Jay Meier - VP of Corporate Development Michael DePasquale - Chairman and CEO Ceci Welch - CFO.

Orin Hirschman - AIGH Investment Partners Dan Cammis Ed Schwartz - Schwartz Investments Irene McGrath.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International, Incorporated fiscal 2014 third quarter conference call. (Operator Instructions). As a reminder ladies and gentlemen, this conference is being recorded today November 13, 2014.

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

Thank you. Good morning, everyone, and thank you for joining us today for our fiscal 2014 third quarter financial report conference call and webcast. With me this morning are 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 for Q&A. This morning BIO-key issued its fiscal 2014 third quarter 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 the completion of this call. The replay may be accessed by calling 877-344-7529 in the U.S. or 412-317-0088 internationally. And the access code for the replay is 10055289 followed by the pound key.

I'd 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 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..

Thank you, Jay, and welcome, everyone. And thank you for joining us for the BIO-key fiscal 2014 third quarter report conference call. We're glad to be here today to discuss our most recent results. Q3 was a good quarter and very much improved from the previous one. The industry continues to emerge and we are emerging with it.

Our sales have been a bit volatile this year and in Q3 we benefited from the volatility with record Q3 revenue that exceeded our expectations. Further while our pipeline remains robust and we forecast a respectable Q4 and fiscal year, we remain emergent and potentially volatile.

And so we are applying disciplines to manage our fresh working capital and operations as efficiently as possible in preparation to the day when market demand requires all available resource and bandwidth. We think that 2104 could be the best year in BIO-key's history as a standalone biometric vendor.

But as the industry emerges and our channels develop, we continue to see our opportunity horizon improve and so we have several tings to discuss. As always I'll start by framing our presentation of envision for the industry, its emergence and in particular how it's changing.

Now I'll put some color on our Q3 results followed by CC summary of the financial details. Then I'll provide a little more context for our Q4 guidance and finally will open the call for Q&A. It's no secret that biometrics and more specifically finger biometrics are beginning to go mainstream with consumers.

With Apple first introducing Touch ID and more recently Apply Pay, one of the first payment offerings in the market to include finger biometrics, consumers are clearly accepting the ease-of-use and convenience that finger scanning provides.

Also, the deployment of finger scanners on Samsung devices, as well as many other about to be introduced smartphones and tablets indicate there is no turning back to passwords and pins as multifactor finger biometric authentication will dominate the landscape for identity and access management across both the enterprise and consumer markets.

Although the largest segments of our economy serve the consumer, it is the enterprise that makes available virtually all products and services that consumers purchase and utilize in their everyday lives.

Securing the enterprise that has access to significant amounts of consumer data, protects both sides of the equation and it is our mission and objective to provide the most advanced, flexible and secure technology to do exactly what I just described, protect identities and access to critical information, as well as secure higher risk transactions.

Although Apple has devices that include biometrics they don't comply with required standards in US Healthcare for example. The US Drug Enforcement Agency regulations require advanced user authentication for doctors to write prescriptions and fingerprint biometrics metrics are beginning to flourish in that vertical.

However hospitals and doctors cannot use an iPad or an iPhone to write prescriptions, because the Apple platform doesn’t comply with the required standards. Therefore US healthcare is a niche if we could call it an niche that we can and do exploit without worrying about Apple or Samsung (indiscernible).

In fact there are other verticals we pursue where Apple does not compete. My point here is that we cannot allow ourselves to miss forest beyond the single large Apple tree. We focus primarily on large markets where barriers to entry exists and where our technology is differentiated and that strategy is starting to bear fruit.

Our tactics to develop the US healthcare market channels are starting to produce. Our partners are starting to bring us hospital system deployments, and today we have over a hundred healthcare related deals in our opportunity pipeline. Further, we want to a couple of deals in Q3 and feel confident on many for Q4 and beyond.

