BIO-key International's (BKYI) CEO Michael DePasquale on Q2 2014 Results - Earnings Call Transcript

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BIO-key International, Inc. (NASDAQ:BKYI) Q2 2014 Earnings Conference Call August 13, 2014 10:00 AM ET


Jay Meier - Vice President, Corporate Development

Michael DePasquale - Chairman and Chief Executive Officer

Cecilia Welch - Chief Financial Officer


Edward Schwartz - Schwartz Investments


Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International, Incorporated fiscal 2014 second quarter conference call. (Operator Instructions) I would now like to turn the call over to your host today, Jay Meier, BIO-key's VP, Corporate Development. Sir, you may begin.

Jay Meier

Thank you. Good morning, everyone, and thank you for joining us today for our fiscal 2014 second quarter 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'll begin the call by reading our customary Safe Harbor statement, after which Mike and Ceci will review our results and milestones, before opening up the call to questions. This morning BIO-key issued its fiscal 2014 second quarter financial results. The press release is available in the Press Release section of our website at

Additionally, the call is being webcast live on our website and replay is available beginning one hour after the completion of this call, until 9:00 AM Eastern Time on September 15, 2014. The replay may be accessed by calling 877-344-7529 in the U.S. and 412-317-0088 internationally. The access code for the replay is 10050818 followed by the pound key.

I'd like to remind everyone that today's 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, Incorporated, 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 obligations to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made.

At this time, I'd like to turn the call over to Mike.

Michael DePasquale

Thank you, Jay, and welcome, everyone. And thank you for joining us for the BIO-key fiscal 2014 second quarter report conference call. We're glad to be here today to discuss our Q2 2014 results. It was a tough quarter for BIO-key and we have learned a few things, but there are also several important and constructive milestones and notable occurrences that need discussion.

Not least importantly, we missed our sales and expense forecast. I'm disappointed by our performance in Q2, and we are reexamining our disciplines to continue to improve. Inversely, I'm thrilled that our 12-month opportunity pipeline has grown very quickly. Since our last call, it may now be the largest in the company's history.

Of course, we have discussed the lumpy nature of an emerging industry in business. Both the lumpiness and emergence are easily demonstrated in Q2, but also more constructively demonstrable in Q3. Our booked revenue for the third quarter has already grown 100% over Q3 fiscal '13 total revenue, and already represents record Q3 sales results for the company as a standalone biometric vendor.

So we have lots to discuss. As always, I will start by framing our perception of envision for the industry, its emergence, and in particular how it's changing; and it really is changing, so we'll start there. Then I'll put some color on our Q2 results, followed by Ceci's summary of the financial details.

Then I'll provide a little more context for our Q3 guidance, and then tie back our pipeline activity to my comments about the industry. Finally, we'll open the call to Q&A. And given the Q2 results, where we are today and everything we have going on, I want to make sure we leave lots of time for Q&A, where we'll answer anybody's business related questions.

First of all, did you hear about the Russian hackers that have stolen over 1 billion passwords and user profiles? It's anecdotal, but enormous. And it demonstrates the overarching driver for biometrics. Passwords aren't just debt, they're a liability. Of course, we have all known this for some time, but the gravity of the situation is mind boggling and alarming.

Nothing is secure, and that means, what we as a society have been using to secure things is truly useless. The main obstacle for mass adoption today is general resistance or reluctance to tear out and replace some cost infrastructure. The market for fingerprint biometrics is huge, thus one of our three focus areas is clearly the identity in access management space, including healthcare, where we continue to make progress in building out our partner network.

There are many economic research firms that estimate the market and its size, and they say, it's measured in multiple billions of dollars annually. Sometimes the forecast are even higher. Well, this is a massive upgrade cycle, a replacement cycle. Industry doesn't like spending billions of dollars unnecessarily, so there is reluctance to make large expenditures, it's inevitable though. The statistics are overwhelming and there is no choice.

I read a New York Times article that suggest we use 14 character passwords to avoid having them compromise, but even go as high as 25 characters to ensure a higher level of security, all ridiculous by any standards. There is a recently published industry study that stated 79% of risks would ditch passwords for biometric security measures like fingerprint scanners.

