BIO-Key International Inc (BKYI) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Incorporated fiscal 2014 fourth-quarter and fiscal year-end conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, March 20, 2015. (Operator Instructions).

I would now like to turn the call over to today's host, Jay Meier, BIO-key's Vice President Corporate Development. Sir, you may begin.

Thank you. Good morning everyone and thank you for joining us today for our fiscal 2014 fourth-quarter and fiscal year-end financial report conference call and webcast. With me this morning is Mike DePasquale, BIO-key's Chairman and 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 and I will review our results and milestones before opening up the call to questions.

This morning BIO-key issued its fiscal 2014 fourth-quarter and year-end financial results. The press release is available in the press release section of our website at www.bio-key.com. Additionally the call is being webcast live on our website and the replay will be available for 30 days beginning one hour after completion of this call. A streaming audio replay of the webcast will be available shortly after the call on our website for a period of 30 days. You can also access the recorded call by dialing 1-877-344-7529 in the US or 1-412-317-0088 internationally and using the access code, 10055289.

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 Litigation Reform Act of 1995.

For a more complete description of these and other risk factors that may affect the future performance of BIO-key International, see risk factors in the Company's annual report on Form 10-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.

At this time I would like to turn the call over to Mike.

Thank you, Jay, and welcome and thank you for joining us for the BIO-key fiscal 2014 fourth-quarter and year-end report conference call. We are excited to present to you today as we have accomplished much and have significant plans to share for 2015.

On one hand, we arguably only hit the low end of our Q4 guidance. On the other hand, we doubled our annual sales year-over-year and reported an all-time record for the Company. We have the opportunity to share some successes but also to learn from our experiences last year to ensure stronger future outcomes. So today we are going to discuss history both for the industry and the Company understanding that the history is an asset upon which we can grow and build.

Finally, we will share more details of the plans to ensure that our shareholders understand what we are doing and why. So per our tradition, I will share some industry events that have occurred recently and then show how they relate to BIO-key. We will then discuss the fourth-quarter and fiscal 2014 financial details including Ceci's summary of the specifics. We will then spend more time describing our plan for 2015 and why and we will give some guidance. And finally, we will open the call for your questions.

If you recall, our fiscal 2000 report conference call, we described that we believed the Company was at an inflection point and we would emerge into the high growth phase of its development in 2014. We noted the business would remain variable quarter to quarter. We described how the commercial market for biometrics was finally taking off as the iPhone 5s was released only a couple of months prior. We reiterated our perception of various vulnerabilities of the on-device authentication model promoted by Apple, Samsung and the Figlo Alliance.

We noted Apple was spoofed immediately as was Samsung on their device. We suggested that we would pursue on-device relationships as the market demanded but reiterated our view that market pressures resulting from these vulnerabilities would force the market to consider both on-device and cloud authentication models.

While we signed two OEM agreements with fingerprint sensor vendors that produced half of our revenue in 2014, we all watched as those on-device vulnerabilities continued to emerge and it continues today.

Now with that, I would like to just take a side track moment to point out a couple of things about Apple and Apple Pay.

First, recall Apple stated that they would never move biometrics data from their phones. Within the last year, Apple filed a patent application demonstrating how they might move biometric data from their phones to their cloud and back down to different devices. We are watching that closely but you must understand it will be some time before that can become economically important to us if at all.

The point is that Apple has contradicted itself and appears to be considering a change in course. Apple is contemplating doing exactly what we do and what they said they would never do but for all of the reasons we suggested, they will. Interesting but not coincidentally Gartner Data Analytics, the big IT consulting firm, published its identity and access management Hype Cycle report last December. In that report, Gartner predicted that by 2017 50% of corporate enterprise user authentications would be conducted through a cloud-based service. That is music to our ears and that could tend to conflict within an on-device only mentality.

Clearly along with on-device authentication, the cloud has a role in user authentication as well both within the Apple ecosystem as well as the broader enterprise market. Not coincidentally, we hired Gartner as part of our 2014 strategic plan specifically to voice our view of the world.

Jay and others in the Company have spent many hours interviewing and collaborating with Gartner analysts over the course of the year. It is not to say that we caused Gartner to believe one thing or another but on the other hand, it is important that Gartner is covering biometrics today because its customers are starting to ask about it.

