bkyi initiation sep 21 2016 final

Transcription

INITIATING COVERAGE (September 21, 2016)
BIO-key International, Inc.
(OTCQB: BKYI, Target Price: $0.45)
We initiate coverage on BIO-key International, Inc. (OTCQB: BKYI, “BIOkey”) with a price target of $0.45. Based in Wall, NJ, BIO-key is focused on
developing and commercializing advanced biometric identity verification
technology. We see BIO-key as an attractive growth company with an
innovative set of solutions targeting the $34.5Bn market for biometric
technology at what may be an inflection point for the industry. Biometrics
are garnering an increasing amount of attention from corporations,
governments, and consumers as an alternative to traditional passwordbased security measures. This interest is due to growing instances of data
breaches and identity theft, as well as consumers’ growing dissatisfaction
with managing complex passwords required to operate securely in an
increasingly web-based and mobile economy. Also educating consumers
on the benefits of biometric authentication is the growing distribution of
biometric readers in smartphones and the incorporation of built-in biometric
capabilities in the Microsoft Windows 10 operating system.
INVESTMENT HIGHLIGHTS
Differentiated player in large market
With a growing customer list across several key customer segments,
including healthcare, government agencies, and enterprises BIO-key is an
established player in a large and growing market. According to Credence
Research, the market for biometric technology is expected to reach $34.5
billion, globally, by 2022. While biometric security has long been thought to
hold significant promise in the technology sector, growing concerns related
to cybercrime and dissatisfaction with traditional password-based security
measures may be catalysts for broader acceleration of biometric security
solutions. BIO-key appears to be positioned to benefit from this trend, as its
fingerprint identification solutions represent a fast, accurate, cost-efficient
and secure method of authenticating the “human” behind every transaction.
Moreover, BIO-key’s technology has been validated by impressive
customers, including the FBI, Allscripts, AT&T, NCR, Cleveland Clinic and a
partnership with Microsoft as the featured biometric reader partner for
Windows 10.
Strong growth from new hardware and cloud-based products
BIO-key’s outlook supports the view that the fingerprint authentication
market may be poised to accelerate. The company grew revenues by
31.3% in 2015 to $5.3mn, and the midpoint of its 2016E revenue guidance
of $6.0mn – $8.5mn implies 37% growth this year. A large component of
BIO-key’s forecasted growth stems from its WEB-key solution, a platform
that enables biometric authentication in the cloud. WEB-key is targeted to
enterprises seeking to integrate cost-efficient biometric security measures
with their cloud-computing strategy. BIO-key is also benefitting from
strategic partners, such as its marketing partnership with Microsoft for
fingerprint readers that support the biometric capabilities of the Windows 10
OS. Given the expanding footprint of this new OS, management expects
growth from the hardware division of its business. In 2015 management
entered into a strategic partnership with China Goldjoy Group (HK:1282),
which gave the company access to capital and manufacturing capabilities
for small form factor fingerprint authentication devices – such as SideSwipe
SideTouch and EcoID. The partnership also enables BIO-key to target the
large market for biometric security solutions in Asia.
Equity | Technology / Biometric Security
Initiate coverage with a price target of $0.45
We see BIO-key as an attractive, speculative growth
company in a large and innovative segment of the
technology market.
With technology validated by
impressive customers in healthcare, government and
enterprise verticals, BIO-key seems positioned to benefit
from expected growth in fingerprint devices, which is
forecast to rise from 317mn today to 1.4 billion devices
by 2020E. The price target of $0.45 suggests potential
upside of 80.0% from the recent price of $0.25.
Stock Details (9/15/2016)
OTCQB:
BKYI
Sector / Industry
Technology / Biometric Security
Price target
$0.45
Recent share price
$0.25
Adj. Shares o/s (mn)*
131.3
Dil Market cap (in $mn)
32.8
52-week high/low
$0.31 / 0.10
* Assumes conversion of $19.5mn in convertible preferred at $0.30 per share
Key Financials ($mn unless specified)
FY15
Revenues
FY16E
FY17E
5.3
7.8
11.8
EBITDA
(1.6)
(1.7)
0.3
EBIT
(1.7)
(1.8)
0.3
Net income
(1.9)
(2.6)
(0.5)
(0.03)
(0.04)
(0.01)
FY15
FY16E
FY17E
75.7
63.6
66.2
Operating Margin (%)
(32.2)
(23.1)
2.3
EBITDA margin (%)
(31.1)
(22.3)
2.6
Net margin (%)
(35.3)
(33.3)
(4.5)
P/ Revenue (x)
6.2
4.2
2.8
EV/Revenue (x)
5.6
3.8
2.5
EPS ($)
Source: SeeThruEquity Research
Key Ratios
Gross margin (%)
Share Price Performance ($, LTM)
0.50
0.40
0.30
0.20
0.10
0.00
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Source: Bloomberg
© 2011-2016 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
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September 21, 2016
SUMMARY TABLE
Figure 1. Summary Table (As of September 15, 2016)
Share data
Balance Sheet data
Key personnel:
Recent price:
$0.25
Total assets:
17.1mn
CEO
Michael W. DePasquale
Price target:
$0.45
Total debt:
0.0mn