Fingerprint technology was voted as the most popular biometric method according to the New Index and 53% of U.K. banking customers, want bank's to integrate fingerprint scanners into their digital banking services. The least popular method was found to be voice recognition, popular with only 27% of the customers.

The future password index was determined from an online survey of 2,000 U.K. consumers, which was commissioned by Intelligent Environments, following the company's findings that 51% of U.K. banking customers expect their bank to introduce more innovative security measures, all good for BIO-key and for our industry in general.

As for mobile banking, it would seem that anchoring someone's identity on a device like a phone that is vulnerable to hacking, bring some risk. As we have pointed out, enrolling an identity on a phone, without setting the identity before that enrollment, but effectively enroll a fraudulent identity on the phone or the service. If that fraudulent identity is successfully enrolled in a phone and the phone becomes the trusted source of that individuals identity data, then there is no way to prevent that individual from committing fraud.

Importantly, the same risk exists in any situation, where an identity is enrolled as the trusted source of identity data. It doesn't matter if that identity is enrolled in a large database within a bank or on a phone, like with the Apple 5s or Samsung S5 or even the FIDO Alliance deployments.

Now, there is different jargon to describe this vetting of the applicant, some call it identity proofing. Bad data in equals bad data out. If you don't know who you are enrolling in the service, you might be enabling a fraud and the marketplace is beginning to understand this and is looking for alternative architectures, because of what has been done, there is nothing to solve this problem.

We happen to know a lot about these alternate architectures. In fact, some might suggest, we are the alternate architecture. Thus the second key focus for BIO-key is offering a cloud security platform based on our WEB-key product line. Importantly, this is exactly why we partnered with Experian, and I'll discuss that in some detail later on in the call.

It's also exactly why we have designed our technologies and systems to exist both on the device and in the cloud, where a large database would exist. One important aspect to vetting the applicant is to ensure that the applicant is not already a customer, potentially under a different name or other falsified identity information.

Well, quite frankly, this type of identity proofing is effectively impossible without a system design with a phone as the primary source of user identity, and yet biometrics are deploying on the device first. And those that advocate this have gained much attention in notoriety. That leads me to our third focus area, which is mobility and highly accurate on-device technology, and we are making great progress in that space, as our relationship with IDEX and InterDigital and others continues to develop.

While we've see some interesting behavior in the biometrics in mobile industries within the context of these risks associated with identity proofing and weak authentication, what's interesting is that the primary sponsors promoting various device-centric architectures like PayPal and the FIDO Alliance architecture, appear almost dismissive of security vulnerability concerns sited within their promoted architectures.

After the Samsung S5 fingerprint sensor was spoofed within 24 hours of release, PayPal's reaction was to shrug shoulders and point to other identity features that offset the fingerprint vulnerability. Within the last couple of weeks, however, additional written articles describe how PayPal's two-factor authentication systems are also actually quite weak and vulnerable. Again, they shrug.

It all bets the question, why? Why wouldn't an entity like PayPal seem to care more about security vulnerabilities? Well, is it possible that the early adopters of biometrics like the phone manufactures and FIDO stakeholders are actually more concerned with promoting user convenience than with user identity security?

You know one of our strategies for 2014 is to raise our visibility and establish BIO-key as a thought and opinion leader. We've been in the media, introducing some novel concepts lately, and have also been working with the analyst who are the so called authority on these types of things, including Gartner.

Jay, this morning is on the call from San Diego, where he is attending The Gartner Catalyst Conference. And he's been interviewed by various analyst, who were very interested in our Experian relationship, how it came about and why. One point we've made is a concept of associating risk with the user authentication transaction.

Now, of course, people have been talking about risk-based approach to user authentication for years, suggesting that a lower risk profile transaction can be secured with less stringent security measures. Our core Multi-Factor Authentication Solution or MFAS built in collaboration with InterDigital supports this concept.

Inversely, high-risk transactions demand the use of more stringent security features. It seems to make intuitive sense that Multi-Factor Authentication Solutions have been around for sometime, generally promoted by the single sign-on vendors like RSA, VeriSign, Entrust and others.

We used to think, the new industry revelation about risk isn't about that, it's about risk distribution. It's about who takes the risk assumed in an identity authentication transaction. Different authentication system designs distribute the risk differently to different stakeholders. So the new revelation ask, how is the risk of an authentication system distributed, how is that risk paid for and by who?