We estimate the finger biometric market in North America for healthcare can grow from under $200 million in 2014 to over a $1.5 billion in 2020. So as you might expect, we have made the North American healthcare market one of our top priorities.

It's interesting to field questions about Apple and the mobile handset market, it's interesting because so often these questions presume that Apple and Samsung somehow represent virtually the entire global biometric marketplace as Jay and I have been speaking to many people about that.

While nothing could be more incorrect, in fact the size of the market for finger algorithms in smartphones is really not very big at all.

To kind of example that, let`s assume that Apple has shipped 150 million iPhones with fingerprint sensors, believe it or not, while the fingerprint sensor hardware cost a few bucks each, the software to drive each sensor is measured in cents, not dollars.

We're focused in the segment through our relationship with the sensor company such as IDEX and most recently Next that will be using our software for inclusion in sensor packages that they make available to their handset and tablet OEMs as well as to other device manufacturers that will be part of the Internet of things, which is an even bigger market.

A sizable opportunity, but nowhere near the potential that our enterprise business provides. As you know, we are starting to see banks pass for biometrics, recall our last conference call where we discussed the differences between mobile banking and mobile payments, where banking is interested in security and payments is interested in convenience.

Where the iPhone and Galaxies of the world along with the vital alliance are about convenience, not security, but they don't pay for security and thus we have seen those stakeholders shrug when their fingerprint systems were hacked. This is why the mobile handset market is pricing the way it does. They value throughput not security.

Again however, recall that its banks are starting to inquire about my biometrics and we disclosed that our opportunity pipeline grew from about $15 million to $30 million over the last 90 days. After these bank, just three of them, offered procurement solicitations for fingerprint biometrics.

Three single bank deals for fingerprint biometrics that we can participate in and are pursuing that are valued at roughly $15 million. Those banks pay for security and thus our relative value in banking is far greater than payments. So consider this. Those three bank deals are for single use fingerprint applications in a single geography.

Now how many other fingerprint applications exist at those banks and in the same geography? How many other banks are in that geography? How many other geographies? What about other highly regulated industries? You can do some simple extrapolation to see that the relative values of the mobile handset opportunity absolutely pales in comparison to server based opportunities in highly regulated industries.

The server based opportunities for fingerprint biometrics are deploying after the device based sensor markets. However they are measured in billions of dollars annually, not millions. Therefore our strategy's focus is on deploying server based platforms to highly regulated industries including healthcare and bank.

As I mentioned above, we also have a strategy to deploy handsets. We have partnered to supply our algorithm to two independent sensor hardware manufacturers. However this is more strategic for us to facilitate cloud server based opportunities than tactical to drive handset related revenue.

Those partners will include our Webkey client along with our algorithm in their sensor systems. The algorithm allows to match prints on the device as within the Apple's system which is a nice little business.

However the client allows the secure release of the biometric data from the phone and to the network and the cloud which facilitates a server based transaction more like those we described in highly regulated industries. That's a very big business.

Importantly, neither Apple or Samsung or Fido or anyone in the Fido alliance can do the server based applications like we can and that's obviously good for us. Next I'd like to share some comments about the quarterly results. Q3 results were solid and very much improved sequentially.

It was the best Q3 showing in our company's history with sales growing approximately 195% our sales were pretty evenly spread between healthcare, OEM and strategic partnerships. As we noted, demands for our products is rising. Our opportunity pipeline has exploded over the last 90 days and is holding steady at about $30 million.

Though we are building a new value added reseller or bar channel, this completes a three tier sales platform that we will continue to grow and Apple will grow with our opportunity pipeline. New opportunities require support and resources, yet expenses held relatively flat sequentially despite substantially higher revenue.

This is the direct result of the budgeting process and the cost containment programs that we've implemented. That being said, our working capital has remained somewhat light. Subsequent to the end of Q3 we raised roughly $1.4 million from existing shareholders through the conversion of existing warrants.