CFO:
Cecilia Welch
52-week range:
0.31 - 0.10
Equity:
15.4mn
CTO
Mira K. Lacous
Average volume:*
100,879
W/C:
8.2mn
COO
Barbara Rivera
Market cap*:
$32.8mn
ROE:
-9%
SVP, Sales
Jim Sullivan
Book value/share:
$0.23
ROA:
-7%
Cash/share
$0.03
Current ratio:
5.7x
Dividend yield:
0.00%
Asset turnover:
0.1x
Risk profile:
High / Speculative
Debt/Cap:
0.0%
* three month average volume (number of shares); Assumes conversion of $19.5mn in convertible preferred at $0.30 per share
Estimates
Valuation
FY December
Rev ($mn)
EBITDA ($mn)
EPS ($)
P/Rev (x)
EV/Rev (x)
P/E (x)
2014A
5.3
(1.6)
(0.03)
6.2x
5.6x
NM
2015A
7.8
(1.7)
(0.04)
4.2x
3.8x
NM
1Q16A
0.4
(1.1)
(0.02)
19.1x
17.0x
NM
2Q16A
0.4
(1.3)
(0.02)
19.7x
17.6x
NM
3Q16E
2.5
(0.2)
(0.01)
3.3x
2.9x
NM
4Q16E
4.5
0.9
0.01
1.8x
1.6x
22.6x
2016E
7.8
(1.7)
(0.04)
4.2x
3.8x
NM
2017E
11.8
0.3
(0.01)
2.8x
2.5x
NM
INVESTMENT THESIS
We initiate coverage on BIO-key™ International, Inc. (OTCQB: BKYI, “BIOkey”) with a price target of $0.45. Based in Wall, NJ, BIO-key is an
innovative technology company focused on developing and commercializing
advanced biometric identity verification technology. We see BIO-key as an
attractive growth company with an innovative set of solutions targeting the
$34.5Bn market for biometric technology at what may be an inflection point
for the industry. Biometrics are garnering an increasing amount of attention
from corporations, governments, and consumers as an alternative to
traditional password-based security measures due to growing instances of
data breaches and identity theft, as well as consumers’ growing
dissatisfaction with managing the growing number of complex passwords
required to operate securely in an increasingly web-based economy marked
by mobile computing devices.
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September 21, 2016
BIO-key specializes in fingerprint biometric technology and
related identify management / verification solutions. The
company offers a robust suite of software and hardware
solutions that include:
•
Vector Segment Technology™, a proprietary
software algorithm that extracts unique fingerprint
data for fast, accurate and cost-effective matching
and verification with records;
•
WEB-key Technology, which extends biometric
data from the device into cloud-based applications,
supporting customers with a combination of local,
mobile, and cloud-based biometric authentication.
•
SideSwipe, SideTouch and EcoID, BIO-key’s new
line of hardware products, which are small form
factor USB fingerprint readers that are compatible
with Windows versions 7/8.1 through 10 and
interoperable with other systems. BIO-key gained the capability to produce hardware through a
November 2015 strategic partnership with China Goldjoy Group, in which China Goldjoy Group
invested growth capital into BIO-key and provided access to manufacturing assets at favorable
pricing as part of the deal. Retailing at approximately $40 per unit, these devices are being sold
through OEM partners, distributors, directly to customers, and through online channels.
Biometric security has long been understood to hold significant promise as an emerging new technology.
Recently, however, it seems that this market is approaching a key turning point, shifting from a technology
deployed only in the most regulated and secure situations, to a more broadly adopted security measure in
enterprise and consumer markets. Indeed, well-publicized security breaches, cybercrime, and identity theft
have raised public and corporate awareness of the shortcomings of traditional security measures, and
further investment in new security measures is expected to follow. According to Credence Research, the
market for biometric technology is expected to reach $34.5 billion, globally, by 2022. Factors driving this
market include the shift to web-based computing and the proliferation of mobile, web-enabled devices, which
increases the complexity of securing data through traditional means.
With advanced biometric
authentication technologies, companies can quickly, securely and accurately identify the “human being”
behind every transaction.
Additionally, BIO-key
management also believes that consumers are
proving to be more willing to use fingerprint
authentication than in the past, as the number of
fingerprint-sensitive devices is forecast to rise from
317mn today to 1.4 billion units by 2020E.
In our view, BIO-key appears positioned to benefit from this trend. The company has a well-established
presence in the biometric technology market, with a record of providing advanced software solutions to an
impressive list of customers in the government, healthcare, financial and telecom markets. A few of the
company’s representative customers include telecom AT&T, the FBI, and a recently announced partnership
with Microsoft, all of which support the view that the company’s technology is robust and has been validated
by market leaders. In the short term, management has indicated that the company expects the healthcare
vertical to remain one of its strongest customer groups. Healthcare represents an attractive market for
biometrics due to the high degree of regulation related to securing patient records and e-prescriptions. BIOkey has announced several partners in this area, including Caradigm, McKesson spinoff Aesynt/Omnicell
and market leader Allscripts.