Well, recall PayPal shrug and the rhetorical question of why. The new revelation is about security disconvenience, and the distribution of risk in the system might give the PayPal shrug more context. Maybe PayPal cares more about convenience than security. Mobile vendors like PayPal generated fee every time somebody buys something, so maybe mobile payment vendors are motivated by higher transaction velocity rather than security. Security encumbers transactional velocity, if it's frictioned.

Now, I point out that PayPal co-founded the FIDO Alliance, and the FIDO Alliance has been pretty steadfast in its device-centric approach to convenience. It's curious that FIDO has been pretty quiet since its first major rollout, where the fingerprint was spoofed and some of the architectures vulnerabilities were exposed.

But here, I'll take it to a different level. Now, you have noticed that banks haven't been first in line to deploy biometrics, neither have banks embraced FIDO. Well, if our hypothesis is correct that mobile payment vendors like biometrics for convenience, shouldn't banks pursue biometric convenience also, maybe, but maybe not. Are mobile payment vendors' banks? No.

Banks have not jumped into the mobile payments business either. Why is that? Don't we intuitively associate payments with banks? Well, let's examine some of the basic differences between banks and payment vendors. Mobile payment vendors use your credit card to secretly buy the things you tell them to buy. I mean not to oversimplify that, break it down, isn't that what e-payment and mobile payment vendors do. So why don't banks?

Well, maybe because mobile payment vendors and banks view risk differently. Banks prefer security to convenience because of the risk profile of the transactions inherit in their business. It's almost absurd to imagine a major U.S. bank shrugging after its newest security feature was hacked. I think we'd all conclude that the bank would see its deposits decline.

It's the bank security integrity that makes the bank viable. In fact, it's the same perceived security integrity that makes the banking system viable. So to question the security of a banking system is to question the integrity of the broader economy. So banks view the tools to guard access to bank's services and systems differently than how mobile payment vendors view the tools that guard access to their services and systems, and it changes the way security-minded organizations like banks invest in security technology.

It also affects the sales and deployment cycles as well. Believe it or not, the industry is just starting to get its communal brain around this concept. So given that context, we can show why one industry is quick to deploy in secure identity authentication systems, while another has not yet started. And so we discussed over the last year, biometrics will deploy solely, and that deployment will evolve over time as the market's demand emerge.

Now, recall my earlier comments about the need for proper identity proofing. Well, Experian is pretty good at identity proofing. In fact, identity proofing is core to their business. One could argue that Experian is a global leader in identity proofing. They do this in 40 countries today.

And further recall that the industry is still figuring out, what problems it needs to solve. Well, one problem is a desperate need of a solution, authenticating the user once that user's identity has been proved. Its one thing to know it's me, when I apply for a credit card; it's another thing to know it's me, when I try to use the credit card.

Attaching the user's fingerprint to the user identity profile, when the user's identity is proved, would lock the identity to the user from that point forward. As I mentioned before, clean data in means clean data out. Well, this is the idea behind our agreement with Experian.

So let's talk a little bit more about our relationship. I'd love to tell you that the announcement was a revenue producing announcement. Unfortunately, today it's not. However, we could not produce any revenue from the Experian relationship without this agreement, because Experian needed to vet our technology. They conducted their due diligence on us before agreeing to partner with us. This agreement deems us safe to do business with, for all Experian companies around the globe.

But now we are permitted to engage various Experian companies to provide our technology for their needs, and presumably as those needs arise we will generate revenue. In fact, today we are working closely with Experian companies on projects that could produce revenue for us in the future.

This is important because organizations that are actually concerned about security like banks are now starting to consider biometric deployments. We are involved in several discussions with various banks about how they might use biometrics in our solutions. More specifically, we are currently participating in the bidding process for some bank procurements solicitations.

Most importantly, if there is any takeaway you need to glean from this, neither Apple, nor Samsung, nor FIDO, do what these banks require. Moreover, most fingerprint sensor companies are excluded from these solicitations, because their technologies simply cannot do what is required, but ours is designed for it.