This minimizes dilution and supports our working capital requirements for our growth initiatives. During the quarter we landed deals from new integrator partners and with new customers. We also picked up additional business from existing customers.

NCR expanded the utilization of BIO-key's fingerprint authentication solution for POS terminals with their retail customers including Arby's and Wendy's. We entered in strategic agreements with NEXT Biometrics Group.

This partnership will focus on opportunities for mobile authentication using our software and the distribution of low cost, high quality fingerprint readers. We secured a contract to provide software to a leading provider of health insurance in Austria. This opportunity was introduced to BIO-key through an international IBM reseller.

We established a second joint customer with healthcare integration partner HealthCast, providing finger authentication for accessing electronic records for a leading hospital. We received a purchase order from Allscripts customers, to provide fingerprint authentication for accessing electronic records.

We further continued with IDEX for the development of a small sensor correlation algorithm to pair with their upcoming product offerings. During the quarter we also launched two finger sensor offerings, called SideSwipe and DASH.

The two new products are offered at price-points 50% less than traditional fingerprint readers available in the market today which we believe will facilitate enterprise adoption. And also I think it's fair to say that we executed well in Q3 both on the sales and operational front.

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

Ceci?.

Thank you Mike. Total revenue for the three months ended September 30, 2014 was $1,283,847 compared to Q3 2013 revenue of $431,576, an increase of $197%. Sales grew largely as a result of higher license sales in addition to higher service revenue. Q3's 2014 growth increased to 81% from 76 in Q3 2013.

Operating expenses grew third quarter in 2014 increased 20% to $1,315,000 from approximately $1,094,000 in Q3 2013 and were sequentially flat. Net loss for Q3 2014 were $51,526 which decreased from Q3 2013 net loss of $782,544. Q3 2014 earnings per share were less than $0.01, a loss of a $0.01 versus Q3 2013 earnings per share of a loss of $0.01.

Total revenue for the nine months ended September 30, 2014 was $3,054,158, compared to $1,658,476 for the same period ending September 30, 2013, an increase of 84%. For the nine-months period ended September 30, 2014, gross margin increased to 83% from 81% the same period in 2013.

Operating expenses for the period increased 36%, year over year, to approximately $4,024,000, from approximately $2,957,000 in 2013. Net loss for the nine months September 30, 2014 was $1,377,026, or $0.01 per share, which decreased from a net loss of $1,652,963, or a loss of $0.02 per share, for the period ended September 30, 2013.

The Company reported cash, cash equivalents, and accounts receivables of $798,753 as of September 30, 2014, as compared to $902,578 at June 30, 2014. And now back to you Mike..

Thank you Ceci. Now we should discuss our future including Q4 2014 guidance. Last quarter we reiterated our view that our pipeline opportunities are often large and hard to predict. Given our Q3 results, I think we should reiterate this once again. The opportunities typically pursue can often exceed several $100,000 in value.

The timing of the recognition of such orders can materially impact quarterly results, both negatively as well as positively. Therefore we continue to recommend evaluating our progress over a longer period of time. This trend will continue for some time but we'll smooth this out 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 $30 million and our pipeline currently stands at just under $30 million.

For clarity, the opportunity pipeline as the total value of deals that we could win within the next 12 months. Opportunity pipeline is not backlog or bookings. We expect third quarter revenue to be between $1 million and $1.7 million.

This range reflects the more conservative approach to guidance and budgeting that does include any one single potential large order or contract that may be awarded prior to the end of the year. We ended Q4 with solid bookings expected to ship during Q4; therefore we have high confidence in the low end of that guidance range.

We expect gross margin to remain at around 85%. We further expect to generate operating profit with incremental revenue about $1.5 million. Our headcount remains at about 20 employees plus a number of contract developers. We anticipate adding more resources incrementally in both sales and R&D through the course of next year as our business grows.

