BIO-key International, Inc. (BKYI) Earnings Call Transcript

Thanks, operator, and good morning to all of you. With me on the call today are Mike DePasquale, BIO-key's Chairman and Chief Executive Officer, and Ceci Welch, its Chief Financial Officer. I want to point out that this call and webcast, along with responses to investor questions, contain forward-looking statements, and those statements carry risks and uncertainties that could make actual results come out materially different from what we currently expect. Terms such as anticipate, believe, expect, plan, project, target, and words of a similar nature serve to identify and convey forward-looking statements. Management makes such forward-looking statements relying on its beliefs, assumptions, and information available at present, in line with the safe harbor provisions of the Private Securities Litigation Reform Act. If you want a fuller picture of the risks and uncertainties affecting future performance, please refer to the risk factors in the company's annual report on Form 10-K as amended and its latest Form 10-Q filed with the SEC. Listeners should be careful not to rely unduly on forward-looking statements made as of today, and the company is under no obligation to revise or disclose revisions to forward-looking statements in order to reflect circumstances or events that occur after this call; with that, I'll hand the call over to Mike.

Thanks, David, and good morning to all of you. I'll begin by giving you an overview of the quarter along with our business. After that, Ceci will walk you through the financials, and then we'll wrap up by taking your questions. The results we posted for the third quarter show how strong our core software business is. Revenue from license fees rose 39% compared with a year earlier, and that recurring revenue, which carries high margins, pushed our gross margin up to 90% from 77% in the prior year, while also helping us cut our operating loss by 8%. Since the second quarter of last year, our gross margin has gone up each quarter, and license fee revenue has now posted double-digit year-over-year growth for three quarters in a row. Total revenue for the quarter fell 4% versus last year's third quarter, since robust license growth mostly made up for weaker hardware sales. Summer vacation schedules typically make the third quarter our slowest stretch of the year, while the first quarter usually gets a lift from license renewal activity. Across the first nine months of 2026, total revenue climbed 14%, and our net loss improved by 42%, which is a solid move in the right direction. I'd like to take a moment to explain why we're seeing more new business wins and how they tie to our core biometric expertise, built over decades, which is increasingly recognized as a genuine differentiator in the places where identity assurance matters most. In areas like government, defense, and financial services, the regulated industries, these customers understand without doubt that a person, the actual individual accessing a critical system, is who they say they are. That is exactly what our Identity-Bound Biometrics provide, linking access to the individual instead of to a device, a phone, a token, or a password that could be shared, stolen, or phished. Authorities continue to move the same way; reacting to growing cases of systems being breached, in the UAE, for example, the central bank instructed banks and other licensed financial institutions to retire SMS and email one-time passwords earlier this year in favor of stronger approaches, including biometrics and passkeys. Rules like these represent significant tailwinds for the value our solutions deliver; that environment shows up in who picks BIO-key and in how big the opportunities are. As I mentioned before, our global team continues to secure larger, prominent contracts in highly regulated industries like government and banking. In Q3, the Central Bank of Jordan selected BIO-key for a countrywide biometric authentication program designed to upgrade how customers reach digital services across the financial sector, which supports about 11.6 million individuals. We are collaborating tightly with the central bank as this effort advances toward development deployment. Over in Portugal, a national security agency chose BIO-key along with our partner Visualforma to protect access to its administrative systems, privileged accounts, and critical applications. We believe there is enormous potential in international markets, particularly in the Middle East and Europe. With these awards, we now have eight new customers in the Middle East region in roughly seven months. These rank among the most security-focused organizations anywhere, and every deployment turns into a significant proof of concept and reference point for the next one, and that is what we