Good morning, ladies and gentlemen. Thank you for standing by. And welcome to BIO-key International’s Fourth Quarter and Full Year 2020 Conference Call. During management’s prepared remarks, all participants will be in listen-only mode. Afterwards listeners will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, Thursday, March 25, 2021. I would now like to turn the call over to Kimberly Johnson, BIO-key’s Vice President of Product Marketing. Please begin.

Thank you and thank you for joining us this morning. Participating on today’s call are BIO-key’s Chairman and CEO, Mike DePasquale; Chief Revenue Officer, Fred Corsentino; and CFO, Ceci Welch.

Thank you, Kim, and good morning, everyone, and thank you for joining our call today. As I begin, I want to thank the entire BIO-key team for their hard work and commitment during a very challenging year. I want to also acknowledge our customers who have stepped up to secure their assets in what has been an unprecedented time in our history. Speaking on behalf of the entire BIO-key global organization, we have never been more enthusiastic, opportunistic, and optimistic about our future as we are today. Despite the challenges posed by the COVID pandemic, 2020 was a transformational year for BIO-key. And importantly, during 2020, we were able to accomplish a major recapitalization of the company, putting us on a very sound financial footing for years to come. We also completed the acquisition and integration of Pistolstar, the developer of PortalGuard, an identity and access management solution. The purchase substantially enhanced our suite of security, ID, and authentication solutions, our talent pool, customer base, and our addressable market, and also provided a very significant contribution to our second half performance. In late 2020, we began to see business activity gradually moving towards more normalized levels, following COVID-related disruptions to our sales and marketing dialogues. Our business benefits from IT security challenges driven by the shift to remote work and studies, which obviously grew very rapidly in response to the pandemic.

Thank you, Mike. I’d like to highlight a few areas that underscore our optimism for the business. First off, as Mike mentioned, we launched our software-as-a-service model for the PortalGuard business to build on our on-premises solutions and position BIO-key to participate in the trend towards asset-light or cloud-based IT infrastructure solutions. Our PortalGuard identity-as-a-service platform, or IDaaS as we call it, includes a highly scalable framework hosted within an AWS Cloud infrastructure that can integrate with our customers' other cloud hosted data and solutions. This new paradigm provides a range of benefits to all parties, including a scalable procurement experience with far lower upfront costs for the customer, while providing a stable and far more predictable recurring software revenue stream for BIO-key versus variable or episodic license sales. Our teams are very focused on building traction for our cloud solutions and building a growing base of annual recurring software revenue. I mentioned on our last call that we have integrated our sales and marketing functions around three primary verticals: education, financial services, and government. Within the higher ed vertical, one of our priorities is to target larger institutions. Given our recognition in the market and significant installed customer base, we will continue to strengthen our position in the education segment. As discussed in today’s release, we are very excited about BIO-key’s Channel Alliance Partner Program, which we consider to be a key force multiplier in our go-to-market efforts. As a result, we are focusing a significant portion of our time on this program, working to steadily build and support our base of productive partnerships. The CAP program expands our paths to market by leveraging partner contacts, market knowledge, and sales reach to new customers where our technology solutions are a great fit. We have more than 50 partners and I’m confident that we can more than double that base in the coming months and continue to grow the channel on a global basis. We’re fast becoming a channel-centric company and expect our partner revenue to grow significantly in both the short and long term. We’re also developing programs to support each of our partners and have incorporated a direct assist program to help them close deals.

Thank you, Fred. BIO-key’s Q4 2020 revenues doubled to $1.1 million from $535,000 in Q4 2019, mainly due to the revenue contribution related to PortalGuard, which was acquired as of June 30, 2020. Revenues for 2020 increased 25% to $2.8 million from $2.3 million in fiscal year 2019, with the increase due largely to the acquisition which more than offset the impact of IT project delays and disruptions related to the pandemic. Sequentially revenue increased $120,000 in Q4 2020 from $943,000 in Q3 2020, with Q3 and Q4 being the first two quarters to include PortalGuard. Gross margin improved to 71% in Q4 and 72% for the full year from negative levels in the prior years, neither of which is truly comparable due to non-cash and non-operating charges in 2019 that did not recur in 2020. Excluding the prior year one-time impairment charge of $7 million, BIO-key’s Q4 operating loss improved 34% to $1.4 million from a loss of $2.2 million in Q4 2019. Likewise, for the full year 2020, operating loss improved 21% to $5.2 million from $6.6 million in 2019, also excluding the prior year impairment. On the bottom line, BIO-key reported a net loss to stockholders of $1.4 million or $0.18 a share in Q4 2020, compared to a net loss of $9.5 million or $5.29 per share in Q4 2019. For the full year 2020, the net loss was $9.8 million or $2.08 per share versus the $14.6 million or $8.21 a share in 2019, including the one-time impairment charge.