As you can see at this point, despite some volatility, our business appears to be ramping. Year-to-date our sales have grown 84% over 2013 and we are tracking towards a record 2014. We're 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 well into the future. I'd like to personally thank our very patient shareholders and friends. And now I expect you all have questions for us. So operator let`s start the Q&A. .

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Clearly there are a number of components. Most importantly, it’s the regulatory drivers. It’s the fact that electronic prescribing now is beginning to be mandated across the States. We saw it mandated in New York.

This year by March of 2015 all prescriptions that are written must be electronic and given that they have to be electronic, they need to be authenticated to doctor, the physician, the physician's assistant needs to authenticate with multifactor authentication and biometrics is one of those factors.

So it's clearly the regulatory drivers that are really accelerating the business. The second is that our partnerships are maturing. We have some very, very good marquee customers like the Cleveland Clinic and Nationwide Children's Hospital and Xoma [ph] Health and Genesis Health, Rady's Children's Hospital in California.

So that's Epic and Allscripts, the big EMR providers are starting to really get on board. Their sales reps are recognizing that we have been successful, BIO-Key biometrics have been successfully deployed and given that they can generate incremental sales revenue on their paper, we're starting to see that kind of have an effect.

So it's coming together nicely for us..

The new mandates have been out there for a while.

Is it just a matter at the time now that rush is finally on because they waited and they waited and they waited?.

Yes for example in New York, there were hospitals under tremendous pressure to get this deployed by the end of March. The state is not going to wave the deadline this go around.

But what I think is driving it more than anything else is, there's always been a need to access a patient record securely and multifactor authentication has been required that in some instances, where it's absolutely mandated is e-prescribing and that is kind of a new wave that the DEA and each of the states and the Federal DEA are really driving.

So I think that's what's changing things right now, it's really more along e-prescribing that's driving biometrics. .

And our next question will come from Dan Cammis. Go ahead please. .

I couldn't quite tell, are the warrants adjusted on their reverse split or will they be sold at $0.15, can you give that split?.

No, everything will be adjusted (indiscernible) after the split. So, everything gets equally adjusted, warrants, primary shares, everything is adjusted after the split, the reverse..

And is it going to be one for two or is it just the minimum?.

No, it looks like it's going to be one for two and the simple facts around that are really to maintain liquidity in the stock. What investors want and what we believe is critically important is they are focused on two things, right. The share price and also the liquidity.

Even if we were able to affect a more significant reverse ratio, it still wouldn’t get us other than doing something astronomical; it wouldn’t get us to another exchange or another level without drying up liquidity.

So for example, if we only had 10 or 15 million shares outstanding, there is a good chance that we have tremendous volatility in the share price and again liquidity would dry up. So we don't want to do that. We think our business will grow.

We think that we have opportunity to create, increase and enhance valuation and I think we can do it at this level. The two for one gives us clearly the potential to not only facilitate this transaction, but also to ensure that we can fund the company going forward, should we require and it be necessary for us to do that.

So reducing the -- or I should say reducing the number of shares outstanding that fit with under the authorized share account is very important for us in the near term. .

Do you have any kind of timing on it now?.

Yes, we are going to move forward with the reverse immediately. So stay tuned if you're a shareholder you'll be receiving a package I would think in the next 30 to 60 days. .

Okay. Find Biometrics reported that you guys purchased 75,000 NEXT readers.

Are you selling those currently? Have they been delivered and can you tell us how your -- how the sales of readers you’ve got a few readers now you're selling, is that actually a growing business or is that to be the?.

Actually that's a business that we see growing but more importantly we see providing a full and complete solution including these readers as a way to catalyze our software business.

So, what customers are looking for is one throat to choke, they are looking for a supplier than can provide them the sensor, the software and the services integration to their applications. Developers are looking for that as well. We have purchased sensors from NEXT Biometrics. They have a very large placement sensor which is very inexpensive.

We purchased the sensor modules and we will be putting them in a package and making them available in the market likely towards the end of this year. So that's underway right now. This is going to be a revolutionary device with revolutionary pricing. And that will be again available as we get to the end of the year beginning of next. .

