Earnings Call Transcript - BKYI Q1 2023

Operator, Operator

Good morning, everyone. Thank you for standing by, and welcome to the BIO-key International's First Quarter 2023 Conference Call. As a reminder, this conference call is being recorded today, Tuesday, May 16, 2023. I would now like to turn the call over to Mr. Bill Jones of Investor Relations. You may proceed.

William Jones, Investor Relations

Thank you. Thank you for joining today's call. Participating today are BIO-key's Chairman and CEO, Mike DePasquale; and CFO, Cecilia Welch. I remind everyone that today's conference call and webcast, as well as answers to questions, will include forward-looking statements, which are subject to certain risks and uncertainties and that can cause actual results to differ from those expected. Words such as anticipate, believe, estimate, expect, plan, project or similar words generally identify and express such forward-looking statements. These statements are made based on management's beliefs and assumptions today using information currently available pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete description of these and other risk factors that may affect the future performance of the company, please see risk factors in the company's annual report as filed on Form 10-K with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward-looking statements, which speak as of today's date only. BIO-key undertakes no obligation to revise or disclose revisions to any forward-looking statements to reflect circumstances or events that occur after today. And with that, I'll turn the call over to Mike.

Michael DePasquale, CEO

Thanks, Bill, and good morning, and thank you to everyone for joining us today. We held our Q4 call just six weeks ago, so we can keep our comments brief on this call. After Cecilia does a brief update on the status of our filings, our 10-K and 10-Q, she'll review our financials and then we will open the call to investor questions. We are very proud to report quarterly revenue growth of 59% from $1.9 million to $3.1 million for Q1 '23, along with a substantial improvement in our bottom line performance, reducing our operating loss by 70% from $1 million to $308,000. As we have discussed, our quarterly performance reflects our growing base of annual recurring software and maintenance revenue as well as strong new customer activity, reflecting our growing global base of partners in our Channel Alliance Program and enhancements to our direct sales efforts, including a disciplined focus on larger enterprise opportunities. These go-to-market paths are resonating in the market we serve and are generating a growing pipeline of opportunities, including several large customer prospects in the mid- to high six digits and above range. Specifically, our Identity-Bound Biometric solutions, which address customer mandates for phone-less, token-less, or password-less authentication, are really resonating in the marketplace. For example, at a recent Gartner-hosted event, including the Gartner IAM conference in April, we have developed several significant IAM deployment prospects that we are now working to progress to formal engagements. The Gartner events have proven to attract a very strong base of larger prospects with particular requirements that match well to our solutions. We're optimistic that a number of these larger opportunities will progress to formal deployments later this year, including a few that are already in proof-of-concept stages. Building on this traction, we attended the RSA conference earlier this month and we'll be attending the Identiverse Conference in early June. We've also refined our focus in Africa, signing a number of new partners who will sell our PortalGuard solutions to the emerging markets in several countries on the continent. Concurrently, we continue to serve the larger contracts that we've executed two years ago. Our work with Nellix in supporting the onboarding of young college graduates to support the emerging identity and payment ecosystem is starting to gain traction, and you will be hearing more from us on this initiative in the coming months. First quarter developments included the expanded use of our biometric client identification system to 21 million users by Capitec Bank in South Africa, up from just 9 million users in March of 2020. Our solution delivers enhanced security which streamlines client identification in a highly scalable manner. Capitec has been a flagship banking client since 2015 when they took the pioneering step to leverage fingerprint biometrics to secure their clients against fraud and theft. Our work with Capitec has developed into a long-term relationship, a very valuable customer case study, and, of course, a growing base of recurring revenue for BIO-key. Also, in Q1, our Swivel Secure business launched a project to enable 1.5 million citizens in a Central American nation to securely access their country's online tax applications. Our solution will reduce long queues for tax delivery, providing substantial benefits to both taxpayers and the tax authority. We have also recently supported Dayton Children's Hospital with their migration to Epic Hyperdrive, the next-generation web-based medical records application. Our PortalGuard solutions provide support for their existing deployment of our biometric authentication solution in this new web-based Epic environment. Our work with Dayton's provides an excellent proof of concept for other Epic clients, utilizing our biometric solutions who are now contemplating the migration to Epic Hyperdrive. Our Identity-Bound Biometrics, or IBB, capabilities create a personalized authentication solution that is both highly secure and frictionless for end users. Shared workstations are common in various settings in healthcare, customer service centers, and even in manufacturing and industrial settings. Such shared workstation access creates the potential for security vulnerabilities due to password, token, or card sharing. Our IBB solutions allow customers to cost-effectively deploy flexible authentication capabilities in a phone-less, token-less, and card-less environment balancing strong security, expediency, and convenience. Another Q1 highlight was with Alabama Power, headquartered in Birmingham, which selected BIO-key's PortalGuard and WEB-key to secure their 15 enterprise Air Gap networks, representing a new customer relationship for us. BIO-key serves over 600 customers around the globe with strong engagement in higher education, county governments, health care, and financial services. Customers are attracted to our highly efficient, cost-effective solutions that deliver secure, scalable, easy-to-use user access across hybrid user environments. As mentioned, we are seeing particularly strong engagement prospects that are seeking a more robust authentication solution to meet their specific needs and eliminate commonly used authentication factors that are failing. To address this global opportunity, we continue to build on our technology and distribution partner efforts to position BIO-key solutions before a broader base of prospects. We're also working to engage more deeply with some of our larger and more influential partners. For example, our EMEA group recently met with a leading global web service provider about quickly onboarding BIO-key into their accelerator program. We hope to have more to say on this next quarter. Additionally, we have an effort focused on building technical alliances with other leaders in the IAM industry, where we can collaborate to bring the best-in-breed solutions to their customers. Though we have viewed these companies sometimes as competitors, we recognize today that there are mutually beneficial ways that we can work together. We continue talking with other industry leaders where we feel there are good synergies. We expect these tech partnerships to open new sales opportunities, both small and large, that we would not otherwise be able to pursue. As partner-sourced sales opportunities are increasing, we're building awareness, engagement, and understanding of our capabilities within our CAP program members. In that vein, we have launched a program called BIO-key University for channel partners to train online on BIO-key integrated solutions with the first version ready to roll out this quarter. In terms of product development, we recently completed a WEB-key password-less log-in browser for Epic. We're releasing two new PortalGuard family products: a PortalGuard desktop MFA for Windows and Mac this month and PortalGuard for MSPs this quarter, as part of our effort to expand the capability and relevance of our suite of software solutions, especially for managed service providers, managed security service providers, and all of our other partners in our partner network. On the marketing front, we have implemented an account-based marketing model where our marketing and sales resources are better focused and aligned to target new commercial account opportunities with larger deal sizes. Our goal is to increase our average project size by 50% this year. For perspective, we've contacted 35 new marketing qualified accounts in April alone, leveraging this new approach. Cecilia will review our Q1 financials next. But from a high level, the strategic actions we have been taking enabled us to achieve record quarterly revenue in Q1 '23 while also trimming our operating loss. Considering this solid start to 2023 and our growing pipeline of new and existing customer opportunities, including larger engagements, we are confident BIO-key is positioned to deliver top-line growth and bottom-line improvements for the full fiscal 2023 year with some variability in our quarterly results driven by timing of new business activity. With that, I'll turn the call over to Cecilia.