Our first question today comes from Jack Vander Aarde with Maxim Group.

Good morning, Michael, Fred, and Ceci. Thank you for taking my questions. I want to start with the revenue guidance for 2021, which is between $8 million and $12 million. This is quite encouraging and above my expectations. Can you provide more details on what is driving this revenue guidance? Specifically, could you give a rough breakdown of contributions from PortalGuard versus core BIO-key? Also, if there are any contributions from contracts in Africa, that information would be appreciated.

Thank you, Jack, and good morning. I appreciate the question. I think I can share some color on the revenue guidance. Certainly, $8 million to $12 million, we are attempting to be conservative. As we mentioned in our press release, and I mentioned in our prepared comments, we see there’s also significant upside on the Africa site. As you know, the contracts are significant. They’ve been delayed now nearly a year. So remember, we had expected to begin generating revenue in the second half of 2020. That has slipped. We’ve now begun to deploy technology, but everything is certainly behind approximately three quarters to a year. So there is significant upside in that guidance range if in fact, the African business accelerates more significantly. So we do have some revenue associated with the African business in that guidance range. But the bulk and the base for that range is our core business, which is fundamentally our biometrics and our identity and access management PortalGuard solution right now. So that’s the way we’re looking at it at this point in time.

Got it. That’s helpful. I appreciate the information. Given that PortalGuard has been integrated for some time now, is there anything you can share about the revenue growth rates you anticipate for 2021 between the core BIO-key biometrics business and PortalGuard? Do you expect them to grow at a similar rate, or will one outpace the other in 2021?

It’s an interesting question, because there’s an integration of the biometric technology that’s also in the PortalGuard solution, right? So, fundamentally, they’re going to grow together, for sure. But we are expecting to see significant growth in our identity and access management PortalGuard platform. And remember, in my prepared comments, and as you have heard us say before, we support over 15 authentication factors. So biometrics is only one of those factors, right? There are 14 others that we support: pins, tokens, cards, keys, all those things, FIDO tokens. So, we will see both of those businesses grow as we proceed through the year, but they’ll also grow together, because some customers will opt to buy biometrics and some won’t, but it doesn’t matter. We love all our children and we’re going to support all those authentication factors and support our customers in whatever they require.

Okay. Fantastic. It's wonderful to hear that the children are growing. I have two more questions regarding the first quarter. You mentioned the $500,000 revenue expectation for the first quarter from the Africa contracts, specifically with Nigeria. The first shipment is already in progress. Looking at the overall revenue for the first quarter, considering seasonality and other factors, do you anticipate the total revenue to remain flat, increase, or decrease compared to the fourth quarter, or is it difficult to gauge?

Well, we don’t provide quarterly guidance, as you know. We’re providing annual guidance because we don’t feel yet we’re able to be predictable enough to do that. We really want to make sure, again, where as accurate as possible as we come into 2021. I will say this about the quarter: We did announce earlier this week that we would generate approximately $0.5 million from our Africa contract. And if you look at our run rate business, it’s pretty clear that you will see sequential growth from Q4 of 2020 into Q1 of 2021. Where we’ll end up? We’ll see. But we’re certainly believing there’ll be significant potential and opportunity for sequential growth from Q4 to Q1.

Okay. Got you. And then, if I may ask as well, just because it’s March 25th. There’s only a few days left in this quarter. What’s your confidence level or certainty of receiving that $500,000 payment or at least recognizing that $500,000 revenue for the first quarter? Is there a risk that a portion of it or all of it slips into the second quarter?

Right now it’s high.

