BIO-Key International Inc (BKYI) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Inc. second-quarter results conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, August 15, 2012. I would like now to turn the call over to today's host, Scott Mahnken, BIO-key's Vice President of Marketing. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today for our second-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 will 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's (technical difficulty) second-quarter fiscal year 2012 results. The press release is available on the home page of our website at www.biokey.com.

Additionally the call is being webcast live at our website, and the replay will be available beginning in one hour after completion of this call until 10 AM Eastern standard time on September 16, 2012. 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 10017451 followed by the # key.

I would 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 Litigations Reform Act of 1995. For a complete description of 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 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 may undertake -- 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 DePasquale.

Thank you, Scott. When we reflect back upon the start of 2012, including the first and second quarters, we continue to see evidence that fingerprint biometric security is closer to becoming a universally accepted solution for identification and authentication. For the first time ever, we are witnessing this on an enterprise and consumer level, a very encouraging sign of things to common. Yet history has proven that growth within the biometric industry is choppy, and this was confirmed by our second-quarter financial performance, yet this will not deter us as we head down the pathway of inevitable universal adoption.

And you may ask, why do I say inevitable? Because two of the global market leaders and market influencers, IBM and Apple, have taken a significant position on and -- let me stress -- fingerprint biometric technology.

In relationship to IBM, BIO-key was able to accomplish something that no other vendor in our space has been able to do. During our Q1 call, I mentioned that we had an opportunity to work directly with them and their technical development team in Singapore, but that it would require a significant investment of time and resources on behalf of our Company. Based on their statement that the password is dead and that biometrics would be the new solution for identification, we felt that they were poised and ready to commit to offering their customers a strong biometric solution.

We also understood what it would mean to BIO-key if we could become IBM's go-to-market solution for fingerprint technology. Certainly everyone recognizes the value of their brand.

Additionally there is significant value to becoming part of IBM's distribution network; therefore, BIO-key elected to invest in IBM and share our technical resources. This included allowing our CTO and her team to work hand-in-hand with the IBM developers for the purpose of furthering their ability to provide the best-in-class biometric technology through to their customers.

Frankly, we sensed that if we work closely with their team, they would not only appreciate the support, but would grow accustomed to turning to BIO-key as a valued and trusted resource. Fortunately the coordinated effort could not have gone better, and the outcome is IBM has elected to produce a dedicated technical manual called the Redguide, promoting our technology as the IBM biometric fingerprint solution for customers. The Redguide is posted on the IBM website. It is hosted in their global technical resource library and was distributed to their vast group of field tech sales and support agents.

BIO-key is already bearing fruits from the IBM relationship. Dancom, an IBM reseller, selected BIO-key technology to support their project with Aeon Credit Services. Aeon required strong security and authentication for their call center representatives involved in handling financial transactions. The project is going well and has already gone through Phase I expansion from 1700 to 2100 users. We will be distributing a press release on this project in the near future, and we feel it will generate more opportunities for us within the call center industry, an industry that is currently using passwords as a solution.

Over the past 30 days, we have signed five new IBM resellers to contracts that will allow them to represent our biometric technology to their customers. And although today's call focuses on Q2, every investor or potential investor in the biometric space because of the general nature of our industry is compelled to look at the big picture.

Just two weeks ago, Apple shocked our space when they declared that fingerprint technology will be part of your future and my future when they made the offer to acquire BIO-key partner, AuthenTec.

Now what does this mean for BIO-key? Today we face two challenges when we present our solutions to customers. The first is educating the customer about biometric technology and addressing the facts versus myths. Once we get through Biometrics 101 with the prospect, demonstrating the technological benefits is quite easy.

Now enters the game changer. Apple will introduce the world to the convenience of using fingerprints and provide the appliance or fingerprint sensor that can be used to access all types of information from the cloud. That is BIO-key's expertise or sweet spot.

Most of us on this call today would be elated if we had entered our last password today. Therefore, BIO-key is very excited about the acquisition as Apple is a market leader, and we are confident that Apple will do what they do best, which is create a market and a condition for the consumer.

Some of you may have heard that Samsung is not taking this lightly, which makes one imagine that they, too, will incorporate fingerprint biometric technology into their devices moving forward. As the Apple AuthenTec integration paves the path for consumer adoption, BIO-key has 10 patents which protect our ability to offer enterprise class finger access in a ubiquitous fashion for any commercial or government application.

Eight years ago when we created our business model, the mission was to develop a software solution which offered infinite operability, scalability and best-in-class performance. Our challenge then and now is that we operate in a market that needed help to catch up. When we started, there was a huge gap between the capabilities we offered and what the customer thought -- and I do stress "thought" they needed. Today the gap is much narrower, and the customer is starting to get it.