are seeing today; this momentum rests on robust local distribution and integration partners who have strong ties to and deep understanding of what each customer requires. Our partner network continues to expand—one example is the recent tie-up with Al Majlis Group, which widens our footprint throughout the Arabian Gulf. Beyond that, we've begun establishing a BIO-key subsidiary in Saudi Arabia to back our growing government work in that country, and that operation will be staffed with BIO-key personnel as well. Taken together, the opportunity here is substantial: Gartner projects that end-user spending on information security across the Middle East and North Africa will hit roughly $4 billion by 2026. This is beginning to appear in our numbers—third quarter revenue for our Europe, Middle East, and South America region rose 39%, and license fees more than doubled. Over in Europe, we've just kicked off a tech partnership with Cipher — the cybersecurity arm of Prosegur, a worldwide security company — and their lineup now includes our IAM, biometric, and password offerings. That starts in Portugal, and we intend to look into additional countries where they do business, including Spain, the U.S., and Brazil. Stateside, we're concentrating on PortalGuard, our adaptable IAM platform that handles 16 authentication factors, among them fingerprint, face, and palm biometrics. Our newest release, PortalGuard 7, keeps going out to customers. In October we brought aboard Steve Morrow, a seasoned cybersecurity executive, as President of PortalGuard to speed up uptake. We're honing our U.S. We've been pushing our go-to-market work forward via the DLT partnership, which centers on the public sector, and through additional channel partners on the commercial side. The payoff from these initiatives is beginning to show. This week, a major U.S. casino resort picked PortalGuard along with our Identity-Bound Biometrics to protect workforce access throughout its 24/7 operations — that announcement came earlier in the week, and it represents our first foray into gaming and hospitality. We beat out far bigger rivals — ones that couldn't deliver the functionality we offer — to win this enterprise-wide prepaid three-year agreement. Since most of the resort's highest value employees aren't able to carry phones on the gaming floor, our efficient biometric-driven solution fits the need naturally. On the AI side, this September our newly built in-house Passkey:YOU authenticator earned full certification from the FIDO Alliance. Final testing is underway before a major launch that lets us jump ahead of what our previous outsourced product could do. With Passkey:YOU, staff can log in using a fingerprint reader or a badge instead of a phone or token, and it sets us up for one of the biggest emerging identity challenges — AI agents. Machine identities, AI agents included, outnumber human ones by more than 100 to 1. That figure comes from industry research, and it's remarkable. This year, a FIDO Alliance working group was formed to create standards for trusted AI agent interactions. For those highest-risk actions, we think verification has to come from a real person, not from a password or a device acknowledgment. With our Identity-Bound Biometrics, approval of sensitive AI-driven actions can be tied to the person who is actually accountable. This authentication and authorization for agentic AI is a key piece of the integrated offering in our new Cipher relationship. As I mentioned, Steve Morrow, President of our PortalGuard group, is heading up development of the product plans in this area; we view it as a meaningful new market opportunity next to our core workforce and customer authentication business. Financially, we strengthened the balance sheet considerably during the third quarter. Having paid off the last of our notes and debt, we're essentially free of borrowings now, and we're sitting on a healthy cash and working capital position to support the business. As we look ahead, recent deal wins, an expanding recurring license revenue base, and a strong pipeline of regulated industry opportunities throughout EMEA position us well for a good close to 2026 and a very strong beginning to 2027, helped along by the annual license renewal from our biggest customer, which comes in above $1 million. In the first quarter by itself, we anticipate about $1.2 million in annual license fee renewals, and our goal is to reach profitability as we near that point. With our extensive know-how in biometrics, flagship clients in government and finance, expanding software revenue at high margins, a leaner expense base, and an improved balance sheet, we have a really solid footing — one we think positions us well for an exciting stretch ahead. I'll now pass things to Ceci so she can walk you through the financial details. Ceci?