Ensuring Gartner understands our side of the story means Gartner is well-educated and can describe our view to its enterprise customers when they ask. As those customers become more educated about cloud and on-device security, they push back on Apple, Samsung and Figlo, who may just need to react by filling device to cloud patent applications.

So we are very encouraged by all of this movement because the industry is moving according to the way we are thinking.

Have you heard about the Apple Pay fraud rates? This just happened and is very exciting news. You have probably read that their design in general has enabled significant fraud. According to widely publicized reports, fraudsters are associating stolen identities and credit cards with their Apple Pay iPhone 6. It appears they have fraudulently purchased millions of dollars of products with the fraudulent Apple Pay enrollment.

According to reports Apple Pay fraud rates are running orders of magnitude higher than traditional credit card fraud rates. But it is not because the fingerprint sensor is inaccurate or other spoofing, it is because no one has done anything to authenticate the person's identity to conduct identity proofing when they enroll in Apple Pay. So the fraudsters just simply enrolled on the iPhone 6 with someone else's credit card number and neither the phone nor the retailer nor the credit card issuing bank has any way to know that the fraudster holding the phone wasn't the credit card owner.

In effect, Apple Pay vouched for the fraudster by authenticating the fraudster at the transaction. The fraudsters of course were smart enough to shop at Apple stores knowing that Apple would never scrutinize its brand-new flagship product. So they used in essence their own system to rip Apple off. Isn't that incredible?

Now please recall also one of our most important announcements from 2014, our strategic partnership with Experian. Experian does identity proofing that could have helped prevent the type of fraud that the Apple Pay and other device authentication models are reported to enable. The point I'm trying to make is that these are the market pressures we discussed followed by the result in actions of some of those in the space.

So we think we are still well ahead of the market but the market is moving towards us and this is starting and has shown up in our 2014 numbers, our partnership agreements, new conversations with very new recognizable technology vendors who are just getting interested in biometrics along with our forecast for 2015 and beyond.

During 2014, we signed a couple of dozen partnerships with third-party technology resellers. These companies sell products from IBM, CA and others that we work with. They work to generate deal flow that we could participate in. Throughout 2014 we saw our opportunity pipeline grow significantly both in terms of the number of deals and the gross value of those deals. And to make sure we are all clear, our opportunity pipeline is the value of all of the deals that we have qualified and chosen to pursue that could book over the next 12 months.

To follow in 2014 our opportunity pipeline grew from $12.7 million to $25 million. To follow that, we grew revenue significantly in 2014 and while we understand that $4 million is not a huge number, it doubled what we did in 2013 and represents a record for the Company.

So we enjoyed a high growth rate, a rate that we believe constitutes our ability to continue to do that in the following year.

Now what else did we do? One of our strategies for 2014 was to implement rigorous sales and budget forecasting techniques so we could increase the predictability and potentially reduce the volatility in our business which represents risk. In this effort, we were partly successful but also experienced some challenges. If you recall the historical seasonality of our annual revenue Q1 and Q4 were typically the largest in terms of sales with Q2 and Q3 significantly lower.

2014 however did not follow that trend as closely. In part because our planning strategies and tactics but also because the business is starting to change and improve. In fact, Q1, Q3 and Q4 all enjoyed revenue of approximately $1 million or more. The delta or volatility between those quarters was significantly reduced per our plan. Of course we missed our Q2 forecast and were forced to react by raising money for working capital and reverse splitting the stock.

Taking a step back however, one might see that Q2 as a one-off problem in 2014 without minimizing it, excluding the Q2 frictions we actually are very pleased with everything else that we accomplished in 2014.

Despite the Q2 results, we still enjoyed high growth and many other important accomplishments. 2014 was a productive year for the industry and BIO-key and so as we look back at the year, we can use the experience to improve our business going forward.

But before we discuss our plan and projections for 2015, I would like to invite Ceci to provide the financial details for last year. Ceci?

Thank you, Mike. For the three months of the fourth quarter total revenue for the three months ended December 31, 2014 was $951,698 compared to $327,500 in Q4 of 2013, an increase of approximately 191%. Sales grew largely as a result of substantially higher license sales, hardware sales and service sales while maintenance sales were held firm.