BIO-key is being asked to exclusively attend DMR and EHR conferences conducted by the largest providers in the world, and they are recognizing that there has to be a better way. As I speak to you right now, Glen Tullman, the CEO of Allscripts, is giving the keynote address at the Allscripts Client Experience, their annual customer conference. Front and center in the introduction video, BIO-key biometrics will be highlighted as the innovative approach to security and access that they will be selling on a global basis. And although our Q2 results reflect some of the choppiness that we must navigate through as we move towards increased adoption, the recent commitment to finger biometric technology by a number of global leaders points to a bright future in this space.

I'm going to turn the call over to Ceci now for a recap of our financial performance, follow-up with a brief summary and then open up the call for questions.

Thank you, Mike. Total revenue for the three months ended June 30, 2012, was approximately $533,000, representing a decrease of 46% from $984,000 reported for the quarter ended June 30, 2011, with an increase in the service custom software and maintenance and support contracts, which was driven by a mix of new accounts' renewed maintenance agreements from legacy customers. The increase was offset by a decrease of its core license and third-party hardware revenue.

BIO-key's gross margin for the second quarter of 2012 was 73% compared to 70% for the same period in 2011, due mostly to the costs associated with third-party hardware revenue. Operating expenses for the second quarter of 2012 increased 8%, primarily attributable to the increase for our reserve of doubtful accounts of $193,000 due to contract whose payments are behind schedule and was offset by decreases in R&D contractor expense and commission and referral fees related to decreased revenue to approximately $998,000 compared to $926,000 in the comparable quarter in 2011.

Operating loss for the second quarter of 2012 was $607,292 compared with an operating loss of $234,000 reported in the quarter ended June 30, 2011. Net loss for the three months ended June 2012 was $613,000 compared to the net loss of $594,000 for the comparable period in 2011. Net loss for 2011 included approximately $291,000 in expenses related to derivative and fair value adjustments that are no longer relevant in 2012.

Total revenue for the six months ended June 30, 2012, was $1.943 million, representing a 19% decrease from the $2.389 million reported for the same period in 2011. The product mix varied with a decrease in third-party revenue to approximately $289,000, license revenue of $1 million and an increase in service revenue to $563,000 for the six months ended in 2012, compared with third-party revenue of approximately $530,000, license revenue of $1.5 million and service revenue of $309,000 for the same period in 2011. Gross margins for the six months ended June 30, 2012, was approximately $1.6 million, representing an 18% decrease from the same period in 2011 of approximately $2 million.

Operating expenses for 2012 decreased 4% to approximately $1.857 million compared to $1.932 million for June 30, 2011. The decline in operating expenses were primarily related to lower R&D contractor expenses, commission and referral fee expenses, offset by an increase in reserves for doubtful accounts.

Operating loss for the six months ended June 30, 2012, was approximately $238,000 compared with operating profit of $50,000 reported for the same period in 2011. Net loss for the six months of 2012 was approximately $250,000 compared with a net loss of $354,000 for the comparable period in 2011. Net loss for 2011, again, included expenses related to derivative and fair value adjustments, which are no longer applicable in 2012.

As always, additional information can be found in our Form 10-Q filing with the SEC, which was filed yesterday.

And now I turn the call back over to Mike.

Thank you, Ceci. I want to spend a few minutes speaking to more tactical activities that are going to lead to significant short-term growth for us in what is usually our weakest and slowest quarter of the year.

Many of you know that BIO-key has a solid footprint in the blood industry. This industry recently completed a consolidation phase, which delayed projects and the ability to introduce new technologies. During Q2 and into Q3, BIO-key has engaged in a very positive way in very positive meetings with some new organizations that were formed after the consolidation. The new groups and their leaders undoubtedly see the value of incorporating fingerprint biometric technology into the enrollment and identification process, and some have made it clear that they will be moving forward in that direction.

In regard to electronic health records management at the hospital market, as I mentioned before, we will be featured this year at Allscripts Client Experience event, and our Director of Healthcare Solutions will be cohosting a presentation, along with the Manager of Product Management for Allscripts. Here, too, we are witnessing progress in our partnership as we are not just an exhibitor, but have been positioned as a valued customer resource.

Another significant development in the area of healthcare for BIO-key included receiving a special invitation to attend the Epic User Group Meeting. This is an intimate gathering of the country's leading hospitals and EPIC employees. EPIC is the world's largest EHR provider, and their customers include Duke University Health and the University of California. BIO-key will be the only biometric vendor at that conference really by choice of EPIC.