Thank you, Mike, and hello everyone on the line. Our third quarter numbers were released this morning via press release, and the Form 10-Q should be filed either today or Monday. I'll walk through a few of the highlights. Revenue for Q3 2026 totaled $1.48 million, down from $1.55 million in Q3 2025. License fees grew 39% to $1.28 million, driven by a number of new customer license deployments, and represented 86% of total revenue compared with 59% a year earlier. Hardware revenue came to $12,000 versus $364,000 in Q3 2025, as that prior-year quarter had included a sizable hardware deployment for a long-standing customer. Revenue from sales, maintenance, and other sources declined 27%, landing at $195,000, which came down to the schedule of our agreement renewals along with how our partner-led sales model has affected things. Essentially all of our integrated business moves through channel partners, and those partners usually take care of implementation and sales support on their own. Across the first nine months, revenue was up 14% to $5.55 million, again powered by a 37% rise in license fee revenue. Gross profit climbed 12% to $1.34 million, while gross margin gained 90% over the 77% recorded in Q3 2025, a reflection of license fee revenue making up a larger share of total revenue. This year, gross margin has gotten better each quarter in sequence — 83% in Q1, then 87% in Q2, and 90% in Q3 — and across the first nine months it rose to 86% from 77%. Year over year, operating expenses were up 4%, though they came down 2% versus Q2. SG&A increased 9%, which reflects higher administrative and personnel costs as well as annual meeting costs, whereas research, development, and engineering expenses fell 7% over the first nine months. Operating expense came in at $6.29 million, a decrease of 1%. In Q3 2026, our operating loss improved to $820,000 from $892,000. Net loss improved to $886,000 from $965,000 in Q3 2025. When you factor in a non-cash deemed dividend of $4.5 million tied to the August warrant inducement, the net loss available to common stockholders came to $5.9 million, or $4 per share, versus $965,000, or $1.44 per share in Q3 2025. That deemed dividend is purely an accounting entry — it has no effect on our operating loss, cash, or stockholders' equity. Over the first nine months, our net loss improved 42%, dropping to $1.67 million from $2.87 million. Once the deemed dividend is included, net loss available to common stockholders was $6.17 million, or $5.37 per share, compared with $2.87 million, or $4.87 per share. The per-share figures take into account the April 30th 1-for-10 reverse split, along with the warrant exercises and other financing activities. Now on the balance sheet side, stockholders' equity rose to $6.5 million as of September 30th, up from $4.3 million on June 30th. At quarter's end, current assets stood at $5.3 million, which included $2.2 million in cash, $2.4 million of accounts receivable, and net inventory of $367,000. Working capital came in at $3.1 million when the third quarter of 2026 closed, an improvement from $0.8 million as of June 30th, 2026. During that quarter we retired the remaining balance on our note payable, so no note debt remains on the books; all that's left is a small euro-denominated loan of about EUR 12,000, which we expect to repay in full by year-end. Through the warrant inducement transaction in August, we brought in gross proceeds of $2.5 million. As Mike described, we anticipate a solid close to 2026 and a strong beginning to 2027; that brings our prepared remarks to an end. Operator, would you please open the line for questions.

All right, thanks, and good morning. I appreciate the update, and thank you for taking my questions.

Good morning.

Mike, morning Mike. First question is about third quarter revenues. Strong license growth is good to see, and it's been consistent. For the hardware line, I'm wondering — sometimes orders and timing delays slip. Did we expect a big hardware order in 3Q, or did something get pushed into 4Q?

Yeah. Starting in Q2, I think, we had a larger hardware order expected for an international customer we've been working with for quite some time. That's just been pushed, and that's the nature of these large civil ID government programs; sometimes they get deployed on time, sometimes they get extended. That larger hardware order has been pushed. Again, given that that happened, obviously our revenue would have been much, much higher; that's also hardware product that, as you know, we fully own and has been in our inventory for a considerable period of time. So, it's also all margin and cash and profit for us; we're selling the hardware, but it's just happening in smaller tranches, and so it's dribbling. We expect we'll continue to sell that hardware through the end of this year and certainly into the beginning of next year.

All right. I appreciate that added detail. From what you're describing, this isn't a missed chance—just smaller batches—and it will get recognized as time goes on. Gross margin looks really robust here. In fact, I believe on a blended overall basis, this ranks among the strongest quarters in your company's history. It's encouraging to see.

Yes, it is. Absolutely. What we're observing is, once again, as I noted during my prepared remarks, extremely strong license revenue. Hardware is part of this too. In our EMEA group within the regulated space, sometimes that comes before, and sometimes it comes after the sale.

Following up on that, Mike, you're obviously achieving a lot of success in the Middle East. It's ramping up significantly. I believe you said there are eight new material customers there. I'd imagine that helps shape 2027. Do you think you'll be heading into 2027 and even 4Q 2026 when it comes to licensing? How do these new customer wins, if you could quantify them or just give direction, how does that position you for, say, entering 2027?