BIO-key products were designed for this segment to the biometric space, so one would think that if this segment to market is starting to explore biometrics, than our pipeline must be growing. Of course, the pipeline must grow before the revenue and bookings can incur. This is why we started providing pipeline data in our guidance, so you could see it start to grow. And it is growing very quickly right now.

Next, I'd like to share some comments about the quarterly results. Q2 results were disappointing. On the topline, some deals we were confident in fail to materialize. The revenue shortfall was not a result of competitive losses for the most part. Some opportunities slipped out of the quarter and some of those landed in Q3. However, it is noted demand for our products is rising. Our opportunity pipeline has exploded and with the right kinds of customers.

Since the Q1 report, our pipeline has doubled in value including several large bank related opportunities. New opportunities require support and resources. Expenses rise as demand grows. So our expenses grew, while our revenue struggled. So we're examining our processes and implementing more conservative forecasting and budgeting guidelines. For example, as we consider Q3, we have noted that our booked revenue has already basically doubled last year's total Q3 revenue.

We can have a very high confidence in booked revenue and had taken that into view and into our guidance that we're projecting. Moreover, we're tuning our project management and budgeting processes. This should also tend to control variances. And we hope to show progress along those lines of Q3.

On other fronts, we continue to gain traction in our channel development initiatives. We signed several new integration and reseller partners, and all this is to continue to build the funnel. Moreover, we did win several contract awards with new customers. Much of that is at healthcare, which continues to heat up.

There are new federal and state regulations in place that mandate two factor authentication for doctors and other healthcare professionals that creates demand for our systems. We have hired two new sales reps to further penetrate the U.S. healthcare market, and of course, we are working on a few banking related procurements, as I mentioned before.

Now, before I turn to the future, I'd like Ceci to provide a brief summary of the numbers, the details of which can be found in the P&L and balance sheet we provided along with our earnings release early this morning. Ceci?

Cecilia Welch

Thank you, Mike. The total revenue for the three months ended June 30, 2014 was $402,788 compared with Q2 2013 revenue of $422,257, a decrease of approximately 5%. Sales fell largely as a result of lower license sales and expected orders slipping out beyond Q2.

Q2 2014 gross margin decreased to 60% from 78% in Q2 2013. Operating expenses for Q2 2014 increased 58%, quarter over quarter, to $1,366,000 from approximately $867,000 in Q2 2013. Net loss for Q2 2014 was approximately $1,026,000, which increased from Q2 2013 net loss of approximately $555,000.

Total revenue for the six months ended June 30, 2014 was $1,770,311, compared with the first half of 2013 revenue of $1,226,900, an increase of approximately 44%. The first half 2014 gross margin increased to 84% from 83% for the first half of 2013. Operating expenses for the first half of 2014 increased 45% year-over-year to $2,710,000 from approximately $1,862,000 for the first half of 2013. Net loss for the six months ended June 30, 2014 was approximately $1,325,000, which increased from the first half of 2013 net loss of $870,000.

Liquidity and Capital Resources. The company reported cash, cash equivalents including accounts receivables of $902,000, as of June 30, 2014, as compared to $1.9 million at March 31, 2014. BIO-key has no long-term debt. And the shareholder deficit of approximately $235,000 at June 30, 2014 compared to Q1 2014 shareholder equity of $730,000.

And now, I'll turn the call back over to Mike.

Michael DePasquale

Thank you, Ceci. Now, we should discuss our future, including Q3 2014 guidance. Last quarter, we reiterated our view that our pipeline opportunities are often large and hard to predict. Given our Q2 results, I think we should reiterate this once again. While it's still lumpy, but the opportunity and potential order flow is growing in both size and in frequency.

In other words, we are growing right now. Demand is increasing, but it presents itself in more large orders rather than lots of small orders. Of course, the single large order can really impact individual quarterly results, simply because of their relative size. This trend will continue for sometime potentially throughout the year, but will smooth itself over time.

It will smooth primarily as we increase the number of sales channels, penetrate them more deeply and grow such that individual orders become relatively small compared to our overall size. As noted, we started the quarter with a total sales pipeline of roughly $15 million -- we started the year with the pipeline of about $15 million. However, our pipeline currently stands at approximately $30 million.