I understand that we did not meet the revenue forecast and revenue plan for Q2, but our key strategic partners, those that are vital to helping BIO-key generate substantial long-term revenue, are proactively growing closer to our Company and our technology because of the inevitable growth and acceptance of fingerprint biometric solutions as the global universal identification and authentication solution.

Indeed, the time has arrived. Fingerprint technology will play a significant role in your future and mine, and it is not just me making that claim as I have in the past. Instead it is IBM, it is Apple, possibly two of the most influential companies in the world. We all know that IBM owns the technology space in the enterprise, and Apple is the clear leader with consumers.

During the second quarter, a meeting with key IBM executives confirmed our vision. They stated that BIO-key was selected to be integrated into their security infrastructure because of our interoperability, scalability and performance. Everything we believe in and stood for was validated at that moment. They understood that partnering with other companies would mean pigeonholing their solutions and would limit their ability to meet their customers' demands.

Those of you that have been following BIO-key have heard me championing our interoperable capabilities for years, and you have also been hearing us predict that mobility would be a key driver for our technology. Well, for sure, that is coming to pass.

At this point, I would like to open the line for questions. Operator?

(Operator Instructions). [Sam Karnis].

Hello?

Yes, good morning.

It is [Dan Chemis]. I've got some questions on the document. Maybe you can do some clarification for me. I noticed that there was $200,000 in cash in the first quarter, and you lost about $600,000 in the second quarter and now show about $50,000 in cash. I cannot get where the $450,000 difference comes from. Maybe you or Ceci can clarify that?

Ceci, why don't you take that question?

Okay. So in the statement of cash flow, you can go through and just see where the loss is and where we are or are not spending our money. Some of this -- it is written back up from the allowance for doubtful accounts, and yet some of it is going through the receivable accounts. So there are a variety of contributing factors to that.

Well, can you just give me the one or two main ones?

It's a makeup of all of them. I mean there is not one or two main ones. There is a big write-up, like I said, for the allowance of doubtful accounts, and we collected a lot of money from some of our old receivables. So the receivable amount has gone down and the cash came back up, and then it was spent on operations. So, like I said, it is not just one or two things, but there are two or three big numbers in there that offset each other.

Okay. So it came from the $330,000, yet the receivables went down then. That contributes to that?

Yes.

Okay. I got it. Can you tell me how much factoring was done in the second quarter?

You mean how many invoices or what the total amount was or --?

No, you have a factoring deal on your account receivables I thought, and I thought it was mentioned -- I just had a brief chance to view the document -- but I thought it was mentioned that that was actually made use of.

Yes, yes. So we put through a variety of invoices that they factor for us and then we fulfill. Fortunately for us, all our customers are perfect payers, so we have not had any issues with the factoring. As far as the total amount, probably in excess of $200,000.

Is that for the quarter, or is that to date?

That would be for the quarter.

Can you tell me if you have used the additional amounts to date?

Yes, we have.

I see. So is that no longer available since the receivables are down to $256,000, or I'm just trying to understand (multiple speakers) --?

No, there is no limit on when we can or cannot use it. It is a two-year contract, so it is still available.

Isn't it based on the accounts receivables?

No, it is invoice based.

The way -- this is Mike. Let me maybe just explain the way this works, and then we can move on. It is a very simple arrangement. BIO-key sells a software or service, they invoice a customer, we pass the invoice over to the bank, they fundamentally release the funds almost immediately, 70% of the total value. The customer pays; we get the other 30%; they keep their fee.

It is a very, very simple arrangement. It's available to us to use and utilize at any time at our choice, and it is really a very good facility to equalize our cash flows. And, as you can see, we have been able to do that, and we have been able to keep ahead of the game now for quite some time, considering that we have not had on a year-to-date base a profit. We've certainly had a nice profit in the first quarter. We had a loss in the second quarter. So it allows us to equalize our cash flow. So that is really all a factoring arrangement is, and at least in the context of the way we use it, that is really what it is all about.

I see, so it just allows you to get paid early?

Exactly. Exactly. (multiple speakers) Now if you look at our average DSO because our customers, as Ceci mentioned, are very good payers, it is likely in the 30-day range, 30 or 32 days.

So the factor loves us because because they get paid on time or ahead of time, and it's very good for BIO-key because it allows us to access cash when we need it.

Okay. I got it. Now on the doubtful accounts, it looks like it went up $200,000. So does this mean that you are even more certain that you will not be receiving payments on these accounts, or how come it went up?

Well, no, actually what it is, if we were certain we were not going to receive the money, we would probably deal with it in a different way. I think what we have been experiencing is a delay. And it is one key project. It is not -- it is one piece of business, it is one project, and the appropriate way to treat this from an accounting perspective is to do exactly what we just did, to reserve for it.

