Scott Mahnken - VP Marketing Mike DePasquale - CEO Ceci Welch - CFO Barbara Rivera - COO.

Bob Schnell - Dougherty Gary Sironen - Private Investor Richard Pew - Pew Investment Counsel.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International Third Quarter 2016 Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] After the speakers' remarks, you will be invited to participate in a question-and-answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, November 15, 2016. I would now like to turn the conference over to today's host, Scott Mahnken, BIO-key's Vice President of Marketing. You may begin, sir..

Thank you and good morning, everyone. Thank you for joining us on today’s call. With me this morning are Mike DePasquale, BIO-key's Chief Executive Officer, Ceci Welch, BIO-key's Chief Financial Officer; and for the very first time BIO-key's newly appointed Chief Operating Officer, Barbara Rivera.

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, projects, 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 complete description of these and other risk factors that may affect the future performance of BIO-key International, see Risk Factors in the Company's Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company also undertakes no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made. At this time, I'd like to turn the call over to Mike DePasquale.

Mike?.

Thank you, Scott, and good morning everyone and thank you for joining us today.

While our third quarter results fell below expectations we're encouraged by the progress we've made in building out our hardware distribution infrastructure as well as the growing number of new prospective customers we've engaged that we expect will contribute to our expanding pipeline of revenue opportunities.

Because purchase and implementation of our software products typically depends on the decision making of the various layers of our customer senior management, the sales process for our solutions can be difficult to predict and could be held up at various points along the way.

Contracts that we felt confident would execute in the third quarter have not yet closed, though virtually all of them still remain promising opportunities for BIO-key. One of the reasons for contract delays has been a dynamic shift in the marketplace from perpetual licensing to subscription or software-as-a-service recurring revenue based model.

A few of our largest contract discussions have asked for this model and we’ve developed appropriate pricing for them to consider as an alternative to our perpetual license plus maintenance model. Ultimately we view this development as good news for BIO-key.

As a software-as-a-service or SaaS model provides more stable and recurring revenue streams for our company. These revenue streams have the potential to deliver greater total revenue and profits from our software than from our upfront perpetual license approach.

However the near term impact on the business from such agreements is to reduce first year revenue by as much as two-thirds, but providing ongoing more stable and predictable revenue streams that are preferred by most investors and provide a basis for potentially higher long term valuations.

We're choosing to embrace the growing preference for the SaaS model at this time, as we also do continue to offer our software on a perpetual basis. We also believe that in offering a SaaS based model we'll substantially increase the scope of opportunities for our services by significantly reducing the initial upfront costs to deploy our technology.

However I must reiterate that any transition we experience in moving to a SaaS model, will and can adversely affect our near term revenue while improving the longer term stability and visibility of our software sales.

Given the slower than expected pace of software development year-to-date combined with our expectations for our growing preference for the SaaS model, we are reducing our 2016 revenue guidance to a range of $3 million to $6 million, which implies revenues ranging between $1.7 million and $4.7 million for our fourth quarter 2016.

As a complement to our core enterprise software business, we have focused on go-to-market strategy on three pillars. One is enterprise outreach both direct and VR channel partners for our software and cloud base solutions.

The second is leveraging our Microsoft partnership and growing base of enterprise and consumer distribution to drive sales of our fingerprint reader hardware solutions. And third, supporting our bundle or OEM sales via partners who are leveraging our software and hardware technology to deliver strong authentication solutions for their applications.

This partner approach is historically been one of our strongest channels, but in order to drive expanded sales growth we have built out two new key areas of sales and marketing engagement.

We feel confident in the outlook for our enterprise sales opportunities as we have been commissioned to pilot our device and cloud base authentication platforms ID Director and WEB-key with major U.S. and international enterprises.

Major initiatives include pilot testing of our WEB-key secure biometric authentication solution with a leading global retailer with over 2,000 locations nationwide. The perspective customer offers the potential to install our technology in all of their POS systems to secure system access within their 300,000 employees.