For clarity, the opportunity pipeline is in total value of deals we could win within the next 12 months. Pipeline is not backlog. We expect second quarter revenue to be between $800,000 and $1.2 million. This range reflects the more conservative approach to guidance and budgeting. We expect gross margin above 85%.

We further expect to generate operating profit with incremental revenue above approximately $1.5 million. Our headcount remains at about 20 employees, plus a number of contract developers that we have working on very specific projects. We anticipate adding more resources incrementally in both sales and R&D, through the course of the year, as our business evolves.

As you can see at this point, our business appears to be ramping. We are very encouraged and expect this trend to continue. We believe we are prepared for hyper growth that we hope is beginning in 2014 and will continue well into the future. I'd like to personally thank our very patient shareholders and friends.

And now I expect many of you will have questions for us. So operator let's start the Q&A session.

Question-and-Answer Session


(Operator Instructions) Our first question comes today from [ph] Dan Chemis, a Private Investor.

Unidentified Analyst

Is $1.4 million in OpEx the new normal, going forward?

Michael DePasquale

I believe that it will hover in that range. I also believe that it would be lower in the third quarter. We had a number of one-time expenses in the first half, things like recruiting expense, and unusually high number of marketing events that we attended in the first and second quarters, early second quarters. So there are number of one-time expenses, so I would expect that they will be lower, but given the demand, as I described in a number of the larger opportunities that we're pursuing, our expenses maybe slightly higher.

Unidentified Analyst

I don't quite understand how you're using the term, incremental revenue. Your guidance is for $800,000 to $1.2 million, but the release and I think you just said, incremental revenue above $1.5 million. Can you clarify that for me please?

Michael DePasquale

I believe if you take -- obviously, Ceci can answer this, but if you take revenue of $1.5 million and you assume an 85% gross margin, and you spend about $1.3 million or $1.4 million, that's how you get to the formula of profitability.

Unidentified Analyst

Is there a particular area, where the pipeline grew?

Michael DePasquale

We're seeing really nice activity in the financial services area. And as I described, and I spent probably even too much time in my prepared remarks talking about that, is there's a really big difference between what we see in mobile payments and on the whole mobility sector and the banking sector. Our banks are deeply concerned about security and consumers are deeply concerned about protecting their ID and more importantly protecting their assets.

And what we're seeing is that banks are finally getting that and starting to see that. And the convenience factor of incorporating advance security technologies is a big challenge for them. Passwords are great and can be secured, if you make them 14 characters and you change them every 30 days. And you don't tell anyone or post it anywhere or leave it available for some one to hack.

So again, I think banks are starting to really come around. And so we're seeing a lot of activity in that area. The other thing is that we hired a new Senior VP of Sales, Jim Skidmore, and our intent and goal and objective there was to build our channels.

We've signed a robust number of channel partners on board, those who focus in the IBM, CA, Oracle, security infrastructure area, and we now are starting to get them productive. So we're going to see that business as we get to the second half start to really make itself as well. So it's kind of distributed, but we're definitely seeing some serious interest in the banking sector.

Unidentified Analyst

Can you say how may potential customers that $10 million increase includes, just to get a feel for how many customers you're talking about?

Michael DePasquale

I don't have that number off the top of my head. I can tell you that a fair portion of that, that chunk of incremental pipeline is larger projects, so multi-million dollar-type projects. So it's not with 50 customers, it's with the handful.

Unidentified Analyst

Let me ask one more here. When would you expect a rollout of Precise ID?

Michael DePasquale

Well, interesting. We're working on a number of projects with Experian, one of them in particular where the integration is already complete. And I would expect as we get to the end of this year, in the beginning of next year, there's a good chance that the product will be ready for sale and could be purchased by customers.


Our next question comes from [ph] John English, another Private Investor.

Unidentified Analyst

My question is about the news recently from IDEX about winning the first touch fingerprint sensor design for Asian company. Is there anything you can tell us about that?

Michael DePasquale

Yes. I can share a little bit about our relationship with IDEX and maybe an update as to our activities in the last quarter. As you know, we signed the license agreement with them in the first quarter to couple our software with their sensor technology. They are evolving and beginning to introduce product to the market. So it's starting to happen for them.