Licensing sales grew largely as a result of OEM partnerships with fingerprint sensor vendors. Q4 2014 gross margin was essentially unchanged at 76% as compared to 78% for Q4 2013. Operating expenses for Q2 2014 increased by 9% to $1,272,024 from $1,163,961 in Q4 of 2013 while administrative expenses decreased marginally.

The Q4 2014 net loss decreased approximately 45% to $506,546 from $929,188 in the Q4 of 2013. The loss per share was $0.01 versus $0.02 in 2013.

For the fiscal year 2014, total revenue increased 102% to $4,005,856 compared with $1,985,976 for the year ended December 31, 2013.

Sales increased primarily as a result of higher license sales, service sales with our OEM fingerprint sensor manufacturers offsetting a slight reduction in maintenance revenue.

We maintained gross margin at 81% in 2014 as compared to 80% in 2013. Operating expenses for the period increased 29% year-over-year to $5,296,226 from 4,120,629 in 2013. Operating expenses rose primarily due to increased variable selling expenses, higher R&D and marketing expenses while administrative expense remained relatively constant.

Net loss for the year of 2014 was $1,883,572 or $0.03 per share which decreased from a net loss of $2,582,151 or $0.06 per share for the year ended 2013. These are all post split numbers that we are using now for the share numbers.

Liquidity and capital resources, the Company reported cash and cash equivalents, accounts receivable of $1,468,973 at the end of 2014 compared with 2,307,374 at the end of 2013. Net cash used for operations during fiscal year of 2014 was $2.5 million compared to approximately $2.7 million in 2013 and the Company issued common shares and warrants to raise approximately $1.1 million, $1.6 million in FY14 as compared to approximately $5.6 million in the Q4 of 2013. Mike?

Thank you, Ceci. Now we should discuss our revenue and operating goals for 2015 along with our strategies and tactics to achieve them. As you know, Jay Meier is our VP of Corporate Development. He came from Wall Street where he worked as a respected industry and financial analyst. This past year in conjunction with our executive team, Jay spearheaded our business plan process. I would like to ask Jay to discuss our 2015 plan and also talk about our guidance and outlook going forward. Jay?

Thanks, Mike. First I would like to reiterate our view that our pipeline opportunities are often large and hard to predict. The opportunities we typically pursue can often exceed several hundred thousand dollars in value and we are starting to see deal sizes exceeding $1 billion. The timing of the recognition of such orders can materially impact quarterly results, both negatively as well as positively. So we continue to recommend evaluating our progress over a longer period of time.

This trend will continue for a while but will smooth out over time and it will smooth out primarily as we increase the number of sales channels, penetrate them more deeply and grow such that the individual orders become relatively small compared to our overall size.

Looking forward to 2015, our two primary initiatives center around more focused strategic and tactical sales development as well as continuing to improve internal operating disciplines. Clearly developing short- and medium-term revenue opportunities and closing them in a timely manner is our top priority.

We have structured the Company to both focus on the strategic significant relationships that will generate recurring revenue while building the core business in both healthcare and IAM through our partner network.

We expect biometric and fingerprint enabled mobile devices to continue to expand rapidly in the marketplace and with the discussion of fingerprint viability including an appropriate balance between security and convenience in the public debate, we have gained significant credibility and exposure from our public discussions of such vulnerabilities.

Our first strategic priority for 2015 and beyond as mentioned above is to drive revenue. Importantly profitable revenue is critical to our success as resources are limited. We believe there are several tactics necessary to accomplish this in 2015.

First, we are targeting specific market verticals and opportunities. We believe highly regulated industries like the US healthcare and global financial services markets as well as technology OEM relationships including mobility and identity and access management companies will provide the strongest revenue potential for several reasons. Highly regulated industry like US healthcare is our primary market opportunity going forward. Highly regulated industry represents roughly 65% of our opportunity pipeline today and this is because US healthcare vertical is substantial and well defined and join mandates for standards compliant two-factor authentication that both requires end-user investment in such capabilities but also creates significant barriers to entry.

The Company enjoys favorable brand recognition, visibility and reputation as well as significant marquee customer and partner relationships within the healthcare space. BIO-key solutions are currently certified to satisfy those standards in the mandates and further our relationships with major electronic medical record and electronic health record providers like Epic, HealthCast and Allscripts and a number of new EMR partners that we believe a disciplined and aggressive tactical sales push will produce constructive revenue results in 2015.