We’ve also been invited to pilot authentication software with a multinational biotech company, as they are looking to enhance network log-on security for their 17,000 employees. Additionally, a large correction facility has requested to pilot our biometric solutions to secure PC access for over 5,000 inmates.

The problem there attempting to solve with fingerprint biometrics is the trafficking of access passwords within the prison present population that are then used for unauthorized Internet access.

Internationally, we are piloting our multi-factor authentication software with a major Asian telecommunication provider as well as a potential pilot for a leading retailer also in Asia. These initiatives are direct consequence of our expanding footprint in Asia.

Turning to our fingerprint reader marketing partnership, Microsoft has been very supportive in promoting our products through several collaborative marketing efforts, some that are underway and many in developments for the coming months.

There is a very clear synergy between our companies, as Microsoft is keen to highlight the built-in biometric security capabilities of its Windows 10, Operating System and BIO-Key’s high quality value price line of fingerprint readers to support the 100s of millions of devices that lack a built-in finger scanner.

Further, Microsoft’s vision is to integrate biometric authentication into a broad base of mainstream applications on the web, so that users have a very convenient and highly secure avenue to log-in to B2B and B2C resources. Taking away the security vulnerabilities and cumbersome aspects of current passwords and pin authentication.

Microsoft support has included in press announcements, WEB-Key content including web-pages that feature BIO-Key’s products and joint sales and marketing efforts including the underwriting of a training video to support readers as well as sales and marketing videos to promote our products.

Select visibility within Microsoft's network of customers and partners significantly enhances awareness of BIO-key's technology. Further we've launched our hardware fingerprint readers on Microsoft's online and retail stores and we've put together an internal sales team dedicated to handling Microsoft revenue based opportunities.

To increase our hardware revenue on a global basis we've expanded our enterprise and consumer distribution relationships. To-date we've partnered with D&H Distributing, Dell.com, Ingram Micro, B&H Photo and several Microsoft bars, as well as Amazon; and we expect to add both Wall-Mart and Naval and Military provider NEXCOM in the near term.

On another front although it's taken longer than we expected, we've been refining and integrating the core software that we licensed from our partner CGG, into our mainstream WEB-key platform and fingerprint reader products. We will be introducing new security features based on that software in Q4.

We're also building our resources and capabilities to support expanded market engagement, including the appointment of Barbara Rivera as Chief Operating Office, a new position in BIO-key.

Barbara brings deep and relevant operations and management experience to BIO-key to support our aggressive move into hardware sales and marketing for both businesses and consumers. Mostly recently as President and General Manager of the U.S.

Public Sector Division of Experian North America, Barbara focused on multi factor authentication, fraud and healthcare, pivotal areas for BIO-key. She is overseeing all of our business operations with a particular focus on integrating our sales and marketing efforts to better target the authentication needs of our enterprise and consumer audience.

To give you a window on Barbara and the value she brings to BIO-key, I've asked her to provide an overview of a vision regarding some of our new product development initiatives as well as enhancements she is making to better align our sales and marketing operations.

Barbara?.

Thank you, Mike. I'm delighted to join BIO-key and have really enjoyed my first two months working with our team, partners and customers. I share BIO-key's confidence in the role that biometrics will play in bringing security, ease-of-use and lower cost to securing devices and access to network and other resources.

Although we've developed one of the most advanced and discriminating fingerprint technologies available today, the markets in which we compete have been slow to adopt these methods for a range of reasons.

My job is to address those challenges by focusing on enhancing the functionality, reliability and the integration of our current offerings into more compelling solutions. At the same time I'm working with our team to develop new and innovative solutions leveraging our core technology to meet unmet market needs.

In some cases our engineering team is working directly with our customers to design custom solutions, efforts that provide us with a significant competitive advantage.