We are also doing some advanced development work with and for them. Some of which they're funding actually beyond the license arrangement we have. And so we're going to see our collective solutions enter the market as we evolve through the end of this year and the beginning of next.

And in that space, they never disclosed who the player is and what it's all about. So I can't basically make any comments in that regard, but certainly IDEX has sensor technology that's ground-breaking, very inexpensive, very high-quality, and couple that with our software for not only the device, but they also share the philosophical view of the cloud and doing both on device and cloud-based authentication. So I think we have a really nice opportunity ahead with them. And I would expect that business to start to ramp in 2015.

Unidentified Analyst

Well, they just had a webcast this morning, it was 30 minutes, and it was excellent and they had great slides up there, and that's really good for anybody that's interested, and BIO-key or IDEX to go out there and listen to that.

Michael DePasquale

I'll have to go out and I'll -- They are really good people. We have a very, very good working relationship. Hemant Mardia is their CEO. He and I, we're working together for quite some time. And our technology resources and theirs are working very closely together on some innovative things.

Unidentified Analyst

Yes, it was really good. So I would recommend it to everybody. Next question, I was surprised that NCR wasn't mentioned at all in the second quarter?

Michael DePasquale

Yes. The NCR order, John, was actually a Q3 order. So I didn't want to focus too much on Q3. I really just tried to stay focused on Q2.

Unidentified Analyst

Net expansion on those stores, are they the same stores that we have serviced before, they are just increasing the order or are there some new retail businesses involved in that?

Michael DePasquale

It's a combination of both. Their business has actually accelerated significantly. And since Radiant Systems was acquired by NCR, obviously they have a much bigger footprint. And so we're seeing existing customers expand more rapidly and we're seeing them sign on new customers as well. But they're shipping a considerable number of units per month now, way more than they have in the past. So that business is surely moving in the right direction.

Unidentified Analyst

But can anyone tell us about any of the new stores that they might be going into besides Wendy's and Arby's? Didn't they do Dunkin' Donuts there also under Radiant Systems?

Michael DePasquale

Yes. They are very big in the convenience and the best food industries. I can't disclose their new customers, but the ones that we talked about are obvious, and have been out in the public markets.

Unidentified Analyst

NCR also recently announced a deal with PayPal and Jamba Juice. PayPal is going to be integrated on the NCR POS terminals or something like that or in the ALOHA software or something like down there. [ph] B and NCR is connected to that. Are we by any chance in connection with PayPal on that arrangement?

Michael DePasquale

Well, we're integrated into the ALOHA software platform and their POS hardware devices as well. So if that customer chooses to turn on the biometric capability, then we are their exclusive provider. So again, it really all depends on that particular customer and what they purchase, but we are part and parcel of the standard within NCR, and that whole product line.

Unidentified Analyst

NCR is also getting, of course, I guess they've always have been into ATMs for banks, but recently I think they got a Brazil order Rio banks are going biometrics on their banking. Is there any discussion at all with NCR about using BIO-key biometrics on their ATMs?

Michael DePasquale

Very much so. And when I mentioned banking in my prepared comments, it was not just online banking or thinking about someone sitting at a PC or a computer or tablet computer using biometrics to access their accounts, it really is through the ATM network. And NCR has a very big footprint there, have a very good global footprint. And unfortunately, not in the United States, but in the international arena, fingerprint biometrics, in particular, are being integrated into ATMs like wildfire. And so we definitely have a very serious interest in that space and you'll hear more from us in the future.

Unidentified Analyst

AT&T retail stores, I always ask this question to really get an update on that. I also sort of want to get an idea, how BIO-key would be used, if they are being used in that area? I mean, would it be on mobile devices on the floor, would it be the POS, Apple point of sales terminals, can you tell us maybe more about that?

Michael DePasquale

Well, we've been in that space for a while with AT&T. They've used our technology at their retail stores for point of sale access, right, for employees. And if you go to the Michigan Avenue store in Chicago, you will see that they have extended beyond the point of sale terminal.

They actually secure all of the cabinets that house the mobile devices inventory with biometrics. So the store clerk must put their finger down to open a specific cabinet, to pull a device for a customer. That was build as kind of a model store that they will rollout across the country going forward. So that's very, very big opportunity for us.