Well, first, it positions us to be profitable; second, to be profitable consistently; and third, to potentially become cash flow positive and stay cash flow positive. With those premium deals in the six- and seven-figure range, the cash flow is fantastic. If everything is software, the margins are amazing. Once more, we expect some bigger hardware orders to accompany this, since usually these larger organizations, when they roll out our technology, are rolling out biometrics—so they must not only enroll every employee or customer, but also have the capability to identify them, which means our finger scanners come along for the ride. Honestly, I believe our current situation is remarkable—something we've never experienced before. We now hold sufficient cash and receivables to finance operations for roughly two years, plus a pipeline of seven-figure deals that we'll clearly be pursuing over the coming six months. Today presents a completely different set of possibilities for us. This stems from global dynamics we're observing, correct? As you're aware, we've consistently maintained a robust business in defense—specifically international defense. One of our major customers has fielded more than 60,000 units of our equipment and registered hundreds of thousands of their personnel. Right, so this is now spreading internationally to all those other sensitive government and financial services institutions. I also don't want to overlook our domestic business — that casino win, which again was a Q4 item, an opportunity in Q4 that wasn't recognized in Q3, so it will be recognized this quarter, really represents something of a resurgence and reinvigoration of our domestic business alongside partners. We're really going full bore, much the same way we operate in EMEA — partner-centric, partner-focused. I think that will have a huge impact on our domestic business as well.

Good. I'm pleased you raised the casino win once more. I simply wanted to circle back on it and hear your perspective on what I'd call the wider casino gaming hospitality arena for BIO-key — the larger view. And then, of course, also address the agentic AI update that you brought up. In what way does this agentic AI field and opportunity, along with this fresh casino area, stack up against, I suppose, the potential you're seeing across EMEA, in defense, and your other major core verticals?

Right. There are a few questions in there. Let's begin by handling the gaming one. It's fascinating, since gaming companies run into the same kind of security headache that nearly every enterprise does: phones and tokens aren't an option, yet without multi-factor authentication you've got a serious problem meeting compliance requirements. With our approach, a person simply puts down a finger and is authenticated automatically — no phone, no token, no card that could be handed off and used by somebody else. We offer exactly the right answer; this was the first one we brought to market, and we handled the whole engagement from beginning to end. The opportunity arrived as a web lead — not a WEB-key, a web lead — that came in to us, correct? This came in as an inbound lead, and it went from first contact to signed in under 60 days, since they had a serious problem. On top of that, this account — it's a six-figure deal, actually several times six figures, on a three-year contract — is also bringing us to an event in Q1, where we'll get the chance to tell other potential prospects about the work we're doing for them. Gaming is a huge industry here, and not only the major players like MGM and the names you're familiar with in Vegas. There are a tremendous number of tribal and local casinos and resorts in nearly every state across the country. That's a genuinely great opportunity for us. So that's the gaming question. How does it stack up against the EMEA situation? Obviously, the defense and banking deals—some of them run into seven figures, a lot of them are seven-figure deals, so they're larger deals, correct? Those are considerably bigger deals than even enterprise opportunities. Again, there's a balance. Do I believe we can reach that point domestically? I do. I think it'll take us a while, but I believe we can. When it comes to agentic AI—look, it's intuitive. You're hearing about it everywhere. Agents are great; they're amazing when it comes to the efficiency and productivity they can deliver to enterprises and government agencies. The issue is that when they act independently with no human involvement, there's always a hazard and a risk of them going rogue, or you may fail to satisfy your compliance obligations and/or expose your customers to harm; in the actual world of agentic AI, you want a person to acknowledge, validate, and authenticate that agent so it can carry out quite specific tasks on your behalf or the company's. We want to verify via a biometric that whoever is granting the authorization — the individual stating “this agent may go perform X, Y, Z” — is confirmed as who they claim to be, along with the moment they validated and authenticated that step; that matters a great deal, and we see it as a massive opportunity, because AI is taking over enterprise and government, securing AI agents is a real challenge, and human involvement is not a nice-to-have — it is mandatory. With the legislative shifts that came after last week’s election here, my expectation is that significantly greater pressure will emerge to constrain this and to guarantee we secure and lock down agents, preventing them from going rogue.