In our view products and services targeting the Internet of Things or IoT sector represent a substantial growth opportunity for BIO-key given that the proliferation of connected devices of all types has brought about a range of security risks including some that are potentially severe.

Just recently a massive attack on a major domain name system rendered services such as Twitter, PayPal and Amazon inaccessible. The attack is now though to have stemmed from a hacked unsecured IoT device. Such access must be secured and yet passwords and pins have a myriad of challenges that could be efficiently addressed with biometrics.

We are also looking to expand the use case for fingerprints sensors by enabling them with Bluetooth technology, such innovation would build upon our technology leadership while expanding the convenience and security of biometric solutions.

In this way, we are working to fast track several new products and development initiatives including a few that we cannot yet discuss. We look to debut some of our new products and technologies early in 2017, in our own boost at the International Consumer Electronic Show.

As you may know, CES is the world’s largest trade show for consumer electronics that takes place every January in Las Vegas. Given the hardware and software solutions we have developed to directly target the consumer, CES represents an ideal platform to elevate the visibility of BIO-Key and some new cutting edge consumer solutions.

With that, I’ll hand the call over to Ceci to provide a brief overview of BIO-Key’s Q3 results before we move onto your questions.

Ceci?.

Thank you, Barbara.

Total revenues declined to 431,463 compared with 669,846 in the Q3 of 2015, this decrease reflected the absence of onetime 266,000 sales of hardware sensors to a reader manufacturer in the third quarter of 2015, as well as the decline in the service revenues principally due to the absence of special software development service revenues in the quarter.

Third quarter 2016, gross margin increased to 60% from 44% in Q3 of 2015 principally due to a more favorably revenue mix. And Q3, 2016 operating expenses rose 5% to 1.4 million compared with to 1.3 million in Q3 of 2015, principally due to increased R&D expenses related to new product development.

BIO-Key’s third quarter net loss to common shareholder increased to 1.3 million or a loss of $0.02 per share compared to a net loss of 1.1 million or $0.02 per share in Q3 of 2015. Revenues for the nine months ended September 2016 was 1.3 million versus 3.6 million for the period in 2015.

Our software license revenue decreased approximately 2 million principally due to the single large software order in 2015. Hardware sales decreased by approximately 177,000 or 29%, however with the removal of the onetime sensor sale in 2015, hardware revenue actually increased approximately 90,000 or 25%.

BIO-Key’s net loss to common shareholders was 4.3 million or $0.06 per share in the nine month period ended September 2016 compared to net loss of 1.3 million or loss of $0.02 per share in the nine month period ended September 2015.

The higher loss is primarily attributed to the large software order and one-time sensor sale that occurred in 2015 without comparable order in 2016.

As Mike referenced earlier, due to the delays that we've experienced in converting several significant opportunities into revenues so far for 2016 combined with an expected growth in interest -- in SaaS model license sales we've lowered our 2016 revenue guidance to a range of 3 million to 6 million.

As in the past our estimated annual breakeven revenue rate remains at approximately 7.5 million based on hardware to the software sales mix.

Finally subsequent to the quarter's close, BIO-key agreed to raise 1.8 million in an equity private placement with BIO-key's director and lead investor, Kelvin Wong, at an above market price of $0.30 per share with no warrants. As mentioned in our press release, Mr.

Wong’s follow-on investment demonstrates his strong support and confidence in BIO-key and the company's prospects for growth and improving financial performance. And now operator let's start with the questions-and-answer session..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes today from Bob Schnell with Dougherty. Please go ahead..

I was just wondering you guys paid 12 million bucks yourselves for a software license I believe last year from the Chinese company, wondering if you've seen any traction in make any sales or utilizing that license.

And then also if you could walk me through some of the changes on the balance sheet in terms of how you're accounting for those license rights as well as some changes in accounts receivable?.