When we get paid, which we believe is imminent, that will come back to the P&L in the following quarters. So fundamentally I think we have reserved -- I don't know the exact number, but it's over $500,000 against this particular project that will come back in the future P&L when we collect the money.

So it is just really a delay in collecting the payment on the project. The project has not gone away. It has not been terminated. It has not been canceled, and we would be paid a considerable sum of money in the context of delivering that project. But we because the payments have been delayed as long as they have, we had chosen and I believe our auditors have recommended and we have chosen the right and appropriate treatment for that particular scenario.

I see. On the receivables, can I assume you have received the full payment you are going to get from Dancom based on the receivables going down, or is there -- should we expect additional based on the contract they actually won from Dancom?

Yes, you can (technical difficulty)-- at all from the receivables, so I don't know how you could assume that. This is a project that is ongoing. We get orders on a frequent basis; we fulfill the orders; we build them; we collect them. So no, there is no correlation between the two.

Okay. Is there any kind of correlation between receivables and what we should expect to see in the third quarter?

I don't think so. I think, again, our turn is pretty quick. As I mentioned, our DSO is in the 30- to 35-day range. So fundamentally we book ship most of our business, meaning that it happens very quickly. So we can book an order, turn an invoice and collect it in less than 30 days. So there is no direct correlation between the receivables in Q2 and what our performance in Q3 will be.

Okay. I mean we are -- I think three out of the last four quarters we have been in the $500,000 to $600,000 range. I guess I'm just wondering if you are also looking at reducing any expenses at this point or if you are looking at going to the capital markets. I mean we are down to a fairly low level in cash and receivables, so I'm just wondering how we should be thinking about this.

Well, certainly our expenses have been relatively stable. So, if you look at our expenses over the last really five or six quarters, they have either declined or, again, remained basically flat. We have no intention at this point in reducing our expenses, i.e. resources or anything that we have focused in the market. I have mentioned the last few quarters that our business is still choppy, meaning that it is not predictable from quarter to quarter. We did what, almost $1.5 million in the first quarter. We made $400,000. This quarter was certainly lower in revenue, and we had a loss. The next quarter could be dramatically opposing.

So we are still in a choppy kind of volatile condition in the market, but we see that really evolving and changing, and we do expect and anticipate, as I had mentioned at the beginning of the year, that we are going to grow our business in a major way year over year. So nothing has changed in that regard. In fact, if anything we have seen catalysts and accelerators that give us hope and really point to some very, very strong opportunities for us going forward.

We have the only -- the only interoperable, fully scaling solution for finger biometrics in the industry. It does not matter if you eventually one day when Apple introduces an iPhone or an iPad with a finger scanner in it. If you use that to access information through a single enrollment and then you decide the next year or the next month to use an Android device, you will be able to utilize that device in the same fashion you used the Apple device, and you will have access to that information without re-enrolling, without having to re-engage in any, again, enrollment or registration process.

So that is what we bring to the table. That is our secret sauce. So we are feeling actually much more optimistic today than we were even 30 days ago about the potential, not only for this year, but what the next 18 months will hold for the Company.

Okay. Thank you. I will get back in the queue.

[Sean Marconi].

Hi, Michael and Scott. How are you guys doing today?

Very good. Good morning.

Doing well, Sean.

I have actually spent the past two to three weeks really kind of zoning down on BIO-key doing a great amount of research on the Company, really trying to understand this whole transaction with Apple buying AuthenTec, that being the second largest transaction in Apple's history. It is very significant.

So I'm really trying to -- I am looking at BIO-key and BIO-key has got -- they were just recently awarded another patent, and they have got 10 patents. And I'm looking at BIO-key and where it is priced and the real opportunity here. If Apple is basically a trendsetter, as we all know, and they do come out with an iPad or iPhone with a fingerprint scanner, to me it seems like BIO-key is just in the right place at the right time, especially having developed a five-year plus long relationship with AuthenTec.

The question to you is, how does that dynamic change with working with AuthenTec, and what exactly do you do for AuthenTec?

Great question, Sean. First and foremost, our relationship with AuthenTec goes back nearly 10 years, so it is a very long working relationship. They provide hardware, finger sensors, all different styles, all different types. And we have incorporated those finger sensors into our software platform to allow customers who may buy a laptop with a finger sensor in it or plug a USB one in that may be different to interoperate and to make all of that work together for them. They provide some local software.

For example, they have some software that can operate on a laptop to help you cache passwords and the like to do the local consumer type applications. We provide the enterprise class software, i.e. access to the cloud, access to corporate networks, VPNs, all of those things, we provide all of that capability for our customers and for their customers as well.