Cecilia Welch, CFO

Well, thanks, Mike. I'd like first to address the status of our SEC filings. As many of you know, our filing of the 2022 annual report on Form 10-K has been delayed. After over a decade of never missing the SEC filing deadlines for our quarterly and annual reports, we were unable to file our 10-K on time this year. This was primarily due to our acquisition of Swivel Secure in March of 2022 and our auditors being acquired by Marcum, LLP in February of 2022. The combination of the expanded operations in Europe and the transition to Marcum, a large national accounting firm, increased the scope of work for both our internal financial team and outside auditors. Due to resource constraints, the completion of the audit process and the 10-K filing have been delayed. We now expect our Form 10-K to be filed by the end of this week, and we expect our Q1 '23 Form 10-Q to be filed early next week. Importantly, we've had no difference of opinion with our auditors and we do not anticipate any material changes to our 2022 results or our first quarter 2023 results from the results disclosed in our news release. Now I'll turn to the first quarter results. Q1 '23 revenue increased to $3.1 million or 59% over Q1 '22, reflecting higher software license and service fees and the full quarter benefit of Swivel Secure Europe, which was acquired in March of 2022. Revenue from software licenses increased 69% in Q1 '23 and 136% sequentially to $2.5 million in Q1 '23, reflecting strength from new PortalGuard customers, existing recurring revenue contracts, and Swivel Secure. Service revenue increased 33% year-over-year to $527,000, which is down from $587,000 in Q4 2022. Due to the timing of new customer projects and existing customer migrations to the PortalGuard IDaaS from their on-prem version, hardware revenue was down 15% year-over-year and 43% sequentially, which was related to the mix of installations and other projects completed in the period. We view ourselves as primarily a software solution provider and use hardware to support the sales of our software primarily for biometric deployments. Gross profit increased to $2.3 million from $1.6 million in Q1 2022 due to revenue growth. As a percent of sales, gross margin declined to 74% from 83% in Q1 '22 with a variance reflecting a full quarter of Swivel Secure revenues in Q1 '23, which reflects third-party software license fees. Sequentially, our consolidated gross margin improvement from 66% realized in Q4 was due to a mix that included more high-margin license fees in Q1 '23. Total operating expenses decreased modestly to $2.57 million in Q1 '23 from $2.60 million in Q1 '22, as higher selling and G&A expenses related to Swivel Secure were offset by lower research and development and engineering expenses, following the completion of significant enhancements to our mobile app and the PortalGuard IDaaS enhancements. Generally, we expect lower R&D expenses in 2023 as the outside resources required in 2022 are no longer required. We have also taken a number of expense reduction initiatives that should help to decrease overhead expenses in the coming quarters for the full year of 2023, particularly as a percentage of sales. As a result of the higher revenue and slightly lower operating costs, BIO-key reported a reduced Q1 net loss of $526,000 or $0.06 per share versus $1 million or a loss of $0.13 per share in Q1 2022. We ended the quarter with current assets of $9.3 million, including $700,000 of cash and cash equivalents, $3.4 million of accounts receivable, and $4.4 million of inventory. Our receivables are typically collected on a nonpayment term of 30 to 90 days. In terms of inventory, much of what we purchased to avoid supply chain concerns in anticipation of ramping up requirements related to the civil ID programs in Africa is now being fully sold and liquidated to further strengthen our financial position. That concludes my remarks. And now we can turn the call back over to the operator for Q&A.