So, first I mentioned in my prepared remarks that we are continuing to refine and integrate the software that we licensed from CGG and that will be brought mainstream into our WEB-key products and also our line of fingerprint readers, so there are some security features and functions that we'll be selling and marketing along with both our hardware and our software products and you'll see some of that come to market in the fourth quarter, so stay tuned for that.

And so, in terms of the way we've accounted for that, I'll ask Ceci to answer that question because we moved some of the value of those licenses from short term to long term, but again I'll let her answer that question. And then any other questions that you might have on the balance sheet. So why don't I just turn that over to Ceci..

So, in line with what you're saying, we moved some of the license value down into non-recurring based on owning the license rights for the first year, it took us some time to integrate a lot longer than we had anticipated the licensing into our mainstream licenses.

So, therefore the delay and after along with what we have been saying, sort of the adoption of the market -- to go into market with this product, just being conservative that perhaps we wouldn’t fall as much as we thought the first year.

We have agreed with the auditors that we’ll continue to assess this as things are picking up we’ll move it, but right now we’re taking a conservative first year look at things..

In terms of the account receivable in net of current portion of 2 million that’s I guess for the license you sold last year.

Have you not been paid that money yet?.

Correct, that’s outstanding still due to some international issues with just sign-off, et cetera. We expect to fully collect it, but because we can’t get a definitive date we agreed to put that into non-recurrent versus recurrent. Again it’s just a conservative GAAP look at thing..

Can you remind me how long ago that sale was announced?.

That would in the corresponding quarter, the second quarter of last year. .

Approximately a year?.

Correct. .

Thank you. .

The next question comes from Gary Sironen. Please go ahead. .

Good morning. Can you folk shed some light on a couple of sales related questions. First of all, new customers, how many new customers where added this year. And it would seems that the amount of revenue we’re getting each quarter was about 425,000, probably indicates more maintenance quarter-over-quarter. So, is there anybody new buying this stuff.

And the second question I have is about blood banks. We haven’t heard about them in quite some time.

Does that business still exists?.

Okay. So, the first question on new customers, we’ve added -- I don’t know the exact number of new customers since the beginning of the year, but we’ve added a number of new customers. Many of them smaller, many of the customers we added were also a proof of concept to a pilot phase.

So, a small let’s say a very, very small piece paid for piece of what could be a very, very large deal or opportunity for us that we’re tracking not only for this year, but into early next year. So, in terms of our revenues it’s been absolutely very flat, very behind our program especially for the second half at this point.

But we remained very encouraged that some of these against smaller sales are going to lead to bigger sales going forward. So, that’s kind of the first piece and the first question. The second question you had Gary just repeat again for me..

Blood banks..

Yeah. Blood bank, yeah,.

We haven’t heard anything about blood bank business in probably two years now..

Yeah. Got it. We have been very stable in that business, it’s actually morphing now for us more into patient identification. So more and more hospitals are beginning to look at biometric enrollments and biometric authentication and identification for patients.

So, we have sold over 3 million licenses in the blood bank business to identity donors who again come maybe once, twice or three times a year, patient identification in the hospital was a much large population and -- has obviously a much larger population and could be utilized more frequently so our business here is stable, but we see the real future there as a patient ID opportunity going forward.

We've been working with the largest blood system in the country and they've been contemplating a -- I'll call it a pilot roll out now for quite some time, we just have not gotten to that point yet, but there is still opportunity in that market, but most of that will turn for us to be patient ID..

Two other things you did mention by the way, pipeline, what's happened with that? It was up around 30 -- I think $30 million is the last I recall, so you did mention how that pipeline is -- growing or contracting, and also what's the status on the reverse split?.

So, pipeline, our pipeline now is just about $35 million. So it's stable to growing. One of the concerns that I described in my prepared remarks is that we build that pipeline based on the gross value of the specific opportunity. As we're moving to a software-as-a-service model, the initial sale maybe lower.