We similarly believe global financial services may offer significant large opportunities this year.

Second, given various difficulties both Apple and Samsung experienced, we believe there is imminent demand for a more robust matching algorithm deployed at a device level thus we expect existing OEM relationships with IDEX and [NEXT] to produce design wins in 2015. We further expect to develop new OEM relationships with large stakeholder device manufacturers like semiconductor manufacturers and fingerprint sensor providers and other large technology stakeholders.

We believe large value-added resellers and technology component and service providers could add incremental sales opportunities throughout the year. Given the successful channel development work in 2014 we believe our identity and access management relationships that are effectively OEM relationships because they basically sell our products for us, will produce deal flow and visibility which will generate contract awards in 2015.

Finally, we will continue to invest in strategic and tactical marketing efforts to drive pipeline and order book growth followed by routine analysis and appraisal.

Our second priority for the year is to continue to develop and implement operating processes and business workflows within the Company. For example, we have implemented a structure in our developing guidelines to analyze our sales pipeline, forecast revenue on a quarterly, annual and even biannual basis, analyze, connect and forecast both cost of goods sold and operating expenses which will create true visibility and operating predictability. This reduces risk. This should enable more accurate guidance and reduce investor uncertainty about the Company.

We will also analyze our technology integrations and contract integrations, unify and standardize such integrations where possible and this will provide great efficiencies for the Company.

Our tactics to build presence, visibility and influence out in the marketplace require us to insert our opinions into the development of biometric and security related standards as well as a broader industry discussion. This is exactly what we have been doing with Gartner and other companies throughout 2014.

We believe that engaging recognized industry research organizations and reporting organizations like Gartner opening dialogue and contributing educational and opinionated content can help shape biometric development and deployment trajectories in the marketplace as well as create brand value for BIO-key.

The use of social media and Internet marketing techniques has addressed some of what is discussed but we will continue to create additional innovative thought leading content through our blogs and electronic outlets.

As a publicly traded company, our ultimate goal is to increase shareholder value and employee value. All other strategic and tactics fundamentally support this view. Tactics to enhance shareholder and employee value include developing proper investor relations programs, completing any additional capital restructuring, achieving market listings in aligning the board, management, employee and shareholder interest. These are all in process for 2015.

A well-designed investor relations program enhances our credibility with the financial community, solicits sell-side sponsorship and research coverage to attract buy-side sponsorship. Contracting outside investor relations to facilitate non-deal roadshows and investor conference presentations will help.

We recently hired Catalyst Global IR as our outside investor relations council. You can find their contact information in our press release. Importantly solid execution of the 2015 strategies along with disciplined and proper financial forecasting and report presentation meaningfully improves our credibility with the street which in turn facilitates sell-side sponsorship and buy-side sponsorship. All this should increase shareholder value and employee value in 2015.

Now given all of this I would like to offer our guidance for 2015 including first-quarter guidance. For the first quarter of 2015, the Company expects revenue between $0.5 million and $1 million in revenue and gross margin of approximately 75% to 80%.

For fiscal 2015, the Company expects revenue between $5 million and $7 million and gross margin of approximately 75% to 80%. Further, we believe that our breakeven run rate is currently $6.5 million to $7 million in revenue for the year. So basically we are suggesting it is possible for us to break even this year and we think that is constructive. As of December 31, 2014, the Company's opportunity pipeline was valued at $25 million which effectively doubled year-over-year.

Now I would like to turn the call back over to Mike to wrap up. Thanks.

Thank you, Jay. As you can see at this point despite continued quarter-to-quarter volatility, our business appears to be ramping. We grew our business sharply in 2014 and have implemented a rigorous and thorough plan for 2015. We are very encouraged and expect this trend to continue. We believe we are prepared for substantial growth that we hope may have begun in 2014 and will continue into the future.

I would like to personally thank our very patient shareholders and friends and now I expect that you may have many questions for us. Operator, let's start the Q&A.

(Operator Instructions). Aaron Martin, AIGH Investment Partners.

Good morning, everybody. Can you talk a little bit in Q4 of the different components of revenue which verticals worked well, which verticals built in the third land in Q4? Can you break down the $1 million roughly of revenue?

It was a good mix of business. Healthcare, mobility, our OEM business, so it was really a combination of such. I would say the most significant component fell out of the mobility and OEM space.