So they have referred a number of opportunities through the years to BIO-key where, again, it was a requirement to have a strong software suite that was niched PIP certified. We have got all the government certifications, all the quality certifications. We operate in the top-level or top-tier in performance in this space, in this industry, proven again by another niched press release that we issued just a few weeks back. So we are providing the enterprise class robust technology that their customers require. What will that mean going forward in the context of the relationship? Will that change?

No one knows what Apple and AuthenTec will do going forward in the context of integration. My gut tells me that they are going to put appliances in devices, and they don't sell devices in the thousands or even in the millions; they sell them in the tens or hundreds of millions.

So what I think is going to happen is they are going to provide a facility, AuthenTec and Apple, for every one of us as consumers, as enterprise users, business class users to be able to utilize finger biometric technology for access to all kinds of information. I think in the payment industries, electronic payments, there will be a huge explosion in the use of identification authentication using finger biometric technology over time. I think there will be a very strong, strong increasing growth in enterprise access capability to the cloud because, remember, everything is kind of moving to the cloud. Local authentication, local validation on device is one thing, but doing it to the cloud requires a whole level of interoperability and technology that we provide.

So I think at the end of the day this is all going to be very, very good for them, and it's certainly going to be very, very good for BIO-key.

Well, it is interesting, Michael, because I have been reading a lot of -- there has been a lot of articles that have come out, Apple wants your fingerprint and several other articles regarding Apple wanting your fingerprint. And reading comments on the press release, it's very interesting because all the different consumers are talking about the mobility market and how they need a fingerprint company that speed is really accurate and you guys have gotten several awards for accuracy and is extremely scalable and have a system that enrolls people that holds hundreds of millions of users. Well, that to me makes a lot of sense.

Now I'm trying to understand is BIO-key basically the power powering the backend technology solution for enrolling the person with their fingerprint identity and then basically verification and authenticating that user when they go on their iPad and getting their fingertip across it?

Yes. We provide all the backend software to allow for enrollment. Duplicate checking, because remember that it's going to be a big deal, right? Enrolling as Mike and then coming back and enrolling again as Sean would be a bad thing, right? I would have two enrollments in the dataset, so we don't want that.

So we will certainly enroll. We will certainly do the duplicate checking, and then we will do the verification or identification, depending upon again how the user organization chooses to validate their customers.

So when we talk about verification, we talk about using -- for example, on a mobile phone, we already have a phone ID number that is associated with each SIM card or each device. So you can send data and then just put your finger down to verify it is you. Or we can do one to many positive identifications. With a simple swipe of the finger, we can basically tell you who you are. So we have the capability to do it both ways and offer a very open and a very flexible solution for users.

No, that is very interesting. What would you say are the key focuses of BIO-key moving forward? I mean I'm just -- I invest in a lot of different microcap companies, and BIO-key is not my ideal investment just because it lacks fundamentals and it lacks the cash in the bank and it has a higher amount of shares outstanding than I typically prefer. But it's so unique to me because you guys have a patent portfolio. You guys recently got published in the IBM Redguide, which to me that seems like that would be the equivalent of BIO-key hiring a significant sales force, this whole Apple AuthenTec transaction, and then BIO-key has all these strategic partners in the healthcare industry and then developed this Web key platform that is extremely scalable across several different platforms.

So I'm just trying to gauge -- it is like and you got this little company here that is under an $8 million market cap, and I know that with smaller companies, you got to strategically use your resources because you don't have as many resources as you would probably like to have or can afford. I mean I think in the queue it said that you need $385,000 a month just to conduct your operations.

So I'm trying to get a better gauge of how you guys recognize your revenue and how you charge for your products. I just don't understand. I mean how much is this IBM Redguide and these integrators taking your platforms since the integration of the Web key app is very simple for other people to use without BIO-key's help. So how is that going to accelerate the sales of BIO-key and put some profitability down to the bottom line, so I don't need to worry about them trying to form another relationship with the [CHAR] fund?

Well, here you go. I mean it is real simple. You hit on it -- we have a leverage model. So we are not out going -- trying to sell to every hospital or every bank or every retail establishment. We have partners who are the leaders in those industries like, for example, LEXIS-NEXIS represents us in the educational testing industry and in the credentialing space.

Allscripts and EPIC, McKesson represent us in the healthcare space. They are the big players. They are the guerrillas. So fundamentally as our technology has been integrated into their offerings, they are going out now selling it.

So IBM, the Redguide, I mentioned in my little talk before that we had signed five new resellers in the last 30 days. So just extrapolate that out if you want to do a little analysis on how to we get revenue, how do we sell the business. First of all, we sell by the user, and we sell by the user size population. So fundamentally they pay for the number of users that they want to enroll in a population. That is the way we generate revenue.