But again it will have recurring potential for us going forward. So, our real pipeline is still the same as it was if not larger than it was last quarter plus we've been very conservative at predicting our hardware pipeline opportunity. Keep in mind we just went live at the very end of September with Microsoft in their retail operation.

We've been selling on Amazon for approximately two months, maybe a month and a half to two months and our sales have been doubling month-over-month, I mean sometimes in some cases, week-over-week. So our sales in the retail venue, our sales through distribution, again just starting, we just signed up and executed our contract with Ingram Micro.

We've been in place with D&H for about 30 days to 40 days, we're beginning to see the flow through the bars, they're also opening up new retail opportunities for us, for example we're going to be in B&H Photo, we're on Dell.com which is the online function for Dell, which is a very-very big business and a growing business.

So, we haven't really -- we haven't gotten aggressive yet in understanding what that potential hardware flow through opportunity could be. We also signed -- and you’ll hear more about this, we've signed two major distributors in Asia. And so in Q4 you'll start to see the revenue impact of that business as well.

And the reverse split [multiple speakers]..

Before you go to that, let me just ask, you mentioned distribution.

What kind of performance are we seeing out of the distributors that we signed up a year or a year and a half ago? [Multiple speakers] large national --?.

Avnet?.

That's Avnet. Thank you, I didn’t remember that..

Yes, we signed Avnet to represent our software at that time, remember we weren't really in the hardware business in any significant way and we've seen very-very little activity through that channel, quite frankly it's been very disappointing.

I think the channels such as again Avnet, Ingram, D&H, CBW, Tech Data [ph] are very much more interested intangibles and hardware type products and solutions, that can pull our software through, in fact one of the things that we’re working on right now with D&H is getting our software installed in their technology centers, where not only their -- especially their enterprise customers buy our hardware, but they can also buy our software.

So, we’re really looking at the channel giving us the opportunity to expand both sides of our business. So, we think that’s very important for us.

And we’re using -- in fact we hired an agent to represent us in that whole venue, someone who has vast and significant experience and expertise in opening up all of those channels and then managing all of the flow through. .

Okay.

Is that a manufacturer’s rep that’s doing that?.

I would call them -- they might have been in a traditional sense a manufacturer’s rep, I’d call -- they’re a kind of a master dealer or agency that has deep connections with all of the channels.

So, for example can you imagine what it would be like for us to try to go to Best-Buy, Walmart, Target all on our own and try to twiddle our way into their procurement process, it’d be almost impossible. So, these are the folks that had that expertise on a national and international level. .

Okay. You and I have had this discussion for probably the last 10 years or maybe five years regarding how we go-to-market in terms of sales force. And I think we have discussed manufacturer’s rep agencies to take the lead role in developing new customer opportunities.

Is there any renewed consideration of that? And how many sales people do we actually employ now directly to develop our sales channels or develop customer sales?.

Yeah. Well, so that’s two questions. The first is absolutely, our new distribution arrangements that we just described, we expect to do that for us. So, that’s a sales force multiplier. Having those folks on board who are then also nurturing the channels really gives us incredible reach in depth and breadth.

It takes energy and initiative on our side to train them, bring them up to speed, we go to all kinds of meetings, we’ve been investing consumable amount of time, money and energy to get them productive. So, that’s going to happen and that’s already part and parcel of our strategy.

And I think our hardware was really the catalyst for starting and creating those relationships. Those people, again we’re the tangible with the product, it makes it much easier to get them engaged.

On the direct side, on as far as our company internally sales go, we have five people who are selling or supporting sales to our enterprise and our partner customers.

So, we’re dedicating resource to our Microsoft relationship where we think we have tremendous upside and opportunity not only to sell through our hardware products, but also to sale through our enterprise software to their basic customers especially there small, medium sized customers, who desperately need multi-factor authentication solutions for their infrastructure.

So, we think that’s a big -- and that is a big push for us. We have some dedicated resource focused on healthcare where we have a very good base of the accounts and we think there is a lot of upside for us going forward.

