here?

Oh, no. There's more than 20. I think independent, there's probably close to 80, and then you have larger entities like for example the American Red Cross; right? Which spans the entire country, in some regards the entire globe. They could represent as many as 20 million to 30 million donors. But the beauty about the blood donor industry is that it definable. It is contained. We understand it very well. We have great references and great installed base. And we have a long way to go in basically corralling all of the blood centers into utilizing our technology. So it is a nice little market for us.

Dan Chemis, Private Investor.

A couple months ago, there was a release stating Sacramento was starting the use of smartphones, to meet TD compliance requirements with implementation potentially before 2013. I'm just wondering if you're seeing the same thing where they're going -- well, we'd like to see embedded readers in phones or are they still looking at moving forward this year?

Yes. The answer is yes. In that case, because it is a specialized application, they're okay with the add-on attachment device. Because it is kind of contained. It is not -- they wouldn't need hundreds of devices; right? Maybe just tens of devices. So the attachment is fine there. As I mentioned, in healthcare and government, we don't really see an impediment to the attachment. Where we really see an impediment to the attachment and this has been pretty well -- I mean we spent a lot of time in the last six months in mobility, the last eight months. On the consumer side, to really go to the masses, we need to see that embedded device available. So we're working with the ecosystem, I will call it the ecosystem, to try to force and leverage that. The ecosystem in mobility starts with the carrier; right? Because they own the highway. They also distribute most of the devices.

So it starts there. And then again, it transcends to the device manufacturers, and then the application providers that are providing the high end mobility security applications. So that is what we've been doing. And I think when you have a scenario like Sacramento, it is a great proof point. It is a great example. And if it is successful, it is something that will travel; right? And we were in the public safety business and in the state and local market, the beauty about it is, there is a lot of places to go. And if something is successful and it works, it will travel not only within that state, but it could also travel across the country. So that's why we like the small kind of early proof points like Sacramento.

I see. Another one was, I think about six months ago, I think it was, VA was released that it was soliciting mobile device management vendors to control security via the Cloud for up to like 100K tablets. Are they also looking for embedded? Or is that still something that is moving forward as well?

No, an attachment is fine for them as well. Remember that position. I would encourage you, go to our website and look at some of the videos. Scott, do we have the latest attachment device up on our video --

On the home page, everyone. There is a video of BIO-key being used on multiple devices, one enrollment and then verifying identification on a laptop, an iPhone, an iPad, and an Android phone.

And if you look at the SIC attachment for the iPad, it really doesn't add much bulk to the device. It protects it. It has a nice rubberized cover. It is really very, very good for the hospital market, for the medical market. Because it also is designed to be able to be cleaned. So for example, it could be wiped down with alcohol or some type of an antiseptic. And so that is really, I think perfect for that market. So in the context of the VA, an attachment would be fine.

Okay, as long as I'm getting updates here, let me ask you this one. Airlines for America and the Airlines Pilot Association said they would be expanding the Known Crewmember program to more airports. I haven't been clear if BIO-key is involved in that. And if so, can you talk about the program's current status and potential?

I can, well, a little bit. The Known Crewmember has been basically blessed, approved, and is going to be rolled out. Known Crewmember incorporates two, I think core factors of identification. One is a picture ID and an employee number and the second is a biometric for positive identification. Air Inc, which is the -- one of the larger contractors responsible for all kinds of technology in the transportation industry, has been selected as the prime contractor to roll that out. LexisNexis, who is one of our larger customers, is a subcontractor to Air Inc for the vetting process for all of the TSA employees, in particular the crew. I can't say all TSA employees. But in this context, it is crew and airline. Pilots and crew. And our biometric technology is part and parcel of their overall solution. So Known Crewmember's being rolled out. By the way, we've been operating, biometrically, we've been operating at four airports around the country for a long time, for probably 1.5 years. Now they are going to expand and ultimately get to every single airport and ultimately they will use biometrics to ID all crew at every airport, each time they enter the terminal.