BIO-key growing rapidly with new products, partners
BIO-key demonstrated robust growth in 2015 as the company was successful in launching new products
that expanded its market opportunities in hardware and cloud applications, while adding new partners to
expand its capabilities and product reach. Indeed, BIO-key’s 2015 revenues grew by 31.3% to $5.3mn, and
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September 21, 2016
management has guided for this to continue in 2016E. BIO-key’s 2016 guidance calls for revenues to be in
a range of $6.0-$8.5mn, the midpoint of which would
imply $7.25mn in revenues, or 37% growth over
2015 levels. We believe this growth is being driven
by three primary factors: 1) Market growth as
biometric technology evolves as a secure, costeffective and user friendly alternative to passwords 2)
An expanded presence in Asia following its strategic
partnership with China Goldjoy Group; and 3) Better
success with partner-based approaches to the
market, such as its arrangement with Microsoft to be
the biometrics reader partner for Windows 10
Enterprise, and the recent distribution partnership
with Access Sales Group (ASG), a Microsoft value
added reseller (VAR) into the enterprise and retail
markets.
We are particularly enthused about the company’s partnership with Microsoft, in which BIO-key was the only
biometric reader partner for Microsoft’s “Ignite Your Business” Windows 10 Enterprise national tour. BIOkey indicated that the co-marketing relationship with Microsoft had yielded more than 800 new customer
leads, and the company has received support from Microsoft complimenting the security and ease of use of
the simplified end-user sign-in using fingerprint authentication. Initial co-marketing efforts have been
focused on the corporate end market, but Microsoft is also expected to include BIO-key product offerings in
its retail stores starting in September 2016.
According to a June 2016 announcement by Microsoft, Windows 10 has already been deployed on more
than 350mn devices, representing a large consumer and corporate market opportunity for BIO-key. Of
note, BIO-key also added a new member to its Board of Directors, Pieter Knook, who was formerly a top-25
executive at Microsoft, according to company materials. More recently, on August 2, 2016, BIO-key also
announced a new sales and distribution relationship with Access Sales Group (ASG), a Microsoft valueadded reseller (VAR) into the enterprise and retail markets, which should help accelerate the company’s
market penetration.
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September 21, 2016
COMPETITIVE LANDSCAPE
BIO-key develops advanced fingerprint biometric identification, verification, and cryptographic
authentication-transaction security technologies. This is a large and growing global market opportunity,
which is estimated to reach $34.5 billion by 2022E according to Credence Research. The market has clear
growth drivers stemming from an increase in security breaches, a proliferation of internet-enabled devices,
and consumer discontent with the growing number and complexity of secure passwords required to operate
in the modern world. BIO-key has cited its top competitors as 3M subsidiary Cogent (acquired by 3M for
approximately $950mn in December 2010), NEC, and L-1/ MorphoTrak (acquired by SAFRAN for $1.1Bn in
2010). We also believe there are a number of small emerging private and publicly listed competitors, such
as NXT-ID (NXTD), among others.
The company also faces competition from alternative biometric
technologies, such as retinal scans, facial recognition, and voice authentication.
BIO-key’s competitive strategy has been to develop high integrity software targeting access control within
highly regulated customer verticals, such as healthcare, finance, and government agencies. The company
has worked with an impressive list of customers, including the FBI and AT&T, which validates the robust
nature of its technology. BIO-key’s strategy has evolved recently to leverage the experience, customer
relationships and knowledge gained from its role as an established participant in the biometrics security
market as it seeks to address broader opportunities in the consumer and enterprise markets that are
emerging with the rising trend of cybercrime affecting consumers, businesses and government agencies,
and a growing dissatisfaction among all stakeholders with password-based security.
In the following graphic we compare BIO-key to a number of peer companies and competitors in its industry
on the basis of size and profitability. In light of BIO-key’s expansion into the consumer and enterprise space
through new products and its Microsoft integration into Windows 10, as well as the likelihood of an
increasing adoption of biometric security measures in consumer devices, we considered established internet
security vendors Symantec (SYMC) and virtual private network innovator CheckPoint Software (CHKP). We
also examined direct competitors, such as 3M/Cogent, NEC, and SAFRAN. Finally, we considered other
emerging industry participants, including Aware and ID Global Systems. As shown below, there is a wide
range of profitability, however, competitors who are able to establish a leadership position can attain highly
attractive margin levels.
Figure 2. ROA vs. EBIT– BIO-key Peers
Size of bubble indicates market cap
100%
Symantec
GrossMargin
BIO-key
75%
IDGlobalSolu>ons
CheckPoint
SoDware
AwareInc.
SAFRAN
IntellicheckMobile 50%
3MCo
Iden>v
NEC
25%
ROA
0%
-80%
-60%
-40%
-20%
0%
20%
40%
Source: Thompson Financial, Company filings, SeeThruEquity Research
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September 21, 2016
FINANCIALS AND FUTURE OUTLOOK
Recent results
BIO-key grew revenues by 31.3% in FY15 over FY14, with the company’s top line reaching $5.3mn versus
$4.0mn in FY14. Management attributed the performance to growth in its core business of licensing
software as well as new revenues from sales of fingerprint readers. In 2Q16, BIO-key reported revenues of
$0.4mn, which was down from $2.0mn in 2Q16, as the company booked a large contract in the prior year
but was unable to book revenue for several large deals that management had hoped would close in 1H16.