The second piece is, if each of those brought one deal to us and we signed five a month, it means over the next 12 months we will have signed 60 or so IBM partners or resellers, which means that they might bring us, let's say, 60 to 100 opportunities.

If the average size of those opportunities is in the, let's say, $50,000 to $100,000 range and we were able to close, let's say, 40% of them because they are all highly qualified, you can extrapolate that out and understand that it means millions of dollars in business for us with very little overhead. So remember, this is all software, although they do buy some hardware from us occasionally. They want us to supply the fingerprint sensors, and we do and we pick up about 30% margin on those.

But the bottom line is you can see that it is a game of numbers. When you are dealing with an IBM, they don't have thousands of customers; they have tens of thousands of customers.

And so it's always been our vision to be able to play with the largest of the experts in a particular vertical and have them go to market with our technology. This is what I believe is the most significant value creator for BIO-key in the near- and long-term. There is no question about it. The fact that we can scale, that we can multiply our business very rapidly, that we could see explosive growth once the engine is running is really what differentiates us, I think, from everybody else in this space.

Mike, if I may, I think what we have learned, every sale has its cycle. Right? When you go out and sell a product, there is a sales cycle.

What BIO-key has learned is there is a partner cycle, a cycle that it took us from going from introducing the relationship and securing it with Allscripts, with EPIC and IBM to really maturing the relationship, and that is the phase we are at now. We have gone from a new partner, from a vendor to being one of the premier vendors, the premier partner from a utilization standpoint. And ironically it is happening with three big partners at one time, ironically with Allscripts, ironically with EPIC, ironically with IBM over the past quarter is when they have said, we want more of BIO-key.

Interesting. No, I mean that is really interesting. I noticed on YouTube videos they had online, Scott, it basically showcases the BIO-key products, and it has the bulky hardware attached to the iPad or iPhone. Is that just on there because Apple has not integrated fingerprint sensors yet, and that is just a third-party basically fingerprint hardware that I believe was from --?

I think this goes back to Mike's vision of mobility, right? So we knew mobility would be a key area for biometrics a couple of years ago. So what do you do when you know that the market will eventually happen? You try to go out and make the market or condition the market. And we went out and looked at a few different companies, S.I.C. Biometrics included, and said you know what, maybe this is a solution that might be a stopgap, knowing that eventually Apple, if there was a better way, would find a better way.

I think we have been out to Apple -- Mike has been out there with our Chief Technology Officer. We may have -- I would not be surprised if we may have conditioned this move. So it is all very positive.

No, absolutely. Can you touch on regarding the S.I.C. Biometrics? I know that last August, I believe, that you guys announced that you guys would be involved in a merger with S.I.C. Biometrics, and then I read in the press release that last November you guys decided not to make that transaction happened. Then I started to do more research on S.I.C. Biometrics and it seemed like they had a unique product offering that would fit in even really well with Apple, being combined with BIO-key. How does -- can you touch on differentiating factors between S.I.C. Biometrics and BIO-key?

(multiple speakers) Mike can do that, yes.

You answered the question, so I'm not going to make it long. I'm going to make it very brief. We were interested in potentially acquiring the Company. Scott indicated the reasons. We saw it as a short-term scenario to condition the market and hopefully get more of a universal solution out there.

Bottom line is we decided that they are in the hardware business, and they make these attachable devices that can sit on mobile -- on top of a mobile phone or a tablet. We still have a very strong partnership with them. In fact, we are selling that technology to a number of clients and customers who need today a mobile solution. So we have a reseller and a very tight arrangement with them. But, as you can see, I think Apple is going to take things to a different level, and I did not want to be in the business competing directly with them on the hardware side. I think they will do a much better job than any of us can do.

Well, it is unique, as I started doing research on S.I.C., and it basically said that they offer a software development kit, the SDK for iOS and Android biometric application development, and I did not believe that was part of BIO-key's platform, and I was wondering how their software development kit differs from BIO-key's or what -- (multiple speakers)?

All their kit does is allow you to utilize the hardware in their device. It's not -- it is nowhere near as robust anywhere as close as an enterprise solution is what we make available. So they are not in the algorithm. They don't develop software. That is not what they do. They develop hardware. So customers who are looking for a scalable enterprise solution will likely use our technology, and we have a very strong referral scenario with them, relationship with them. So all good, all positive.

Yes, creating the mathematical template to identify someone built in with several different algorithms, I'm blown away by the technology, Michael, and I'm sorry to bogger you guys down with questions, but I just have a lot of them. And one additional question is that how is the contract going with BC, the $500,000 contract, and when do you think you will see the revenue recognition for that contract that was awarded in May?