And our next question will come from Ed Schwartz of Schwartz Investments..

You talked both last quarter and this quarter about sales opportunities. I think the last quarter you said you had a backlog of like 10 million in sales, opportunities.

If my memory is correct, how much of that backlog in the Q3 did you convert into actual sales?.

Ed, let me just clarify. We talked about pipeline, not backlog..

Yes sales pipeline backlog. Okay, we're on the same page..

Okay, so pipeline I think we said that our pipeline was about $30 million when we held our last call and our pipeline is approximately the same. It's about 29m. We converted over a $1 million in our pipeline in the previous quarter and that's reflected in our financial results. So it's very consistent. .

Okay and what do you expect to convert this quarter?.

Well our guidance which I just described and what's described in our press release were for us to generate between $1 million and $1.7 million in revenue and that's exclusive of any one single large opportunity that may or may not close the fourth quarter.

So you can look for us to convert somewhere between $1 million and $2 million of that pipeline in the fourth quarter. .

Okay. And just from a consumer point of view and a personal point of view, I just came from a trip to Europe, only to find out that someone had gotten my credit card and had wiped out my bank account.

How can I -- and most of this was on online purchases, how can I force my bank to have a biometric on my computer whenever there is an online purchase to -- so that there is no credit card fraud. .

Yes, that's a very, very good question and something that we obviously have a very strong interest in. We've mentioned not only in our last call but I mentioned again that t we're involved in a number of banking opportunities which will include finger capability at the ATM so there would be ATMs that actually have finger scanners in them.

There will be finger scanners in the branches at these banks and they will ultimately allow and include finger capability for online banking. So it is something that's evolving. I hate to say it, but its evolving internationally faster than its evolving here in the US. But I have a feeling that you're going to start to see that turnaround.

In fact Jay Meier, who's our VP of Corporate Development had a lot to say quite frankly especially as it relates to payments and banking and maybe I'll just let him make a comment here as well. But it will happen in the US, just a little more slowly than international. .

All right and do you have an international presence to take advantage of that market?.

Clearly we do. We don't directly -- as you know we've done a lot of international business through the years.

We do it through credible partners and the integration partners that or technology partners that we're working with in these countries generally are very large players have significant presence, significant resources and capability to deliver projects to again (indiscernible). So that's the way we do business on the international front..

(Operator Instructions). Our next question will come from Matt Chambers. Please go ahead, sir. .

Quick question about IDEX, as far as I remember, they were on -- they were set to release their new technology first quarter of next year.

Is that still planned? Can you comment at all on that?.

Yes I can. Actually I commented on it also point you to their website. They did their earnings call quarterly report yesterday and (indiscernible) who was their CEO did a very eloquent presentation on their -- on the status of their products and so far, so good.

They are tracking to first quarter 2015 to be sampling their first placement sensor and also their swipe which will include our software. So it appears that they are tracking right now and helping to those commitments. .

And InterDigital and AMD, we haven't heard anything about them lately specifically.

Do you have an idea of approximately when you expect revenues from these two?.

Yes, let`s take them separately. InterDigital, we continue to work with InterDigital. We have as you know develop, call it a high level solution, multi-factor authentication platform, single sign-on platform for the mobile market with them and we continue to evolve that.

So our engineering teams are continuing to work together and we are in process of figuring out our go to market strategy and exactly what and how we're going to take that product to market. So that's in place and in motion and we still have a very, very tight closely coupled relationship.

AMD, we are in the process of affording and you're going to hear more on this from us and maybe in a formal press release. We are in the process of porting our software to the TrustZone or Trustonic secured elements platform which will be part and parcel of the AMD deployment.

So all of that is evolving as well and our technology folks are engaged in that right now. .

So InterDigital, they have their product as finished, you're in it, you're just about ready to launch, is that right or?.