What size of market is that for BIO-key, do you think? Is that a model where you're going to be getting a stream of revenue? Or is it just licenses up front or something?

No, no, that will have a tail for us, and it deals in the millions. I don't know how many, exactly how many airline pilots and crew there are, but I can tell you it is more than 1 million, it is probably less than 10 million and more than 1 million. I don't know the exact number. But it is sizable.

All right. I've got one more here and then I will let you go. Can you tell us how the BIO-key presentation went at the Winter Biometrics Summit? I know Jim was doing something there. And maybe what emerged as the central theme of that conference?

Well, we've been involved in the Biometrics Summits now for more than two years. And for the most part, it is interesting. In this past -- the past two events, we had three or four presentations in each of them, and there were only a total of seven or eight, on the customer side, that were available. So we have had a dominant position in those events. One center's around the blood industry and not just because of blood centers, but it shows how patients, donors, consumers, can utilize biometric technology. So at the Summit, that's the theme. Again, the use cases is the blood center, but it is really an overview of how you can get the average individual off the street, to utilize the technology and how effective it is, how accurate it is, how scalable it is. So that is number one.

Number two, LexisNexis in the context that I just described has presented with us a number of times. Because again, they touch a whole myriad of different industries. And our technology is used around the globe through their deploys. This past Summit, those were two of the new -- there was another one I think, another healthcare scenario that was presented. I think it gives people, it gives the conference attendees an understanding and a sensitivity to how biometric technology can be used in both the enterprise and again the consumer venue. So we will be attending -- certainly we will be attending the next one, which is I think the summer conference, which will be held sometime in July or August.

Jeff [Sheely], Private Investor.

I've got a few questions for you. A couple pertaining to the fourth quarter and then a couple to the first quarter as well. First one has to do with the cash position which has been declining rather significantly year over year. I'm just wondering if you're beginning to flirt with the need for additional capital or what could you say about that?

We're not. We have no plans right now to raise any additional capital. We believe that our current situation is adequate for us to operate the business. And when you look at the numbers, especially the fourth quarter cash ending or scenario, remember that it also included a subtraction of the bad debt reserves. So that was about, a little under $400,000. Ceci can give the exact number, but that's why you saw the number decline. It looks like a significant decline.

Okay, all right. Great. Then the gross margin picture of 65%. That also seems to have been under pressure and I'm just wondering what comments you can make about that.

Interesting. We did a few large hospital deals last year that had a lot of hardware as part of the deployment. So the customers want to buy not only the software through us, but they also wanted to buy all of the finger scanners, so that they had one vendor, one throat to choke, so to speak, one service point. So that really impacted our gross margins. I think when you see, for example in the first quarter, where the majority of our business was license revenue which is really our model, you will see the gross margins pop back up into the 80%, 90% range. So that is really the reason for the delta in the gross margins last year.

Okay. What are maintenance revenues running at on a quarterly basis now, Mike?

Ceci?

They range between -- about $120,000 or so a month and -- I mean a quarter and they're continually rising. So it depends on sometimes the renewal. We're conservative in our recognition of that where on the renewal ones, we wait until the payment's actually made just to confirm. So they may be higher in some quarters and lower in others. But, yes, $120,000 to $150,000 right now.

Am I correct in thinking that maintenance contracts are normally like around 15% to 20% of the license contract?

Yes, ours range between 10% and 20% depending on size and deployment, that type of thing in the product.

And if the -- Jeff, if the customer takes first level support, first line support, generally speaking, it could be as low as 12%. If we're providing the full venue of support, as we do for example, in -- with our end users in the blood industry and that kind of thing, then our standard maintenance is going to closer to 18%. So it really depends on the engagement level with the partner that's reselling our technology. If they're going to take first level support or we're going to take it.

Got you.