We also have a series of other projects going with them, which will expand our footprint within their company, including utilizing biometrics for internal access, enterprise access purposes for all employees. So they've been an account that we've been working with for a quite some time. And they also utilize the IBM, ICM platform, and so we have a nice direct integration to that. And so I think our business is going to expand nicely within AT&T, but right now in the stores we have a pretty good footprint.

Unidentified Analyst

Well, things are really sounding good to me. The Army bid thing or proposals, I guess you guys are putting into that?

Michael DePasquale

Excuse me, I didn't get that.

Unidentified Analyst

The U.S. army, they're asking for proposals or bids or something about biometrics just recently?

Michael DePasquale

Yes. The army and the DoD, in general, as you know has a very strong interest in biometrics. In fact, the bulk of the biometrics that have been deployed through the years was really deployed in the government space. And so they continue to look for innovative new things and technologies. As you know, we don't sell anything direct to the government, right.

We work through the system integrators who, generally speaking, hold the contracts for any of these specific areas and that's still is our pathway. We work through the channels and the integrators, who would be delivering solutions to them. So for sure, we're visible there. We play there, because again of our presence in the FBI and DHS, and U.S. Courts, those kinds of things, so we will continue to participate where it makes sense.

Unidentified Analyst

Really, one real quick. The U.S. Army has posted a Sources Sought request seeking information from businesses for market research purposes to help the agency design and develop an emerging biometric authentication system sounded like right a BIO-key job.

Michael DePasquale

It certainly is, as you know WEB-key is a very, very unique and robust product, that as I detailed in my comments, it's perfectly in this whole new emerging authentication ecosystem and when you couple that with the potential to incorporate applicants and identity proofing, as what we can do with Experian, you really start to see the whole ecosystem come together. And it's very unique. No one in the industry today is doing that. And no one architecturally has the technology to be able to do that today like BIO-key.


Our next question comes from [ph] Matt Chambers, a Private Investor.

Unidentified Analyst

I'm wondering if you think you're going to need to raise more money here soon and approximately how much? Could you give us a little color on that whole process?

Michael DePasquale

We do not have any plan in motion today to raise capital. But as you know, we've raised, over the last year we raised approximately $6 million to fund and fuel our initiatives. And as the market is growing and emerging you can see, even this quarter, in particular, we got a little bit ahead of ourselves, right. So we spent certainly ahead of the revenue. So we're always cognizant of that. But at this time, we have no plan in motion with our board nor are we in any discussions with any investors to raise any capital.

Unidentified Analyst

And on a different note, I have noticed some BIO-key advertisements in different websites now. Have you had any results from that, any actual sales?

Michael DePasquale

That's a good question. I'm sitting here with my Vice President of Marketing, Scott Mahnken. And we put together back, actually under the recommendation of the board in Q1, an SEO program in place to raise our visibility, not only on the web, but electronically in general, to increase the blogs and the social media outreach that we've been doing. And believe it or not, we're seeing very, very good results.

We just reviewed that at our board meeting on Thursday. And considering that we're not spending a huge amount of money, I'm talking couple of $3,000 a month. We have just increased our visibility tenfold. Jay Meier, who is on the call here, and as I mentioned is out at the Gartner Conference has been blogging, and again creating greater visibility for us.

Jay is one of the perceived experts in this space in credentialing and he's doing a terrific job, again, at spreading the word evangelizing our company. Jim Sullivan, our Vice President of Strategy and Development is doing the same. So yes, our marketing department has really begun to take the bull by the horns and we're starting to see good results from the efforts that we've expended over the last quarter and you're going to see even more in the near-term.


Our next question is again from [ph] Dan Chemis, a Private Investor.

Unidentified Analyst

I'd like to do a follow-up on the IDEX win. Is it safe to assume if IDEX wins, BIO-key wins, or are you not involved in their first generation product?

Michael DePasquale

Some of what they had in motion before we arrived at the scene, we're not necessarily directly involved. Everything that goes forward in the future, their new thin film polymer sensors, which I believe is really the core of their IP, and what they will be offering in a big way is where we're engaged with them.

So we're currently under development of a very highly accurate smaller size sensor algorithm that we'll be able to match. Let's put it this way, far more accurately than what you see today on an Apple 5s or a Samsung S5. That's the easiest way that I can answer that question.