Management still expects these deals to close in 2016E. The company also revised its full year guidance in
its 2Q16 results announcement, and now expects revenues to be in a range of $6.0mn to $8.5mn as a result
of delays in the closing of some enterprise orders.
2016E Outlook: BIO-key guided to 2016E revenues to grow further, with the midpoint of its revenue
guidance ($7.3mn) implying 37% YoY growth. Growth in 2016E is expected to come from new sales efforts,
the benefits of the company’s relationship with Microsoft, and also the addition of a hardware revenue line.
The hardware line is enabled through BIO-key’s strategic partnership with China Goldjoy Group, announced
in November 2015.
Key Assumptions
Our model assumes growth in BIO-key’s top line, with revenues rising from $5.3mn to $7.8mn in FY16E and
reaching $11.8mn in FY17E. We have assumed continued growth thereafter, as the company should
benefit from selling efforts, its relationship with Microsoft, and hardware sales. This outlook assumes the
company is able to execute its hardware strategy, and also that license and service revenues rise from sales
efforts and a trend of fingerprint-based biometrics playing an increasing role in security relative to passwordonly security. The following table outlines the key revenue assumptions by business line in the model
through 2020E.
Figure 3. BIO-key Revenue Assumptions by Segment ($000)
Fiscal Period
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Services
1,489.8
931.4
1,474.7
2,064.6
2,622.1
3,277.6
3,933.1
Licenses
2,516.0
3,629.8
4,845.9
6,469.2
8,280.6
10,516.4
13,250.6
0.0
700.0
1,500.0
3,250.0
5,000.0
7,100.0
9,230.0
Total Revenues
4,005.8
5,261.2
7,820.6
11,783.8
15,902.7
20,894.0
26,413.7
YoY Change (%)
--
31%
49%
51%
35%
31%
26%
Business Mix (%)
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Services
37.2%
17.7%
18.9%
17.5%
16.5%
15.7%
14.9%
Licenses
62.8%
69.0%
62.0%
54.9%
52.1%
50.3%
50.2%
Hardware & Other
0.0%
13.3%
19.2%
27.6%
31.4%
34.0%
34.9%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Hardware & Other
Total Revenues
Source: STE Research, Company data
Margins / Profitability
Given the high contribution of licensing fees as a percentage of the total, BIO-key reported attractive gross
margins of 75.7% in FY15. We have assumed that license fees carry higher than average gross margins
6|Page
September 21, 2016
versus services and hardware. BIO-key should be able to maintain solid gross margin levels as it introduces
its hardware product, however, due to an attractive pricing structure with its partner. The company guided
for 2016E gross margins to come in within a range of 65% - 80% depending on the mix of products.
BIO-key reported negative operating margins in 2015 of (32.1%). Management believes its breakeven
revenue level is approximately $7.5mn, depending on the gross margin mix.
We have assumed the
company reaches positive operating income by the end of 2016E, with 2017E being the first full year of
operating profitability. BIO-key does have estimated Preferred Stock dividend payments of approximately
$0.8mn per year, which affects net income to common shareholders.
Balance Sheet & Financial Liquidity
We see the balance sheet as a key item to watch for BIO-key, given that it will need to rely on continued
access to fresh capital to fund operations and new product development until its revenue reaches a point
that can provide recurring free cash flow. BIO-key had approximately $2.5mn cash at the end of 2Q16, and
no debt. The company had an accumulated deficit of $58mn through the end of FY15, and has guided to
reaching profitability by the end of 2016E.
BIO-key management has indicated that it has monthly cash needs of slightly above $0.5mn per month to
fund operating activities, and the company also has financing commitments for dividends on its preferred
shares outstanding of $0.8mn per year. BIO-key’s convertible Preferred Stock was part of a $19.5mn
financing, which took place in 4Q15, in order to provide growth capital, expansion in to Asia, and funds to
acquire $12mn in technology licenses to be incorporated into its products. These expenses are not covered
by the company’s revenues at this time, and we expect BIO-key may seek to raise new capital during 2016
for its growth initiatives and to fund operations until it reaches profitability. Of note, BIO-key’s preferred
stock converts at $0.30 (versus the recent price of $0.25) and would increase shares outstanding to
approximately 131mn, which is the figure we used to determine the price target in this analysis.
Figure 4. Key Performance Indicators of BIO-key thru FY2019E
30
100%
75%
25%
0%
-25%
2014
2015
2016E
2017E
2018E
2019E
In USD mn
20
50%
10
0
-50%
2014
2015
2016E
2017E
2018E
2019E
-10
-75%
Gross Margin
Operating Margin
Net Margin
Revenue
Operating Inc.