I can't say that it's finished but its evolving. And it's really evolving because some of the standards are changing, we want to make sure that when we do go to market that we meet all the market requirements. So we're still evolving again with our engineering groups.

But again we'll be at the -- we'll be at all the big events next year discussing that product and we have already discussed that particular product with some very, very large players. So it's not as if we're not selling it today, but I think we'll be much more aggressively pursuing the market in 2015 with that product. .

And we do have a question from Irene McGrath..

Mike this question is for Jay, just off of Mr. Schwartz's segment with regards to how the international markets are developing faster than ours in that certain vein.

Could you elaborate on that Jay as Mike you said, Jay might be able to?.

Sure, there is a couple of things going on internationally. First of all, some of the infrastructure that exists internationally is not quite as sunk as the infrastructure in the United States so that you don't have to accommodate a huge fixed investment necessarily in something and navigate around that.

In other words, you don't have to -- you may not have to rip out a high valued network in order to or other technology to accommodate a new infrastructure.

Secondly and maybe even more importantly, culturally the United States values individual privacies and things like that, other countries don't have that same cultural stand on that and so biometrics tends to emerge a little bit more quickly there.

And thirdly it is starting to happen in the United States, but as Gartner pointed out in their Digital Banking Services Hype Cycle, it's just entering the marketplace, but we're definitely seeing activity in the United States and interest. The sales cycle on these things can be a bit long.

There is a lot of engineering; there is a lot of questioning because the risks are very high in banking unlike payments. But it's definitely happening..

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Are you seeing or who are you seeing showing up as competitors in healthcare market now that's reaching critical mass?.

The competitors in this space are some of the single sign-on vendors where to some regard they are competitors but they are partners. So for example Imprivata is a company that most recently went public. They IPOed recently. They have a single sign-on platform and they have a biometric solution that goes along with it.

Unfortunately its inferior, it doesn’t meet the minimum standards and so it gives us an opportunity in these hospitals to compete for the biometric component of their overall deployment. We don't really see anybody else in any significant way especially with our key partners, with Epic and Allscripts who are really two really big players.

We're not seeing anyone else that fundamentally could mean as a competitor to us. Generally speaking, when biometrics are requested or required, we're getting the call and we're engaged in the deal which is why as I described before, we've got over 100 pipeline opportunities in healthcare right now in our portfolio this quarter. So it's significant. .

Okay.

What about competitors in the ATM market if that truly heats up?.

Well keep in mind that the ATM like for example NCR ATMs will include finger scanners in them. But that's part of an ecosystem. It's not software are matching fingerprints on the ATM. It's matching the fingerprints back at the enterprise back on the server, whether it comes from the ATM or the branch or at home, it doesn’t make any difference.

So the competitive nature of that -- the banking industry itself won't come from matching on the ATM. That is a pure enterprise solution and we have a very, very strong position when it comes to enterprise finger technology and you and patents to move the biometrics from device to the cloud. So that's an area where we are very, very strong. .

One last question, the pipeline growth, did it stall or do you think 29 million is where it will stay or it grew pretty fast there for a couple of quarters. This is the first ever it's stalling here in the quarter.

So is there a reason for that or do you expect to continue to grow?.

No I think we continue to expect to grow. I think it grew very quickly because of those banking opportunities that we discussed. So they were significant and they are bigger deals, so the pipeline grew more significantly. As you know things come in and things come out and that's going to happen virtually every quarter.

But I would expect that our pipeline is going to grow -- continue to grow in a significant way over the next year for sure. .

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Thank you for participating in today's call. We hope that you will join us again for our next conference call to discuss our fourth quarter and full fiscal year 2014 results. .

Thank you for joining our conference call. As a reminder, this call will be available for replay one hour after the end of the call and it will be available for 30 days. The replay may be accessed by calling 877-344-7529 in the United States or 412-317-0088 internationally. The access code for the replay is 10055289 followed by the pound key.

Thank you..

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