That was the most significant that was in there -- was in the mobility (multiple speakers)?

The majority of the revenue. In other words, the most significant single piece was in the mobility and OEM space.

Now looking forward in terms of the different verticals, which ones are going to be the more significant ones in Q1 2015?

I believe in 2015 we will see even a broader mix than we saw in 2014 because about half of our revenue as we described before came out of the mobility and OEM segment, so about $2 million. And I believe we announced that early after the close of the year in a press release.

In 2015 I think you will see the spread even out. Healthcare, identity and access management as well as continued revenue flow and identity access management and OEM. So we are going to see (multiple speakers)

What is moving the needle finally on healthcare?

It really has always been the drive to compliance and the regulatory issues that all healthcare providers are facing today, mostly electronic prescribing of controlled substances which is being mandated around the country state by state. So that has been the primary driver for stronger authentication and more convenient strong authentication because it is a very rigorous process.

Aaron, this is Jay. I think you also asked a little bit about a little bit of the breakdown in Q1. I think it is worth noting that financial services is probably going to show up for us in Q1.

Okay. That was going to be my next question about Q1. Obviously looking at the guidance it is a nice range of a revenue number sitting here with about a week of business days left to the quarter. Help me understand that.

Well, I think -- and Jay can chime in after I make my comment -- but it is pretty clear that we are driving with a lot of discipline to be as predictable as is possible and to be as conservative as is possible so we do not disappoint our investors.

As you can see if you look at last year in general other than Q2, we were reasonably tight in our predictability and so coming into 2015, we are going to be very, very conservative about our approach to guidance to ensure that we don't disappoint our investors.

Does that mean there is another deal or two that you think is closing in the next week or so that is going to make that delta and if it doesn't it just slips into Q2?

Quarterly results are always backend loaded. That is just how it is. The contracts typically don't get signed until the last days of the quarter. There is always a push at the end of the quarter so it is entirely possible that we will there will be additional deal flow that is signed between now and the end of the quarter. But those aren't signed yet and so we haven't included them -- we have discounted those in the guidance. Understand?

Okay. And now looking --

We have a very high degree of confidence in the low end of the guidance range.

I would expect that at this point in the quarter obviously. Looking at the full-year guidance of 5 to 7, obviously there I understand the range and obviously this is very difficult but can you talk about call it the confidence level and what gives you the confidence level in the range there and what are the driving pieces of that?

I think you can extrapolate on your own from the press release that we articulated a pipeline of approximately $25 million. If you look at our guidance in the range of $5 million to $7 million even at the high end, it says that we've got to drop about 20% or so of our existing today current pipeline to achieve that number which we think is discounted appropriately and conservatively. So we didn't just --

I will point out that if you look at last year's book of business of $13 million, closing $4 million, you ended up with about 30% of your book of business going into the year.

I mean again and a percent here or there but the bottom line is that is how we approach that and again we had a business planning process that was put in place, reviewed with the Board that I think with a lot of discipline gives us comfort that we can be in that range.

We analyze the pipeline with a lot more scrutiny and we are looking at it deal by deal. We are not including a lot of deal opportunities in the pipeline that we are choosing not to pursue or that we just think there is no way that we could possibly win. So the qualification of the pipeline is important to understand the opportunities ahead of us. And then as we scrutinize each individual deal we have an idea of when they close or are expected to close and we are analyzing the probability of winning each one of those deals and then we are creating a matrix out of that and effectively producing a discount mechanism on the pipeline.

So we think that the guidance is within our control, it will be very, very conservative and as you pointed out, it is possible that our guidance is very conservative.

The other item to note is that as Jay began his portion of the prepared comments, he noted that a number of our opportunities in that pipeline are significant. They are large and so they are binary. So we've got to use a discount mechanism in order to whittle the number down to something that we believe is achievable, aggressive but yet achievable and so that is where we are at.

Okay. And then you talked about the pipeline or the opportunities you are pursuing. What about revenue that is going to come in through some of your partners like NEXT and IDEX where you are not necessarily involved in the pursuing of that business. It depends upon whether or not they are going to be getting their design wins. Is that included in the pipeline?

Yes, we are factoring that.