Net Income
FCF
7|Page
September 21, 2016
VALUATION
We valued BIO-key using the discounted cash flow (“DCF”) method and a Peer Valuation analysis. Our
valuation, which includes a weighting from both methodologies, yields a fair value of $0.45 per share. If
achieved, the target of $0.45 per share represents potential upside of 80% from the recent price of $0.25, as
of September 14, 2016. The target of $0.45 suggests an Enterprise Value of $55.5mn, or 7.6x the midpoint
of BIO-key’s 2016E guidance of $6.0mn – 8.5mn, and 4.7x the 2017E revenue estimate of $11.8mn. While
these are high multiples, we believe biometrics is likely to play an increasing role in mobile security, which
could add strategic value to companies like BIO-key, which already has an impressive base of customers
including the FBI, Cleveland Clinic, AT&T, and Allscripts. Additionally, at 7.6x the midpoint of the company’s
2016E guidance, BIO-key would still have a valuation multiple lower than peer ImageWare Systems and
similar to established security vendor CheckPoint Systems (CHKP).
DCF
We do not expect BIO-key to generate free cash flow from its core operations in 2016E; however, as BIOkey management indicated at the SeeThruEquity Investor Conference on May 31, 2016, that the company
expects to reach operating profitability during 2016. Therefore we have modeled 2017E as being the first
full year in which the company achieves an operating profit. Our model assumes a use of working capital in
2016 and 2017, as we expect the company to invest in the growth of its hardware business. We have not
forecast large capital spending requirements for the company, due to BIO-key’s licensing model and the fact
that hardware products will be manufactured by partner China Goldjoy Group.
We discounted cash flows at a weighted average cost of capital of 15% and assumed a terminal growth rate
of 5% at the end of FY2027E to $63.4mn, as shown in the table below. We then considered the 131mn fully
diluted shares outstanding – which assumes full conversion of BIO-key’s convertible preferred stock at $0.30
per share), to arrive at a fair value of $0.48 per share.
Figure 5. Discounted Cash Flow Analysis
$000
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
FY27E
EBIT
(1,804)
271
1,175
2,433
4,527
7,300
9,209
11,700
14,555
18,040
21,440
26,483
Less: Tax
1
0
0
0
91
876
1,658
2,808
4,512
6,133
7,290
9,534
NOPLAT
(1,805)
271
1,175
2,433
4,436
6,424
7,551
8,892
10,043
11,906
14,150
16,949
(532)
(186)
403
67
728
(184)
(184)
(180)
(87)
(54)
100
40
60
40
97
167
259
356
462
564
646
714
771
821
Working capital
D&A
Capex
FCFF
(77)
(100)
(300)
(420)
(588)
(706)
(847)
(931)
(940)
(959)
(978)
(998)
(2,355)
26
1,374
2,246
4,835
5,890
6,982
8,344
9,662
11,607
14,044
16,812
0.94
0.82
0.71
0.62
0.54
0.47
0.41
0.35
0.31
0.27
0.23
0.20
(2,221)
21
980
1,393
2,607
2,762
2,847
2,958
2,979
3,112
3,274
3,408
Discount factor
PV of FCFF
Sum of PV of FCFF
Terminal cash flow
24,120
24,120
176,524
PV: Terminal cash flow
35,784
Enterprise value
59,903
Less: Debt
0
Add: Cash
3,500
Equity value
63,403
Basic shares (mn)
66.3
Preferred Shares (mn)
65.0
Fair value per share ($)
0.48
8|Page
September 21, 2016
Summary conclusions
Key assumptions
DCF FV ($ per share)
0.48 Beta
Recent price ($ per share)
2.0
0.25 Cost of equity
15.0%
Upside (downside)
92.0% Cost of debt (post tax)
11.7%
WACC
15.0% Terminal Growth Rate
5.0%
Figure 5. Sensitivity of Valuation – WACC vs. Terminal Growth Rate
Terminal growth rate
(%)
WACC (%)
0.48
14.0%
14.5%
15.0%
15.5%
16.0%
4.00%
0.52
0.49
0.46
0.43
0.40
4.50%
0.54
0.50
0.47
0.44
0.41
5.00%
0.56
0.52
0.48
0.45
0.42
5.50%
0.58
0.54
0.50
0.46
0.43
6.00%
0.60
0.56
0.52
0.48
0.45
6.50%
0.63
0.58
0.54
0.50
0.46
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September 21, 2016
Peer Group Analysis
We also considered BIO-key on the basis of a relative valuation with peer companies. Our peer group
included companies with competitive biometric products, such as 3M (through its acquisition of Cogent),
NEC, and SAFRAN (via subsidiaries L1 and MorphoTrack). We also considered small cap companies that
are commercializing or developing biometric technologies, including ImageWare, Aware, Inc., ID Global
Solutions, and NXT-ID, among others. Finally, we included security software leaders CheckPoint and
Symantec, which we see as relevant peers considering the broadening applicability of biometric security in a
variety of technologies including web-based applications. We used the average Enterprise Value / Revenue
and Price to Revenue multiples for the group to determine our price target. We excluded the largest and
smallest multiples to determine a fair average multiple, and therefore have excluded ID Global Solutions and
NEC from our group average. Using the average P/S multiple of 9.2x and the average EV/Revenue multiple
of 8.8x, we determined a fair value range of $0.37 – $0.38 per share using peer multiples and assuming
131.3mn shares.
Figure 6. Comparable Valuation *
EV/Revenue(x)
Price/Revenue(x)
Company
Symbol
Mkt cap
($ mn)
TTM
FY16E
TTM
FY16E
Symantec
SYMC
12,575
2.4x
2.5x
3.5x
3.6x
Aware Inc.