We’ve signed a number of new accounts over the last year, and we think that’s going to continue to grow and having deep relationships with the EMR, EHR providers like Allscripts and EPIC and others are very-very important.

We also have an inside sales person who focuses on and manages the lead through -- the lead generation opportunities manages the small and medium sized opportunities in the most efficient manner that we can.

And then we have two outside folks who are handling enterprise customers and then I have the resources handling distribution with me and I'm kind of splitting my time in building this channel and I have half of the resource also focused on that as well..

Is there an OEM component, or OEM strategy that we're working at this point?.

Absolutely, one of the strongest and most consistent, I'll call it customers that we've had, or handful of customers we’ve had have been the OEM type customers.

Like NCR or Mikasin where they've embedded our software years ago, I mean NCR we've been doing business with now probably seven years, Mikasin equally the same and it's just again the gift that keeps giving.

Because they've embedded our software into their core product and it's included in each and every one of their sales or in the case of NCR, not every single POS terminal they sell, but most of them..

Can I assume those make up most of the 425,000 that we're getting in the last couple of quarters?.

No, in fact the NCR the last -- what we do is we generally get -- we're taking order from NCR on an annual basis and I believe Ceci can correct me if I'm wrong, but we add about a $400,000 order from them Q4 of last year, so that could be coming up soon. And Mikasin is pretty consistent across time.

They have kind of episodal ups and down but generally speaking we generate revenue across the year from Mikasin. So that's included in those -- in the numbers. So Mikasin is, NCR is not..

How about FBI, is there anything new happening there and any opportunities with e-Verify and some of these major immigration programs?.

I guess we'll see, we have a new President who may take a whole new look at securing the borders as he claims and it'll be interesting to be -- in fact our industry organization which I'm the treasurer of the International Biometrics and information industry association has been heavily involved in promoting border security with biometrics.

So it'll be interesting to see what this new administration does and what perspective they take with the e-Verify with the boarder security, I think it'll be good, but that remains to be seen..

So the last point, I think we didn't cover is that reverse, is that still on the table?.

Yes, it is. We had a Board meeting last week and it is definitely still on the table, it's something that's important for us for two reasons, number one, we're at the ceiling in the context of available shares to finance and fund the company going forward and so we need to do something obviously to ensure that we have the currency available.

And number two, I think as we claimed and as we explained last year when we made the announcement and issued the proxy, our goal and objective to this to seek a NASDAQ listing.

We think especially at this point in time with the diversity of our product offering especially on the hardware side right now that there is a significant opportunity for us to attract institutional investors, to attract strategic capital and so, being on a more credible exchange we think is very, very important for us.

So, the answer to that question is yes on the reverse, and definitely we are pushing and we’ll be pursuing the NASDAQ up listing as we describe to investors as year ago. .

Okay.

So that would mean we need to get about $3 a share, which means we’re probably looking at 12 to 1 reverse?.

We don’t really know, we haven’t set yet the ratio, we have the ability and had approved in the proxy anywhere from 1 to 12. So, we’ll see where we wind up, there are various ways to achieve the NASDAQ listing. There are three or four different scenarios, one has an initial listing price of $2, another one is $3.

So, it really depends where we qualify and what we -- where we land in the context of those -- meeting those objectives. We’re working on that right now..

Okay. Great. Well, thanks for taking my questions. I appreciate it. .

You’re welcome..

[Operator Instruction] The next question comes from Richard Pew with Pew Investment Counsel. Please go ahead. .

Disappointing quarter, but I think its short-term pain for long-term gain. I really like the idea of your moving to a subscription base or software as a service model.

Do you have any -- well since we’re in the fourth quarter, have you acquired any new clients using that methodology to this point?.

Most of the -- by the way thank you for your question, Richard. Most of the customers that we’ve acquired obviously, it’s pretty obvious through the beginning of this year has been very small.