Let me answer that, Jay, because I want to be careful on that. We derive substantial license revenue in 2014 from those partnerships and so they advance purchase some licenses which would in the initial deploys for example of design ins would be covered. Now it is conservative and it is not a lot but more importantly, we are not in control and even in the context of IDEX, which is an important partner for us, we are really three steps removed because they sell to a module manufacture or someone who incorporates their technology and then sells it to a handset player. They are not selling directly to the handset player.

So it is very difficult to predict but it appears if you look at the space and the limited number of suppliers for that technology that they are going to get some design wins and they will be successful in getting some business into the coming year and I have listened to their call and presentations and it looks like they have a considerable pipeline of opportunities that they are pursuing.

It is worth noting that neither the $25 million pipeline nor our guidance for the year includes some assumption of a huge binary event from either of those OEM vendors. We think they are going to show up but our guidance is not dependent on it.

Okay, thanks a lot.

Yes, we are not doing that.

(Operator Instructions). [Dan Campes], private investor.

Does the Apple patent indicate you will be competing directly with Apple in the future or is there a potential infringement?

I think again it was a patent application that was filed so there is no infringement at this point but it is pretty clear that if one were to look at our IP, the patents that we have issued that there could be some potential crossover.

Over time we will see what happens over time. They have not been issued or granted these patents. Remember it was a patent application. It will be a significantly long period of time before there is any action on those. It could be that is the case but we will see going forward.

Let's not lose sight of the fact that they are actually talking about and it is talk at this point because they haven't implemented anything. Let's not lose sight of the fact that they are talking about using a cloud-based system, at least some representation of a cloud-based system and if Apple is the thought leadership juggernaut and they are suggesting that moving biometric data up to a cloud is potentially a good idea, we have been saying that for a long time. So we are feeling somewhat validated by all of that.

Interestingly enough they are not the only mobile vendor that is looking at that same topology and it is really happening, Dan, because most individuals today have multiple devices, they don't just have a phone. They may have a tablet or a PC at home or the likes and enrolling on each of these devices individually is problematic and that is why moving that biometric around is so critical.

Okay. How much did the pipeline grow between Q3 and Q4? Or what was the change? Maybe it didn't grow.

It was effectively flat.

Yes, I think it was flat, Dan, quarter over quarter.

Any metrics, any sales metrics on reader sales that you can share or is it too early?

Very good question by the way. It is early; we are early in the stage of our sensor business distribution channel development. But we are making progress and you will see an announcement from us on Monday. We are attending a trade event called Connect ID in Washington and we are going to discuss our hardware business at a more detailed level there so you can stay tuned for that on Monday morning.

But the bottom line is we think that the form factor and the price point that we are offering these products at should give us a really nice opportunity and again we are doing this to catalyze our software and we are going to do it through a distribution medium that doesn't constrict the Company or require that we have to have significant piles of inventory or expense associated with that component of the business.

Okay, I will look for that. I read that New York is requiring e-prescribing now. Are you seeing any effects from the New York mandate? Again, it might be early.

Another great question. Interestingly enough, the New York [ISTOP], it was called ISTOP program which mandated the electronic prescription of controlled substances was just delayed another year. Governor Cuomo signed the bill maybe about a week or a week and a half ago to extend that for one year and it is interesting why. The EMR EHR providers, those who provide the full and complete software systems, record management, health record systems, are really not ready to handle all of that, that component of the technology on a pervasive basis. Now there are some vendors who are like Epic. Epic is very, very well engaged in electronic prescribing. Allscripts is struggling to get to the point where they can introduce a system that is full and complete and gives that capability across the country. So it is evolving and we know that in New Jersey here for example it will be mandated in 2016. I believe in California it will be mandated in 2016. So that is a really significant driver for us in the healthcare space.

One of the things, Dan, that I think people need to appreciate about this is that these are capital expenditures for these hospitals and there is a long planning process. They don't go to the store and buy fingerprint sensors and just attach them to computers. So there is a long lead time on this. If you think about that in relation to our pipeline, we have seen the pipeline grow -- opportunity pipeline in healthcare grow and it has been largely because of those healthcare mandates like ISTOP in New York and there are only two states that have mandated this yet, New York and Ohio. So we think there is a lot of greenfields ahead of us there and we are one of only a handful of companies that can satisfy the requirements.

Okay. Just another thing here, what expenses are increasing is driving up your guided expenses?