Well, first of all, the BC contract is a contract that we were awarded at the end of last year, beginning of this fiscal year. We have already recognized revenue on a portion of it, and we received a follow-on order to that contract this quarter as well. So that is going very, very well for us, and we expect that rollout to continue to evolve and to continue to grow. We are in a very nice sweet spot there with the prison system of utilization of our technology to identify prisoners for all different types of applications. So it is something that we think is going to grow and spread not only in BC but throughout Canada.

Okay. Well, I am going to jump back in the queue. Thanks for your time, and I will talk to you soon.

[Matt Chambers].

Looking at the five new resellers from IBM, how many are you up to now?

We probably have seven or eight resellers, IBM resellers, in our portfolio right now. As I mentioned, since the Redguide was published, it is like amazing how the visibility that we have gotten throughout their field organization has just skyrocketed. So we are feeling pretty positive about that because, remember, they only fulfill directly to their largest accounts. They sell mostly through resellers and partners in the field, and again, some of them are vertically focused, some of them are geographically focused. So the idea here again is to get through their network, and I think we are doing a pretty good job of that, and they are doing a pretty good job at promoting us and helping us there as well.

Any idea of what kind of revenues that group can generate next quarter, this quarter, next year, that kind of thing?

Yes, I mentioned before when Sean asked the question, I said we signed five new resellers. If we just do an extrapolation, if the average deal is $50,000 or $100,000 and each one of them brings one deal and you close 40% of them, we are talking in the millions, certainly in the multiple millions for software licensing. So we are very encouraged by that relationship. And some of the opportunities that they have come to us with are direct, meaning that it is in their large account base. So those are in the millions just by themselves, and that obviously will evolve over time, and that business will or will not close. But certainly a relationship with IBM is worth millions and millions to us, not hundreds of thousands of dollars.

So you would say maybe these resellers might each bring you one a month, one deal a month or two --?

I did not even say one a month. I just said one a year, right?

One a year?

I think they are likely to bring more than one a year. It does not make sense to negotiate a reseller agreement to go through the process of executing the arrangement, signing the NDAs, doing the evaluation on the software if you are going to do one deal. So (multiple speakers)

So would each reseller bring you one deal a month?

You know, it is hard to say. I don't know. But I just know that if we signed 60 resellers and they brought us one deal and one of those deals was between $50,000 and $100,000, it is millions of dollars in business through the course of a year. So it is significant.

Got it. All right. Thanks.

[John English].

This is John. How are you doing?

Very good, John. Good morning.

My question concerns Trusted Computing because that seems to be more heavily adopted now as things are going forward. And also on mobile devices, I think there is a lot more hardware chips going into the mobile devices now. And so you have this new patent, your second one with Trusted Computing, I was wondering if you could tell us what kind of advantage this patent has that will make BIO-key more desirable to all these businesses that are buying computers with Trusted Computing platforms in them?

Yes, I think the most -- we issued a press release about two or so weeks ago describing that particular patent and the opportunity there. Trusted Computing is a -- it is not only a philosophy, but it is a methodology that is being adopted and has been widely adopted on the hardware side to protect, for example, hard drives or to not enable you or allow you to take your hard drive from one computer and put it in another and have it work. Right? So it protects, for example, hardware from theft and malfeasance.

We have the patent on being able to move securely a biometric identifier -- that could be a template, it could be any of the information associated with the biometric -- securely from the finger scanner itself through to the computer up through the network. And it fits very nicely in the trusted computing model where you are verifying and you are ensuring security at all levels from start to finish. And given that we are going to see a significant movement to information in the cloud -- we are already seeing it -- and we are going to see mobile devices with biometrics in them, we are going to want to know that we can securely move through the trusted computing platform. We are going to want to see that we can securely move the biometric information up and down from the cloud. That is what our patent at a high level protects us against. It protects really what it provides for and will protect our technology for years to come, and that is just one of a number of patents that we have in the secure computing space.

So would that mean if a corporation or (technical difficulty) or somebody like that wanted to ensure that they have security when they are using fingerprint technology, that way would have a significant (technical difficulty)-- wait, that is the other company, I got stuck. BIO-key would have a significant advantage in keeping that secure that other fingerprint people would not have?

You know, that is a tough statement for me to answer because I don't know what everybody else has. But I know what we have, and I know the advantage that it will give us. If you are looking again to secure from an end-to-end perspective a biometric, in particular finger biometric, engagement or enrollment, yes, we will have a significant advantage.

Okay, okay. And another quick question. FBI, are they anywhere close to buying an official license for another 10 million people or 100 million fingerprints?