Okay. Fantastic. And then, maybe just, Michael, what’s your overall sentiment, your current sentiment or feeling of just regarding the status of Nigeria and Africa as a whole? Is there a clear positive trend that you can point to or any visibility just in terms of like the reopening of their economy and the country altogether?

The economy is open, but it has faced some challenges. Although the country’s economy relies heavily on oil, which has seen a recovery in prices, it has been inconsistent. However, I am optimistic about our projects and programs there. The World Bank is supporting an initiative to implement an identity management solution in Nigeria, with funding of around $480 million. This initiative aims to enroll every citizen and provide them with a Nigerian identity management number, similar to a social security number in the U.S. Without this number, individuals will struggle to access services, including basic needs like having a cell phone, as SIM cards will be linked to the NIM number. There is significant pressure to complete this enrollment, even though it has faced delays. While the process is not entirely smooth, it is progressing and expected to accelerate. We believe that 2021 will be a breakthrough year for us. Additionally, we are exploring opportunities beyond Nigeria in other countries and partnerships to expand our reach, including introducing PortalGuard in new markets. Kenya is emerging as a significant tech hub, providing further growth and potential in the sector. Overall, we are encouraged about the opportunities ahead.

Fantastic. Okay. Excellent. And then just maybe one more question, maybe two more questions from me. Michael, you talked about your strong backlog and maybe said pipeline as well in the prepared remarks. Are you able to quantify anything with regards to the backlog or pipeline or maybe you want to keep that undisclosed for now? But is there any comments you or additional color you can provide with regard to the backlog and pipeline?

Yeah. We don’t have the numbers now to share, but I can’t say it’s growing. Some of it is obviously the opportunity and potential we have in Africa, but a significant part of it as well is within our core business in biometrics, in PortalGuard, and also with our CAP program. I think Fred in his prepared comments made it clear that a force multiplier for us is the expansion of our Channel Alliance Program, getting more feet on the street through this partner network to sell our solutions. Now that we have an IDaaS, we have a cloud-based solution available, managed service providers love selling the cloud solution because it doesn’t require a lot of on-premise installation and support. So that’s going to be a big part of our growth as well going forward.

Okay. Great. And then just one final question, the biometrics capability you cited remains the core differentiator of BIO-key versus competitors or other solutions that are out there in the space. So maybe either Michael or Fred, can you maybe just talk about what you’re seeing in the marketplace when negotiating new potential contract wins or customer wins? Are there any competitors you’re consistently seeing at the deal table or the bake-offs and how are your win rates kind of tracking or trending?

I think I’ll let Fred handle that.

Yeah, Jack. So biometrics is definitely differentiating and where we’ve seen the most traction right now is with our CAP partner growth. So we offer something very different and that they know and understand the certain markets, customers are required. So that’s where we’ve seen the most traction right now. As it relates to competitors, there is always the typical competitive landscape. So there’s no one particular competitor that stands out, and when it comes to our biometrics, we certainly have the best solution integrated into the PortalGuard platform.

Okay. Fantastic. Well, guys, I appreciate the added color and congrats on the strong finish to the year and wish you the best of luck in 2021. That’s it for me.

Thank you, Jack.

Our next question comes from Dan Thomas, a Private Investor.

Hi, guys. Well done on getting at least an initial draw on Nigeria stuff. But I was wondering was there any movement on the telecom deal that you can tell us about?

Are you talking about the African deal, Dan or..

Yes.

… domestic? A similar in nature, everything is starting up together and so both of our contracts are moving forward.

So does that guidance that you gave us include revenues from both those Nigerian deals?

As I described before, we’ve taken a conservative approach. I won’t repeat myself again, but we’ve taken a conservative approach. There is certainly revenue in the guidance from Africa but at a minimal level.

All right. So much talk about in the news about chip shortages. Do you have the hardware inventory necessary to or can you manufacture or get it to ramp the way you’d like to if the revenues do come in?

Well, that’s a great question. It’s interesting. We were a little bit limited in our ability to supply hardware this first quarter because of some chip shortages from some of our suppliers. So that was a bit of a challenge. But we are now very well prepared to be able to deliver product in the coming quarters and so we’ve arranged with our suppliers to be sure that we can do that. Again, we don’t like getting too far ahead of ourselves. Remember that we operate on a cash basis in the third world, and so it’s a balancing act. But we are pretty confident that we can satisfy the demand for the next three quarters.