So, no significance larger customer yet has been brought into the boat, but we’re highly confident in at least our short-term pipeline that there will be those types of opportunities ahead of us in the near-term.

So, I think that’s very, very important and also and maybe I’ll just give Barbara a kind of second to maybe comment on this as it relates to the subscription economy. But that seems to be the direction that the world is moving, and most of our larger customers had always been asking for site licenses.

They wanted to be able to have an unlimited sealing, and not have to worry about counting heads. But now they’re like everyone else, thinking about cash outlay, initial expense and would much prefer to go with the SaaS model. But, Barbara I don’t know you have any other comments on that, I think it might be a good time to speak up. .

Sure. Just a very quick comment. Thank you, Mike I appreciate it. As many of you probably know the term that you use now is that corporations are moving more towards a subscription based economy, it’s more predictable for them. The way that they post the expense on their books is different. So it’s not looked at as a capital expenditure.

And they can budget for it in a more predictable manner. So, I’m very pleased that we’re able to offer our customers now, and our prospects, a SaaS priced model, because that is what they've been asking for. So, thank you Mike..

So, you haven't seen any new customer signing on for this yet, is that correct?.

I would say we've had some smaller customers, but anything significant which would be in the high six to seven figure range, not yet. But we expect that to happen..

One other question, on the consumer use of your fingerprint readers, the hardware.

Is that simply to sign on to their own computers, is there any extended use so that they can get into a website without using a password, have you gotten that kind of arrangement setup yet?.

So, the answer to your first question which is, can they use the hardware to sign on to their device? The answer is absolutely yes..

Of course..

Under the Windows 10 framework there's a product extension called Windows Hello. And Windows Hello allows you to replace the pin or the password that you use to access your device, so that's pretty simple and basic. Under Windows Hello there are two versions, there's Windows Hello and Windows Hello for business.

That's the Microsoft extension that's going to lead enterprises to the capacity to eliminate their passwords. Most of the functionality to extend the use of the biometric beyond just device access is yet pending to be released by Microsoft.

So to answer your question, that capability is absolutely going to be there and it's going to be there shortly and that's what drives the value proposition for our hardware and even our software for technology going forward.

But they've been a little bit slow, Microsoft is a little bit behind in introducing all of that capability with their new browser called Edge, but that is pending and should be in the market soon..

So, just to be sure I understand, would that mean that each individual website that was being accessed with your fingerprint reader software and the fingerprint identification, would that each website have to purchase your software?.

No, so the way this will work is Windows Hello on your device itself on your PC or your tablet will allow you to replace your passwords with a biometric. So it'll release a token that will in essence emulate your password for access to that particular website or web portal.

So, it's all going to be contained within the Microsoft framework and the idea here for Microsoft is that they don't have to share or potential move the biometric from the device up to the cloud and back. So, as Microsoft strategy right now is a very device centric strategy we will fit very nicely into that.

On the other hand our enterprise customers, our larger customers want the ability to do exactly what you just described. They want the ability to ensure that an employee or a contract or an individual who is accessing their site is able to match their biometric from their device up into the cloud on a server.

So, we kind of go both ways, but as it relates to Microsoft and getting into your bank account or getting into your social media account, any of those things, those will all be contain within the Windows 10, and Windows Hello framework. .

All right. Thank you..

You’re welcome,.

[Operator Instruction] The next question is a follow up from Gary Sironen, a Private Investor. Please go ahead. .

Mike, can you also share some thoughts on the banking industry. What’s going on there, how do we penetrate it? What kind of strategy we’re looking at. I look at all these banks and I have to log-in with numbers and passwords and everything. And I guess I’m trying to figure out why the banks are so slow in adopting a fingerprint reader.

How we do go after that market, what -- who takes the charge for developing that industry?.

Yeah. That’s a great question. First of all, we in -- outside of the U.S., so not in the U.S. but outside of the U.S. especially in the third world, banks have been using fingerprint technology for quite some time. So, we have a very large bank in South Africa, Capitec Bank that has 7 million customers enrolled.