AWRE
110
2.5x
N/A
4.9x
N/A
NXT-ID
NXTD
25
36.9x
N/A
35.6x
N/A
IDN
16
1.4x
N/A
2.3x
N/A
Intellicheck Mobile
3M Co
MMM
108,177
3.9x
3.9x
3.6x
3.6x
SAFRY
27,755
1.5x
N/A
1.4x
N/A
ID Global Solutions
IDGS
45
517.4x
N/A
518.3x
N/A
Identiv
INVE
22
0.5x
0.5x
0.4x
0.4x
NEC Corp.
NIPNF
6,320
0.3x
0.3x
0.2x
0.2x
CheckPoint Software
CHKP
13,180
7.0x
6.8x
7.8x
7.6x
ImageWare Systems
IWSY
114
23.5x
15.2x
23.7x
15.4x
8.8x
5.8x
9.2x
6.1x
SAFRAN
Average
BIO-key
Premium (Discount)
BKYI
31
5.3x
3.6x
6.0x
4.0x
(45.4%)
(38.1%)
(41.5%)
(34.1%)
Source: Bloomberg, SeeThruEquity Research, data as of July 31, 2016; Average excludes ID Global Solutions and NEC Corp
10 | P a g e
September 21, 2016
RISK CONSIDERATIONS
Financial Liquidity
We see access to capital as a key risk to BIO-key. BIO-key has not yet achieved market adoption of its
products sufficient to generate revenues of a size that would sustain recurring free cash flow, and therefore
the company is reliant upon raising new capital, either in the form of new equity issuances, borrowings,
hybrid securities such as convertible preferred stock and/ or convertible debt, or licensing activities, until it
reaches sustainable profitability.
There is no guarantee that the company will continue to have access to the capital required to fund its
business and support the growth initiatives planned by management and contemplated in this analysis. As
of the end of 2Q16, the company had cash and cash equivalents on hand of $2.0mn.
Going Concern
BIO-key’s auditors included an emphasis paragraph that notes that the company’s financial statements have
been prepared assuming that BIO-key can continue as a going concern. This analysis has also assumed
that BIO-key will need to raise fresh capital and, that the company has continued access to new capital on
palatable terms for equity holders. To date BIO-key has not been able to demonstrate that it can achieve
recurring free cash flow from its operations. As of the end of its fiscal year, December 31, 2015, BIO-key
had an accumulated deficit of $59mn.
Competition
BIO-key operates in the biosecurity market, which is a competitive market that is characterized by rapid
innovation. To remain competitive in this market, BIO-key will need to maintain continued investment in
research and development to ensure that products are differentiated, meet industry standards and can
respond to the evolving challenges of the market. Many of market participants in the biosecurity / fingerprint
authentication market are larger companies with greater access to resources than BIO-key, including
significantly more financial assets to invest in new products, larger and more advanced research and
development facilities, and more established sales distribution. BIO-key management identified the following
companies as its principal competitors, though we believe there are several others, as well: 3M/Cogent,
NEC, and L1 / MorphoTrak (subsidiaries of SAFRAN).
Market adoption
Although we believe BIO-key has developed an interesting product lineup well-suited for its market, and the
company has announced impressive industry partnerships with large established technology leaders (such
as Microsoft), supporting this view, with 2015 revenues of $5.3mn, BIO-key has not yet been able to gain
widespread market adoption for its products. The company faces a difficult task in creating market adoption
for its technology, which stems from competition, a reliance on OEMs to integrate and sell its products, and
continued enhancements to its solution to meet the needs of an evolving market place. Even if the company
is able to demonstrate that its products are robust and best-of-breed, it may still have difficulty translating
this into market adoption of its products into the broader internet security and biometric security markets.
Technology
BIO-key is a technology company and is exposed to many risks characteristic of this industry, including the
risk associated with defending and enforcing its intellectual property, as well as the risk associated with
complying with industry standards. Moreover, the company faces risks that new technologies may emerge
that render its solutions less competitive or even obsolete.
11 | P a g e
September 21, 2016
Dilution
Including 2015 financing efforts, BIO-key has issued convertible securities which could cause significant
dilution if exercised. The company has approximately 65mn potentially dilutive shares resulting from
potential conversion of preferred stock, which was excluded from its share calculation given that the effect
was antidilutive because of net losses experienced by the company. Moreover, there were approximately
24mn warrants and options which have been excluded from the share count due to the fact that the exercise
process are above recent market prices.
MANAGEMENT TEAM
Michael W. DePasquale, Chairman & Chief Executive Officer
Michael W. DePasquale serves as Chairman and Chief Executive Officer of BIO-key International. Mike
was appointed Chairman of the company in February 2014 and has served as Chief Executive Officer since
January 2003.
Mike brings more than 25 years of extensive executive management, sales and marketing experience to the
Company. Prior to joining BIO-key, he served as the President and Chief Executive Officer of Prism
eSolutions, Inc., a Pennsylvania-based provider of professional consulting services and online solutions for
ISO-9001 / 14000 certification serving customers in manufacturing, healthcare and government markets.