And are you still manufacturing the product in China? Are they ramped up or…

Yeah. Yes. The answer is yes. And we are now in a normalized state right now. So we’re back to where we need to be. And that includes manufacturing products like our sites like site touch, EcoID. Those products are now fully available and our manufacturing lines are back open in full swing.

That’s great. Would you expect your quarter breakeven number going forward to be? I think it was about 1.8, is that change or is that still a good number?

Yeah. We think based on the mix and so it really depends on the mix. But we are looking at now about $2 million to $2.2 million.

I see. That’s because of lower margins on the hardware, might be selling more hardware, is that it?

Not necessarily, we’ve made some investments, as you know, we’ve expanded our staff. We’ve certainly opened our African subsidiary. So there is some upfront cost and expense that we are experiencing right now. Some of it again is mix, right? The margins on hardware, if it’s our hardware, are one thing, if it’s third-party hardware, they’re a little bit lower. So it takes all of that into consideration.

So then have you begun hiring staff for the African office? I know you hadn’t done that yet, except for…

Now we are right now on the customization. So as things are opening and we see the need and we will have a requirement for support and so forth, we will do that. But we have not made any significant investment in staff in Africa as of this point to-date.

I see. And what would you consider a fully staffed African office, if you could make that kind of…

I can’t even imagine. It really depends on the ramp, how fast and how significant. Those contracts have had a face value of approximately $75 million, and so if they ramp more quickly and more aggressively, and our other business continues to expand. For example, if our partner network and sell of PortalGuard across the territory gets more significant, there may be more staff required. But right now I couldn’t answer that question.

Okay. Let me ask a couple of questions on PortalGuard then I’ll get back in the queue. Are you seeing any PortalGuard sales where the customer is also interested and buys the biometric component?

Absolutely.

Okay.

Absolutely.

Have you charged extra for the biometric capability or is that just built in the PortalGuard now?

That’s a good question. The answer is it’s an authentication factor within PortalGuard. There is an up-sell for the hardware, right? That’s required if it’s finger scanners to support the solution in the system, and it’s part and parcel of our offering today and it needs to be part and parcel of our offering.

Okay. Thanks. I’ll get back in queue.

It looks like our next question will be a follow-up from Dan Thomas, Private Investor.

Okay. I just got a couple more here. What was the SG&A in the fourth quarter? Do you have that broken out?

Ceci?

As far as, you mean, what the selling cost, the general and administrative, marketing, et cetera?

Yeah.

I don't have the exact figures in front of me, but the total is around $1.7 million. I would estimate that approximately $400,000 is for selling, about $500,000 for marketing, and the remainder is in general and administrative expenses.

Okay.

Just off the top of my head.

All right. Thank you. And were the one-time charges must have been down in the fourth quarter. I’m wondering how big they were?

Yes. We had paid the debt off in the third quarter. So on the press release we put out, the one-time interest charges, et cetera, are down and our non-cash charges were down as well for compensation expenses, et cetera.

Okay. And I noticed that the cash flow was down $1.4 million. Is that because revenues counted in the quarter weren’t collected until the first quarter?

We actually did have a larger shipment at the tail end of the quarter versus the beginning.

Okay. What was the accounts receivable and deferred revenue?

What was the deferred revenue? What was...

And the accounts receivable, yeah. I guess I can wait for the queue. But I just thought you might have the numbers.

Yeah. No. I have for the deferred revenue at the end of the year was we had long-term and short-term are current and non-current. So we had a total of almost $700,000 there for deferred and accounts receivable of $548,000.

Okay. Got it. Last question for Mike, first is about back where you made purchases in the fourth quarter, are you looking to add more shares? If you don’t want to answer, that’s okay, just asking.

Yeah. Probably.

Okay. That’s all I got. Thank you.

Thank you, Dan.

Our next question will come from Ashok Mehta, a Private Investor.