That is a very good question. Yes, their dataset continues to evolve, and I believe there right now we are up to 110 million records. And it will be, I guess, on the next tranche. As they grow, our revenues will grow as well because not only will they need additional licenses, but the maintenance revenue goes up as well. So, as that dataset and their population grows, so will our revenue and our recurring revenue as well.

Well, it sounds like that might happen this year then. Is that possible?

Yes, sure it is possible. Remember that most of the enrollments for the FBI system are not in the forensics space. They are not because we are arresting more criminals. It is because of all the background checks that we are doing on people. And it seems as though almost every Company these days or every profession is looking for a way to ensure that the individual who comes to work or becomes part of the organization is vetted. And so that is why that dataset is growing, and I think that is going to continue to grow as well, especially (multiple speakers) as more finger biometrics are beginning to be used in the space as Apple kind of catalyzes and conditions the market.

Yes, I think that would always be a good source of additional revenue in the future. I have always sort of counted on it. How is the Sacramento city clerk's pilot going? I hope it is still going on and I hope it is working out well.

Yes, it is. It is going well.

Okay. That is all I have got. Thank you very much. Appreciate it.

Thank you. Operator, I think we have time for one more question.

(Operator Instructions). [Sam Karnis].

It is Dan. There is a knockoff I have heard about fingerprints, and I sort of I think it fits with the discussion you just had, that once fingerprints are compromised, they cannot be changed like passwords. Is it true that it is not so much the fingerprint as it is the encryption and the addition of a time constraint to the encryption that makes BIO-key's approach workable for secure authentication?

Absolutely because your fingerprints are all over. When you opened your door this morning or walked into your office and put your hands down on the table or on a glass, you left your fingerprints.

So in the context of fingerprints being compromised, your fingerprints are available just like your face, fundamentally available for surveillance at any one point in time.

What really makes our system secure and different is the level of security, as I just described in the last question that we provide, the level of encryption, the algorithm itself and what it takes to build the template and then what it takes to de-algorize the template to be able to do the match. So all of those things are, although we can never say never, right, that something cannot be compromised, it is highly, highly unlikely that an individual, a hacker would be able to reverse-engineer any one of our secure transactions without having the algorithm. And the algorithm is secure and safe, and we don't provide the source for the algorithm to anybody. So it is never again say impossible, but it is probably one of the most secure technologies and methodologies that you can find in the security space today.

Yes, so that is talking about the encryption itself, but isn't the point also that even if they are able to de-encrypt, they cannot do it in the timeframe necessary to make an impact?

Oh, I see. You are talking about the way we can -- the speed and performance of our system and how fundamentally if someone were trying to, let's say, hack a template, it may take them 30 seconds. We only require perhaps that window to be open a second and a half or even in some cases milliseconds up to a second or a second and a half. So that is what you are referring to. Yes (multiple speakers) that is one of the security features.

All right. That is part of your patent, right?

That is correct.

Okay. I think that is -- unless maybe that's just one of the things that I'm applying too much weight to it, but I thought that was --?

Well, that is one of the components of the most recent patent that we were issued, again, for secure transmission of a biometric -- moving a biometric data point or a template from one place to another.

Okay. Another knockoff is that, even if you have, say, a one out of thousand false accept rate, that you are still going to need some type of backup capability, which would probably be a password. And then the argument is, well, why do you need -- if biometrics cannot work perfectly, then why would it be used at all? What do you say to that?

I guess what I don't know is, if you go to the bank, you are at an ATM and you put your fingerprint on and let's say it falsely reject you. Okay. Does that mean that you now -- you cannot get your money out of the bank, or you would have to contact the terminal, or would you then try it again and get accepted? Or are you like one of the one in a thousand that just are permanently rejected? I don't quite understand how the false reject and also there is a false accept, I guess?

Well, we don't -- we are really over our time right now, and maybe we can take it off-line. But false reject just simply means that you are enrolled in the system, we know that you are enrolled, and you went to identify or verify and it did not recognize you.

So it could be -- there could be many reasons why that happened. You could have -- it could have been a bad image scan. You could have put your fingertip down instead of putting your finger flat. There could be a problem with the system. All those things are possible. When you enter a password, sometimes you miss and you make a mistake and then you enter it again. So with a false reject, you would likely put your finger down again and see if you were accepted.

In the context of backup, there is always going to be a backup. And so depending upon the process that that particular bank chose to offer, it could be a PIN backup. It could be -- again, sometimes you enter your PIN wrong three times and they shut your account down. So it really depends on the process that they put in place that will allow you access. But in the context of false reject, it means you have been able to successfully enroll; you just cannot identify and there is usually a reason for that.

Okay. Thanks.

You are welcome. Thank you, again, for participating in today's call. We hope that you will join us again for our next conference call to discuss our third-quarter results.