From December 1999 through December 2000, Mike served as Group Vice President for WRC Media, a
New York-based distributor of supplemental education products and software. From January 1996 until
December 1999, he was Senior Vice President of Jostens Learning Corporation, a California-based provider
of multi-media curriculum that was acquired by WRC Media. Prior to Jostens, Mike held sales and marketing
management positions with McGraw-Hill and Digital Equipment Corporation. Mike earned a Bachelor of
Science degree from the New Jersey Institute of Technology and has served on a number of non-profit
organizations as well as on the Board of Directors of several private companies. Currently, Mike is Treasurer
and member of the Board of Directors for the one of the leading biometric advocacy organizations, the
International Biometrics and Identification Industry Association.
Cecilia Welch, Chief Financial Officer
Cecilia Welch has more than 20 years of operational and financial management experience in a diverse
selection of technology corporations. Prior to joining BIO-key in 2007, she was Controller for Savaje
Technologies, Crystal Systems and ATN Microwave (acquired by Agilent Technologies). Mrs. Welch has a
Bachelors degree in Accounting from Franklin Pierce University.
Mira K. Lacous, Chief Technology Officer
Mira LaCous has nearly 30 years of solution development, project/product management and company
leadership experience. Ms. LaCous has managed software development and product management teams
most of her career. Mira's background includes successfully bringing technology to market including
automated voice response systems, building control systems, software piracy protection, intranet training
materials and security testing, graphic page layout and design software, scanning software and systems,
authentication security, biometric algorithms, scalable security solutions and more. Ms LaCous is also the
author of six US patented technologies, with most having many international counterparts, and has been an
officer or director of three companies; National Computer Systems (NCS), TEL-Line Systems and BIO-key
International. Ms LaCous has a Bachelors in Computer Science as well as all but a Dissertation towards a
Masters Degree.
12 | P a g e
September 21, 2016
Barbara Rivera, Chief Operating Officer
For more than 30 years, Ms. Rivera has demonstrated her management and leadership skills in developing
new markets. Most recently, as President & General Manager of the U.S. Public Sector Division of Experian
North America, her efforts regularly addressed key issues around Multi-Factor Authentication, Fraud and
Healthcare which complement BIO-key's focus. She was instrumental in establishing new accounts with
Federal customers, including the Department of Defense, the Justice Department and Department of
Education, as well as New York City. Prior to Experian, she held senior management positions at L-3
Communications, SAP America and Oracle Corporation, having launched her technology career at IBM's
Data Processing Division.
Jim Sullivan, Senior Vice President Global Sales
Jim Sullivan is BIO-key's Senior Vice President of Global Sales, and a recognized expert in biometric
authentication for consumer and mobile applications. In over 10 years at BIO-key, Jim has directly worked
with dozens of BIO-key’s household name customers, including AT&T, LexisNexis, NCR and McKesson on
large-scale biometric-centered identity management projects that interface daily with millions of corporate
and consumer users. Jim holds a Computer Science degree from Brown University, and has 24 years of
experience in IT projects and implementation, 14 of them directly working with identity management
solutions at BIO-key, Computer Associates, Platinum Technology, and Memco Software.
Scott Mahnken, Vice President, Marketing
Mr. Mahnken brings over 20 years of marketing experience and success through strategic marketing and
building dynamic relationships with channel partners. Immediately prior to joining BIO-key, Mahnken served
as President of Edge Marketing, a leading marketing consulting firm in the dental and medical devices
industries. Mahnken also served as Director of Marketing at Milestone Scientific Inc, manufacturers of
computer controlled anesthetic delivery medical devices, and Director of Partnership Relations at ArcMesa
Educators, an organization dedicated to providing accredited continuing education to medical and dental
providers. For Mahnken, his career in marketing began with Lanmark Group a leading healthcare advertising
agency. Mahnken is a graduate of the University of New Orleans, where he earned a Bachelors of Art
degree in Marketing.
Renat Z. Zhdanov, Vice President, Chief Scientist
Renat Z. Zhdanov has served as Chief Scientist of BIO-key since November 2001. He has over fifteen years
of academic experience in various fields of Mathematics and Physics; fifteen years of image processing,
pattern recognition, and big data analysis, algorithm development experience and more than ten years of
software development experience ranging from database programming to statistical and analytical
programming. Dr. Zhdanov is a recognized expert in Mathematical Physics and is the author of two books
and more than 130 papers published in leading mathematics and physics journals. Before coming to BIOkey, he worked as Chief Mathematician and Visiting Scientist in universities in Ukraine, Germany, Great
Britain, Sweden and Spain. Dr. Zhdanov has two PhD degrees in Mathematical Physics and Differential
Equations from the Institute of Mathematics in Kiev, Ukraine. He serves as a member of the Editorial Board
of the ‘Journal of Applied Mathematics’.