Thank you for taking my question. I have a couple of inquiries regarding the African contracts. The two contracts you secured have a combined value of $75 million. I would like to clarify the timeline for these contracts. They were expected to be fulfilled over a two-year period, but I understand there have been some delays. If we consider a reset starting now in the first quarter, does the company anticipate generating around $75 million in revenue over the next two years? Is that a reasonable expectation, assuming the contracts are executed as planned? My first question pertains to the potential revenue from these contracts and the timelines we are anticipating. While I know the ramp-up is still being finalized, I wanted to confirm this information.

Great question, and the answer is yes. Our expectation is that over the next two years, the potential for those contracts remains at $75 million. We anticipate a gradual ramp-up, reaching full capacity a couple of quarters after we start. That remains our plan. As I have stated several times in my prepared remarks and during the Q&A, we are being very conservative with our guidance because it is unpredictable. We have seen delays, but all indications suggest that things will begin to progress, and our objective is to achieve that $75 million within the next 24 months.

Can I ask about the mix of hardware and software in terms of revenue levels throughout the life of the contracts, and what kind of impact we can expect on the bottom line if these plans are executed as intended?

Well, for sure in the beginning as we’ve mentioned a number of times through the past year, there’s a lot of hardware upfront to be able to facilitate the entire ecosystem, identity management and authentication ecosystem. So there’s a lot of hardware upfront as you saw in our announcement. This week, in fact, the first shipment is finger scanners to support the enrollment for individuals across the country. So that’s going to be a big part of it, and obviously the margins on hardware are not like the margins on software. So our software margins, especially in PortalGuard or biometrics could be upwards of 80%, 90%; hardware obviously ranges depending upon hardware that we manufacture or third-party and that can be anywhere from 20% to 50% or 60%, so it’s a wide range. But for sure, we wouldn’t do it if it wasn’t profitable, and so on the significant numbers that we could be talking about here, the large numbers. We think it will have a very positive impact on the bottom line as we move forward.

The other question I had was regarding potential opportunities in Africa. Can you provide some insight into the volume of RFPs you may be pursuing and whether some of the opportunities could be similar in size to those you secured last year?

There are a variety of opportunities, including our standard business activities. For instance, selling PortalGuard in sectors like banking, finance, healthcare, and manufacturing, focusing on our core product for identity management and authentication to both commercial and government entities in Africa. We're pursuing similar efforts in Asia, particularly ramping up our presence in Japan and Singapore outside of China. In these regions, we'll be offering PortalGuard and similar solutions, including our biometrics. This approach is more mainstream and aligns with our ongoing efforts in North America and Europe. Our aim is to not only develop the base business but also to create a recurring revenue model similar to what we're establishing in the U.S. on a global scale.

Okay. Okay. Yeah. That’s all I had. Thank you very much for taking my question.

Yeah. Thank you for the questions. Thank you.

Our next question comes from David Flooring, Private Investor.

Good morning.

Good morning, David.

I’m a long-time investor going way back to when Tom C was with Osage, and I’m just curious with how you guys announced your contracts? Why don’t you ever put a $1 value even for some of the smaller ones, and if it’s not worth putting a $1 value on there, what good is it even to make the announcement of the contract?

That’s a great question. I get that question probably 10 times a year from investors and other interested parties. The challenge that we have in general, and this has really ramped up for us over the last 24 months or so. The customers we deal with use our technology to secure their infrastructures. They do not like their competitors or hackers or anyone else to know, number one, what they’re using and what they’re doing. And so we have a very difficult time, forget the dollar value; we have a very difficult time sometimes naming our customers. And when we do sometimes we take a risk; there is a backlash. Let’s put it this way, it happens. And so we have to be very cautious, number one in naming who we’re doing business with. The second part is from a competitive perspective, we do not want to share, because people can extrapolate on a per-user basis knowing the size of the company. We don’t want to share our pricing with our competitors. We don’t think it’s good business. We don’t think it helps us in any way shape or form, and so we’re very cautious about that. So that’s the simple answer and those are the facts.

This will conclude our question-and-answer session. I’d like to turn the call back over to Mike DePasquale for any closing remarks.

Thank you, everyone, and I appreciate the time that you took today to participate in our call. We look forward to updating you on our first quarter call in late April or early May, and we will continue to provide interim news and updates as warranted. Thank you very much and have a great day.

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