And that utilizes our biometric for access to their account. So, if you go to a branch, you put your finger down to identify yourself, you don’t just show up with your driver’s license or your account number.

They’re doing the same on the ATMs right now as well, so that you can walk up to an ATM, not only will you have a card, but you use your biometric and you get access to your account. So, it’s been used in the third world, which very difficult to identify individuals for quite some time. So, it’s been there. Now, let’s look at the rest of the world.

We’ve been engaged, heavily engaged with a couple of very big banking opportunities, one of them was a very formal process. Formal RFP, 20 or so or 30 people from this bank engaged around the world where they were planning to introduce a biometric option for their employees, so replacing passwords with a biometric option.

And unfortunately, that process came to -- we were down selected actually, one of two vendors that they were going to pilot, pay pilot and they decided to basically put that project on-hold because of some issues with Brexit and other external things that happen with them.

We’ve been involved in a number of scenarios like that, where banks have started, they’ve discussed, they’ve looked at, they’ve talked about doing it, but yet no one has really pulled the triggers.

So, we’re front and center when it comes to especially cloud based and server based biometrics, we have the preeminent premier solution for that particular use case. But, as you say banks are very, very slow to uptake on this technology, they’re accepting a touch ID off of your iPhone which is not security.

But, again it’s the -- it’s kind of the infrastructure change that’s required is what’s really holding them back, that’s what I think. That’s my opinion. .

So what is there big concern, and you mentioned for them, I guess employees for banks. I’m talking about maybe even beyond that, the customer. I go to my bank and I want to login to my account, I have to punch in numbers. I want to get that so I can swipe my finger and enter my bank bill pay system and things like that.

So, where is -- do we have a sales strategy to get there, have we tried sampling all these banks and getting them to try the product and prove to them it's value to their organization?.

We have, we have Gary. I have to tell you, we have been engaged with many-many banks. Small, medium and large, not just again the little ones where you may say the sale is a little bit easier.

The infrastructure change and their concern about adding a layer of authentication that might confuse their customers, in my opinion today is what's holding that back. We had a conversation at our Board Meeting last week and this goes beyond banking, this is just across the Board.

As you know there is an incredible awareness at all levels within enterprises for cyber security and protection and so those things are being discussed and there's a lot of lip service being paid to chief security officers who have to go to the board, who have to be responsible to ensure that their enterprise is protected against hacks and threats from really all over the world today.

And I'll tell you what we're finding, we're finding that there is a lot of discussion and there's a lot of lip service paid to what needs to be done, but when it comes to funding it, it's questionable and if it’s something that again requires a significant capital outlay or changes to the way they operate or adds in any way expense, it really does get debated and kicked around a lot.

I think that companies today are taking the path of least resistance which is why you're seeing a lot of the mobile two-factor authentication solutions get adopted.

So utilizing your phones as a second factor of authentication, the problem is that's not security, that's number one, and number two, the use cases for those scenarios are kind of limited. So for example right now at AT&T in their call centers, they've about 75,000 or 100,000 employees I don't know which number, but somewhere in that range.

You can't bring a phone as an employee into the call center because the last breach they had, someone was screen scraping and taking photos of customer records and ultimately going out and selling that information.

So, there are used cases where biometrics are really the only logical option for multi-factor authentication and there are other used cases where again this mobile venue is right now in play. I think the world is going to move to biometrics, and we believe that, our Board believes that.

I think we see that that inevitable need will be met, but it is taking much-much longer than we ever imagined it would..

Well clearly, I think we’ve been talking about this for the past five years and it seems like it’s still in its infancy. Thanks again for the follow-up..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mike DePasquale for any closing remarks..

Thank you very much and thank you all for joining us for our call today. We look forward to updating you on our fourth quarter and full year progress later in February and March. Thank you very much everyone..

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