13 | P a g e
September 21, 2016
FINANCIAL SUMMARY
Figure 7. Income Statement
Figures in $mn unless specified
Revenue
YoY growth
FY14A
FY15A
FY16E
FY17E
FY18E
4.0
5.3
7.8
11.8
15.9
35.0%
31.3%
48.6%
50.7%
Cost of sales
0.3
1.0
2.4
3.4
4.7
Gross Profit
3.7
4.2
5.4
8.4
11.2
92.4%
80.6%
68.8%
71.1%
70.5%
5.3
5.7
6.8
7.5
9.3
Margin
Operating expenses
EBIT
Margin
EBITDA
NM
(2.0)
(1.7)
(1.8)
0.3
1.2
(50.9%)
(32.2%)
(23.1%)
2.3%
7.4%
(2.0)
(1.6)
(1.7)
0.3
1.3
(49.6%)
(31.1%)
(22.3%)
2.6%
8.0%
0.2
(0.2)
(0.0)
0.0
0.0
(1.9)
(1.9)
(1.8)
0.3
1.2
0.0
0.0
0.0
0.0
0.0
(1.9)
(1.9)
(2.6)
(0.5)
0.4
(47.0%)
(35.3%)
(33.3%)
(4.5%)
2.4%
(0.03)
(0.03)
(0.04)
(0.01)
0.00
FY14A
FY15A
FY16E
FY17E
FY18E
Current assets
1.8
13.2
11.6
11.8
13.8
Other assets
0.3
7.2
7.2
7.3
7.5
Total assets
2.1
20.4
18.8
19.1
21.3
Current liabilities
1.3
2.3
2.6
3.1
4.6
Other liabilities
0.0
0.0
0.0
0.0
0.0
Shareholders’ equity
0.8
18.1
16.3
16.3
16.7
Total liab and shareholder equity
2.1
20.4
18.8
19.3
21.3
FY14A
FY15A
FY16E
FY17E
FY18E
Cash from operating activities
(2.5)
(15.6)
(1.6)
0.4
2.0
Cash from investing activities
(0.0)
(0.0)
(0.1)
(0.1)
(0.3)
Margin
Other income/ (expense)
Profit before tax
Tax
Net income to Common
Margin
EPS (per share)
Figure 8. Balance Sheet
Figures in $mn, unless specified
Figure 9. Cash Flow Statement
Figures in $mn, unless specified
Cash from financing activities
1.3
19.0
(0.7)
(0.8)
(0.8)
(1.2)
3.5
(2.4)
(0.5)
0.9
Cash at beginning of the year
2.0
0.8
4.3
2.0
1.5
Cash at the end of the year
0.8
4.3
2.0
1.5
2.3
Net inc/(dec) in cash
14 | P a g e
September 21, 2016
Reference Links to BKYI Products Online
Laptop Mag - ECOID Review
Links to BKYI products on Microsoft store:
Eco-ID
SideTouch
SwideSwipe
Links to BKYI products on Amazon:
Eco-ID
SideTouch
SwideSwipe
Other Sites:
Dell.com SideSwipe Product Listing (via SST)
Distribution Partner Access Sales Group - Retail Reach
About BIO-key International, Inc.
BIO-key International, Inc. is revolutionizing authentication as its easy to use biometric solutions enable
convenient and secure access to information and financial transactions. Its solutions eliminate passwords,
PINs, tokens and cards and make it easy for enterprises and consumers to secure their devices as well as
information in the cloud. BIO-Key’s premium finger scanning devices SideSwipe and EcoID offer marketleading quality, performance and price. www.BIO-key.com
15 | P a g e
September 21, 2016
Contact
Ajay Tandon
SeeThruEquity
www.seethruequity.com
(646) 495-0939
info@seethruequity.com
Disclosure
This research report has been prepared and distributed by SeeThruEquity, LLC (“SeeThruEquity”) for informational purposes
only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in
any transaction. This report is based solely on publicly-available information about the company featured in this report which
SeeThruEquity considers reliable, but SeeThruEquity does not represent it is accurate or complete, and it should not be
relied upon as such. All information contained in this report is subject to change without notice. This report does not
constitute a personal trading recommendation or take into account the particular investment objectives, financial situation or
needs of an individual reader of this report, and does not provide all of the key elements for any reader to make an
investment decision. Readers should consider whether any information in this report is suitable for their particular
circumstances and, if appropriate, seek professional advice, including tax advice. This report contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond the company’s control. Actual results could differ materially and adversely from those anticipated
in such forward-looking statements as a result of certain industry, economic, regulatory or other factors.
SeeThruEquity is not a FINRA registered broker-dealer or investment adviser and does not provide investment banking
services. SeeThruEquity does not accept or receive fees or other compensation for preparing its research reports.
SeeThruEquity has not been retained or hired by the company featured herein or by any other party to prepare this report.
In some but not in all instances, SeeThruEquity and/or its officers, directors or affiliates may receive compensation from
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SeeThruEquity and/or its affiliates may have a long equity position with respect to a non-controlling interest in the publicly
traded shares of companies featured in its reports, and follows customary internal trading restrictions pending the release of
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SeeThruEquity’s professionals may provide verbal or written market commentary that reflects opinions that are contrary to
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attributable to the company featured in its reports or other communications. The price and value of a company’s shares
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or by any means or (ii) redistributed without the prior written consent of SeeThruEquity, LLC.
16 | P a g e

bkyi initiation sep 21 2016 final

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