There are several. First of all it is worth noting that our administrative expenses are not, they have been flat and those are things like salaries but our commission structure is variable. We pay our salespeople commissions and so selling expenses increases as our revenue increases. We have also made a strategic decision to invest in marketing so our marketing expense has increased and demands on our research and development team to build new products and new integrations, demands for our services and products are growing so our R&D expenses have grown. Make sense?

Yes, yes, good answer. Last question here. With a eight potential $500,000 quarter in Q1 and a potential $2 million loss for the year and your guidance increasing expenses although as you explained with revenues going up it appears that unless everything goes perfect to result in a breakeven year, capital would have to be raised. Is that a fair analysis?

At this time we don't have plans to raise more capital. There is no discussions about that at this time. But the balance sheet is not particularly flush with cash. We have had to raise a little bit of money, we have had to do several raises over the last couple of years and we have working capital requirements. If the revenues show up the way we think they could, those revenues can fund operations and if they don't, then we have a decision to make.

That is what I was going to say. In my tenure here at BIO-key, virtually every quarter, quarter to quarter, cash is obviously an issue. We don't have a cash reserve. We have never really gone out and raised significant sums of money at one point in time and so cash reserves have never been available to the Company so it is absolutely critical that our revenue flow is solid and more consistent. And if it is not, obviously we will have to do what we need to do to make sure that we can operate the Company. But this is not something new for BIO-key; this has been going on for a long time.

One of the advantages of implementing the processes and systems that we are describing is enhanced predictability and forecasting. So we think we are going to give ourselves a lot more leadtime in order to put ourselves in a position to prepare and take action, should we need to.

Bob Schnell, Dougherty.

Good morning, gentlemen. I would like to start off by saying I really appreciate some of the increased granularity you are providing here today, in terms of pipeline and your revenue and cost projections from the year. I think it is very helpful.

I would also like to -- just something I noticed in your prepared remarks around some goals for the year, one of which included I believe aligning the board with shareholder interests. You know frustration of investors in the past have been that management and the board owns very little, if any, common stock in the Company. So I guess I would just like to question or ask what you guys mean in terms of aligning the board and management with shareholder interests, and what you have planned to beef up that part of the Company in 2015.

Well, I think we have stated a number of times before -- and we are asked this question all of the time, so it is not a new one -- clearly board and management are not obliged to purchase shares in the Company, but certainly can do that and will do that through and under their own volition. So we could see potential insider buying, not only again from the directors but management. But that remains, again, an independent decision that each individual has to make.

We have been in -- unfortunately, we have been in kind of consecutive dark periods. As you know, insiders are not allowed to purchase or trade the shares two weeks before the end of a reporting period until three days after the report is issued. So the window to purchase for insiders is very, very narrow.

And especially in the beginning of the year, it is almost nonexistent because we file our annual report so late in the first quarter. So we are kind of overlapping now in dark periods. But that, Bob, is certainly something that is up to the individual, and you may or may not see that going forward.

(Operator Instructions) Edward [Schwartz], [Schwartz] Investments.

Good morning, gentlemen. In your efforts to improve credibility to both shareholders and potential future investors, I would like to talk a little bit about corporate governance. Wouldn't you think where a lot of public companies are now shying away from the Chairman of the Company and the CEO being the same person, do you think that it would be beneficial for your company to make those changes?

I will take that.

All right. Go ahead, Jay, and then I can make a comment. Go ahead.

Ed, we all wear a lot of hats in this company, everybody, and we have a small set of employees and resources that we can allocate. And we need to stretch our resources as far as possible. This board is respected, they have demonstrated an interest in observing and interacting with the management team, and they have installed policies and made recommendations that are making the Company better.

Okay. I thank you for your honesty.

Make sense?

Yes. No, that is fine and thank you very much.

At this time, this concludes our question-and-answer session. I would like to turn the conference back over to Mike DePasquale, Chairman and Chief Executive Officer, for any closing remarks.

Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our first quarter of 2015 results. Jay?

Thank you for participating in BIO-key International's 2014 fourth-quarter conference call and fiscal year-end report. As a reminder, a streaming audio replay of the webcast will be available shortly after the call concludes on our website for a period of about 30 days. You can also access the recorded call by dialing 1-877-344-7529 in the United States or 1-412-317-0088 internationally, and use the access code 10055289. Thank you.

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