Unidentified Analyst

Is that what they're calling their second generation or is the second generation the embedding last version, and this is just a follow up first generation version?

Michael DePasquale

I don't specifically know their nomenclature, but I would assume that what you just said is accurate. So the second generation, a thin film polymer sensor, that will be available for placement in the device anywhere versus what could be placed onto the glass. The beauty, again, about their sensor is that it's flexible. It's like a plastic. It's not silicon. So it's very inexpensive to build. And it's very, very accurate. I mean we really like the images that come off those sensors. So we think they have something very innovative. Packaging will be small. Power consumption will be low. And with our software, the matching will be incredibly accurate.

Unidentified Analyst

Is CrucialTec, are you working with them or are they competitor or what's the story? Because, obviously, they're working with IDEX.

Michael DePasquale

They're a little of all of that. CrucialTec is a contract manufacturing company. So they build, for example, they built packages, so a finger biometric sensor package that can be embedded, they call it a module, right, that can embedded in a phone. They have other businesses as well.

So at times, we partner, because obviously they're working with some of the sensor manufacturers and we are working with them as well. But on the other hand, they developed their own product, which is silicon based, which I think is early generation and maybe something that's in the market for a little while. But I don't know about their long-term efficacy.

Unidentified Analyst

Is this deal with Experian, somehow a catalyst for the pipeline growth you're seeing or are there any factors?

Michael DePasquale

You know, it's interesting. There is a very strong connected possibility with the work we're doing at Experian. I spend a lot of time in the prepared comments talking about this, and think about again enrolling in for anything. If you don't validate or prove, who the individual is to ensure that they're valid and viable, then you don't really have a true trusted source enrollment.

So any of the work that we're doing, for example, with the banks, could benefit from the proofing services that Experian makes available. And as we connect the dots, as we integrate our products and solutions and technologies together, I think there is a tremendous opportunity going forward, very, very big opportunity going forward.


Our next question comes from Edward Schwartz of Schwartz Investments.

Edward Schwartz - Schwartz Investments

In reviewing some of the filings over the past couple of years, I noticed that the Board of Directors and I know it recently changed. But the members of the board don't have any shares or stock in BIO-key. Is the board aligned with shareholders?

Michael DePasquale

Well, first of all, you're right about two things. Number one, our board has changed. We brought three new board members on the team in the first quarter. So that's for sure the case. I can't answer for anyone personally in regards to them acquiring or not acquiring shares. That's their personal desires or non-desire, that's up to them. I do believe that in the past, Tom Colatosti, who was our Chairman, and myself as a board member, have acquired shares.

So I think for the most part, I would have to say this board is very aligned with shareholders. We're just settling in. We had our second meeting just this past week, and they were starting to really organize. We've got all our committees organized now. And more importantly, this board is engaging directly with our management team.

Edward Schwartz - Schwartz Investments

So just to recap what you just said, you have one board member, yourself, who currently own shares and has bought shares?

Michael DePasquale

I can't, again, speak for those other board members.

Edward Schwartz - Schwartz Investments

Well, according to your filings, other than auctions, they don't own any shares.

Michael DePasquale

And again, I have to check this out and we'll ask Ceci to do that. Ceci is our CFO, who is on the call with me. But I believe that Tom Gilley had purchased some shares or I saw something like that over the last quarter. But again, I believe that to be the case, but it's not.

Edward Schwartz - Schwartz Investments

I think the message that I'd like to convey and I'd like you to convey to the board, if the board has not taken any risk, how can their interest be aligned with shareholders? I just think its corporate governance to do that.

Michael DePasquale

Ed, thank you. And I will certainly be sure that message gets back to the board. Thank you very much.


This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Michael DePasquale

Great. Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our third quarter financial results for 2014. Thank you very much. Jay?

Jay Meier

Thank you for participating in the BIO-key International 2014 second quarter conference call. As a reminder, this call will be available for replay and will be available beginning one hour after the completion of this call until 9:00 AM Eastern Time, September 15, 2014. The replay may be accessed by calling 877-344-7529 in United States or 412-317-0088 internationally. The access code for the replay is 10045178 followed by the pound key. Thank you.


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

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