Biokey International Inc (BKYI)

[topseeded]

Here is an excellent analysis of BIO-key and why it is a terrific investment. The article has been edited. The full article link is at the end of this post.
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Article by Edward Schwartz

BIO-Key: Biometrics' Hidden Gem, Nov. 14, 2014

Disclosure: The author is long BKYI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Summary
•BIO-key is poised for growth.

•BIO-key is an undervalued stock.

•Leading player in a rapidly growing industry that could lead to explosive growth.

•BIO-key has multiple quality partnerships.

BIO-key International (OTCQB:BKYI) is a leading provider of fingerprint biometric authentication technologies and identity transaction security platforms.

The Bio-key fingerprint algorithm is among the most accurate and fastest available. This was validated by The National Institute of Standards and Technology (NIST) (part of the US Dept. of Commerce). NIST is statutorily mandated to verify biometric technologies for performance bench marking and standards compliance.

Bio-key's algorithm is the only fingerprint sensor and operating system agnostic matching algorithm available. This means that it works with any fingerprint sensor, including Idex (NYSE:IEX), Synaptics (NASDAQ:SYNA), Fingerprint Cards (FINGB:SS) and others. It is also inter-operable between operating systems and server architecture. This combination of attributes makes the Bio-key platform more flexible and less expensive to deploy in the market.

Bio-key's patented web-key platform is used to securely release authentication data from the secure zone of a device (eg. Smartphone), to a network environment including the internet or the cloud, where it can be processed more securely than on the device. No other technology enables both on device authentication with any fingerprint sensor and enables identification capabilities in databases that reside in the cloud. As a result, Bio-Key's capabilities are applicable to the entire spectrum of authentication security required by industry stakeholders.

According to the Verizon enterprise services 2013 breach report, 76% of all hacking attempts include the exploitation of weak user authentication technologies. Thus, to solve the rapid rise of hacking experienced by the likes of Home Depot (NYSE:HD), Paypal (PYPL), Target (NYSE:TGT), Apple (NASDAQ:AAPL), and others, a global upgrade of user authentication technologies has begun. This is evidenced by Apple, Samsung (SNLLF) and other handset manufacturer's adoption of fingerprint technologies in their smart phones.

The Gartner Group has recently placed biometrics in the early stages of what they call a "hype cycle" in the digital banking sector. Their definition of the Digital Banking Hype Cycle is focused on potentially game-changing technologies.

As stated in the Gartner Group, August 4th Digital Banking Hype Cycle Research, Biometric mobile banking authentication is one of the four game changing technologies just beginning the hype cycle as they call it.

"Biometric Mobile Banking Authentication - This describes the reuse of on-device biometric authentication solutions to enable customers to access mobile banking applications and services."

BIO-key's cloud based authentication platform could become the standard as enterprises in banking and healthcare seek to rollout biometrics.

The value proposition

BIO-key is the cheapest way to play the rapid growth in Biometrics. As a software company, it's 85% gross margins give it tremendous operating leverage. This year, based on guidance, BIO-key will generate over 4 million in revenue, nearly double last year. BIO-key is cheap at only 4X sales when compared to other biometric companies such as ImageWare Systems (OTCQB:IWSY), which trades for 30X sales.

When you look at BIO-key's website, you will scratch your head and wonder how this company has less then a $20 million dollar market cap given the abundance of marquis customers and partners. I am going to argue that it is grossly undervalued. One reason for the disconnect is a shareholder base that is so tired of waiting for Biometrics to arrive, while living through dilutive raise after dilutive raise over the last couple of years. Now that it has finally arrived they just don't care. As a shareholder you get so angry with management you only look at the annoying stock price and not what they have actually accomplished in the last couple of years. This is what makes opportunities, the ability to put aside emotion and look at the facts.

So here are the facts:

Revenue, as just reported, for nine months, increased 84% In Q3 the company lost a mere $50K. With gross margins in the eighties, you can see how they become extremely profitable from here if they continue the sales momentum.

Experian partners with BIO-key to use BIO-key's technology in their ID verification for their multiple product lines. Think about that for a minute - EXPERIAN. How many customers does Experian have? And if they roll out Biometrics to only a fraction, what would that mean for BIO-key? Recurring license revenue.

BIO-key's ID Director is pre integrated into Allscripts EHR solutions and sold to healthcare customers such as hospitals, clinics, etc. Add to that Epic, CA, Caradigm and a host of other companies that sell to the hospitals using BIO-key as their biometrics solution. Healthcare industry requirements driven by state mandates, DEA, and HIPAA, as it pertains to Electronic Health Records and E- Prescriptions play right into BIO-key's sweet spot. The industry has only just scraped the surface at keeping pace with these mandates and BIO-key is going to be a direct beneficiary. BIO-key can just focus on the healthcare market, where they are the leader, and create value that is multiples of the current stock price.

IDEX, one of the leading developers of biometric readers to the cell phone market is licensing Biokey's algorithm.

NCR is using Biokey in P.O.S. terminals at Wendy's (NASDAQ:WEN) and Arby's (which is owned by Wendy's).

IBM resellers are selling Biokey to their customers.

Interdigital (NASDAQ:IDCC), one of the leading IP companies in the wireless industry, has not only invested in BIO-key, but has jointly developed with BIO-key an authentication product for smartphones.

BIO-key has brought on three new Board members, one of which is an executive at Experian. All three have been very active in guiding the company and have instituted the controls and discipline necessary to show more consistent growth.

An open letter by the Board to shareholders in response to an activist proves that the Board is engaged and that there is pressure to increase shareholder value. It also suggests that BIO-key may be a likely takeover candidate. With this type of market cap and the growth potential, it wouldn't surprise me.

Because BIO-key technology is software and not hardware based (like competing technologies) their gross margin is substantially higher, often exceeding 90%.

Thus the company can generate operating profits today, with quarterly revenue above 1.5m according to management.

So, what are the risks? As with any micro cap stock, there's a greater degree of failure. I'm not worried, as the three new board members have a high degree of knowledge and presence in the biometrics field. Furthermore, the new board has instituted tight cost control measures (as reported in the Q3 2014 Financial Results Conference Call). Moreover, the product sales cycle can be a long period of time, so future revenue may appear "lumpy" at times. For those investors who understand the industry, this should not be a problem.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

A recent capital raise of over $1.4M subsequent to the end of Q3 2014 from existing shareholders has solidified the company's balance sheet. As long as BKYI can produce additional quarterly revenue results at the high end of recent quarterly guidance ($1.7M), I do not anticipate any future need for capital within the next year. As stated in the recent quarterly conference call, BIO-key will increase investment in further research and development and sales and marketing in 2015. I believe that BIO-key will be able to fund this investment from internal growth, and not have to tap the capital markets.

Look for revenue acceleration to begin as the market matures.


Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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http://seekingalpha.com/article/2683295-bio-key-biometrics-hidden-gem