But our maintenance revenues are certainly going to grow over time. That is the beauty of our business. Obviously we want to see that grow and double over time as we close more and more business.

Yes, I'm just trying to think in the back of my head, as to like in aggregate, how much you generated in terms of biometrics license revenues over the years. It would seem like to me that it would be, well I don't know what the dollar amount would be cumulative, but it seems like it would generate more maintenance revenues than $400,000 to $500,000 a year, it just seems like kind of a low dollar amount to me.

Well, it depends. We could certainly go back and look at the calculation. How much software license revenue have we generated, let's say, the last five years; right?

Yes.

And then take a look at the numbers. But I would suspect that -- one good thing about our larger customers, all of our mainstream customers buy maintenance. So no one goes without maintenance, that's number one. Number two, again, it depends -- the percentage depends on their level of involvement. So again, Ceci gave a range; right, 10% to 20%. It could be somewhere in between there. It is never less than that, I'm sure.

Sure, okay.

But we get -- we've also through the years right, we have dabbled in a lot of smaller opportunities as the market was emerging and some of those things may have gone away; right? It may not even be in place anymore. So they might not be generating any maintenance revenue. So you'd have to really go back and take a look at all of that. But certainly as our license revenue grows, our maintenance revenue is going to grow as well.

Sure. So for example, are you generating any maintenance revenues at the FBI yet?

Yes.

Okay.

That will increase as the size of the data set increases. They haven't had -- we haven't had an increase beyond the 110 million records yet that are in place, but I would expect shortly we will see an increase there.

And then just real quickly on the first quarter. Can you talk at all about what percentage of the revenues that you've mentioned here preliminarily is coming from new customers?

The bulk of it.

The bulk of it. So I'm just wondering, your existing customers have been generating, what, about $500,000 a quarter pretty consistently for some time now; right?

Correct. So if you take a look at the ones that we highlight all the time, your LexisNexis, your McKessons, your Allscripts, and some of them are classified as end users because they buy direct from us and not through Allscripts, but you'll get that medical space. For the most part, that is probably a good base level, $0.5 million a quarter.

Right. So that is still kind of steady state then at this point?

Well, we think it is going to grow. Because those partners are selling more and more biometric technology. So we're hoping that, that's going to grow substantially each quarter.

Richard Pew, Richard Pew Investment Counsel.

I just have one more question as I was listening. I looked up fingerprint keyboards. I just recently upgraded my computer, it did not come with such. I noticed, at least what I find online, the prices for a fingerprint reader keyboard is quite a bit higher than a normal keyboard. But more interestingly, it says that the software included with the one I'm looking at, which is by Lenovo, which I think is an IBM buyout deal if I recall correctly. It says that the software included is IBM fingerprint reader software, would that actually be BIO-key software?

I'm not sure. I don't -- I have never seen Lenovo -- a Lenovo keyboard, a resale keyboard available from them, so I don't know. I do know, they had a plug-in reader that was available a few years ago. I don't really know what that product is and what software it would have. And I'm not sure it would have any software really to use, except be available for use by applications that you may ultimately add on to your computer. I'm not sure, Richard. If you send me a link, I would be more than happy to look at it. I think we have time for one last question.

Currently, I don't have any questions so I would like to turn it back for closing remarks.

Okay, perfect timing. Thank you, everyone, for participating in today's call. We hope you will join us again for our next conference call, to discuss our second quarter results. Have a great day.

Everyone, thank you for participating in the BIO-key International Incorporated 2011 fourth quarter full, fiscal 2011 and preliminary first quarter 2012 conference call. As a reminder, this call will be available for replay beginning one hour after the call is ended and may be accessed until 10.00 AM Eastern Standard Time on May 15, 2011. The replay may be accessed by calling 877-344-7529 in the United States. Or 412-317-0088 internationally. The access code for the replay is 10012270, followed by the number key. Make it a great day, everyone. Thank you for your time.

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