Operator, Operator

And the first question will come from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde, Analyst

Okay. Great. Good morning, guys. I appreciate the quarterly update, and it's really good to see the strong growth in operating improvement. Michael, great to see as well record quarterly revenue of $3 million. I imagine the majority of that first-quarter revenue is attributed to recurring license revenue. Last year, looking at the second quarter and the third quarter, it did dip down below the first quarter. So just looking ahead for this year, do you expect a similar sequential trend? Or do you expect sequential growth throughout the year? Thank you.

Michael DePasquale, CEO

Well, we don't provide quarterly guidance, so I can't address that very specifically. But our base is growing, as you can see, and getting much stronger. We did have a strong Q1 and Q4 last year. And so, if you think about our European business, for example, the summer is always a very slow period. So, the third quarter in Europe might be lower than, for example, our domestic business. So, there will be variability, but we certainly believe that this business is going to grow. Our base is growing. Our pipeline is growing. The size of the opportunities that we're pursuing is growing. And so, all of this combined should put us in a very nice position to do two things: number one, continue to grow aggressively, continue to build a significant base of customers, which we already have, but to build on that; and ultimately, to get the company to breakeven and profitability, which we expect to happen as we proceed through the year.

Jack Vander Aarde, Analyst

Okay. Fantastic. I appreciate the color there. And obviously, so, the licensing side of the business on the PortalGuard side is clearly ramping. I do want to just touch on the Africa contracts. I know you're expanding with other opportunities in Africa and elsewhere in the world. But can you just provide an update on your visibility regarding the original two large Africa contracts?

Michael DePasquale, CEO

Yes. I made some comments actually in my prepared remarks, mentioning that we are expanding our partner network on the continent to push and sell our IAM solutions. We do have a really nice base in the Middle East, and so we're continuing to expand our partner network to sell our traditional products there. As it relates to the two contracts we have, I mentioned that the larger one, which fundamentally allows us to help the country employ young college graduates and get them into the identity and payments ecosystem, is progressing forward, albeit slowly. But you'll hear more from us shortly. That program and the initiatives that we have centered around that contract are starting to take hold. The other contract, which relates to the hardware sales for identity management, is centered solely in Nigeria. There was recently a national election, so the new regime is kind of taking over. We're hoping that the country will settle down, and that will enable the initiatives to continue to enroll all of the citizens there. But we have a significant portfolio of inventory associated with that project. We're not sitting on it. We are actively selling that inventory off to other projects and other programs while we expect in Africa that to begin to produce and bear fruit for us as we get through the rest of the year. But we're not sitting on that. I mean, it's been nearly two years, and the tumult in the country makes it very difficult for us to continue to sit on that inventory and wait for that project to move forward. So, we've got a lot of irons in the fire right now, and we're progressing forward.

Jack Vander Aarde, Analyst

Okay. Great. And then maybe just one more follow-up for me on the liquidity side, given the current cash balance. I know you mentioned you're rolling out some cost reduction initiatives. But can you just speak to your liquidity needs and cash runway? Thank you.

Michael DePasquale, CEO

We have a substantial amount of receivables, and as Cecilia noted, our Days Sales Outstanding is quite good. Generally, we collect our receivables within a 30 to 90-day timeframe. While some customers are on a net 45-day schedule, most are on net 30, and a few extend to net 90. We anticipate collecting well over $3 million from these receivables moving forward. Additionally, we have hardware inventory that we plan to sell almost weekly. Therefore, we believe that the cash flow from these two sources will meet our business needs.

Jack Vander Aarde, Analyst

Okay. Great. Yes, I see that looking at your balance sheet now. Okay. That makes a lot of sense. Very helpful. Again, congrats on the strong momentum and a record quarter. It's great to see. Thanks, Michael.

Michael DePasquale, CEO

Thank you, Jack.

Operator, Operator

Our next question will come from Dan Kamis with a private investor. Please go ahead, sir.