Understood. Thanks for all that detail. I realize that question was a complicated one, but it's good to hear that, Mike. So my final question before I go back into the queue concerns the guidance and how it compares with what you said last quarter. As I recall, you were aiming for profitability in the second half of this year; that probably isn't quite on track at this point, though third quarter operating income came close to break-even. I was hoping you might give us a bit more of an update on your outlook for 2027, I suppose a more precise update.

Yeah.

Is there any update? Do you anticipate growth along with profitability? Any additional detail at all would be useful. Thank you, Mike.

Yes. I genuinely anticipate meaningful growth, and I still believe that even in the fourth quarter here, we will have a very strong finish. Obviously, I would like us to be targeting profitability, and we are targeting being cash flow positive. But certainly, as we head into the first quarter, which is the strongest quarter for our company, given the pipeline we have and the opportunities we are pursuing right now, I am highly encouraged that we will see meaningful growth. We are certainly going to have profitable growth. Again, from a cash standpoint we are not in the market needing to raise capital or to do anything on the financial side to support the company; we currently have enough resources to accomplish that.

All right, that's helpful context, Mike. Thanks a lot.

Thank you, Jack.

Hi, guys.

Morning, Dan.

Good morning. Besides the gross margins, your receivables have been climbing quite a bit, reaching $2.35 million now versus $0.96 million at the same time last year. That works out to roughly 245%, whereas your payables and accrued expenses stayed fine over that stretch. Another thing that stands out is that during a soft third quarter, AR rose sharply. I'm curious whether that gain is spread out fairly evenly, or whether it came from just one or two customers, like the bank renewal you brought up?

Actually, it wasn't a bank renewal at all, it was new customers. In my prepared remarks, I believe I said we had been on a tear when it came to closing new business, particularly in the Middle East. A few of those deals are fairly large. It's a mix, but it clearly reflects the opportunities, the new business opportunities, that we closed in Q3.

All right, when it comes to a collectible like that, couldn't that on its own lead to cash flow that breaks even in Q4?

Yes, that's our hope; it comes down to when collections come in, correct? Remember, every bit of this business flows via partners, so we always stay careful about collecting and keep on top of it. Still, yes, it absolutely can.

What's your read on the AR trend? I mean, it sounds like you see it either continuing or having peaked—which is it? Will it hold at this level? Just give some color on what you're seeing in AR.

I believe it can keep going if we close bigger deals, right? I mean, it hinges on how much business we close. We're quite encouraged by what's ahead of us for Q4 and Q1, and we have visibility into Q2. So that trend should carry on. Look, I'd actually be glad if it came down somewhat and we brought in more, so receivables fell while cash collections rose. That's a dynamic we'll watch to see how it plays out.

A strong fourth quarter. I went back and checked some of your earlier fourth-quarter figures. They've tended to be, I'm not sure, roughly one — I believe last year came in at $1.24 million. When you say strong, are you saying it's in line with what you posted in recent quarters, or with those past fourth quarters? It sounds as though you believe strong could even be better.

Well, all right, to begin with, last year's fourth-quarter revenue figure isn't something I'm carrying around in my head. Ceci, do you happen to have that on hand, since I don't have a benchmark to compare against.

Yeah.

Yeah, let me look real quick.

Alright. Dan, as soon as Ceci returns with that figure, I’ll be able to say whether I believe it will end up significantly above it or whatever the case may be. I don’t want to speculate, just toss numbers around. But yes, we are.

Yeah. The figure for last year came in at $1.188 million. The year prior to that stood at $1.286 million. And the one before that was $1.593 million.

Got it. And that was fourth quarter, correct? Fourth quarter numbers.

Correct. These are fourth quarter numbers. Yeah.

Yeah, we're going to see substantial growth beyond that in this fourth quarter. Yes, and it's going to be substantial.

That sounds excellent. When it comes to the agentic AI authentication market, might that turn out to be a killer app for you that genuinely unlocks the U.S. market?

For sure. Honestly, it's amusing, since inside the company we refer to it as a killer app. I'm not keen on using that in our; but we refer to it as a killer app since we genuinely think it's something that, above all, with our passkey included, can connect anywhere; it makes no difference which IDP, in other words, which perhaps security infrastructure you happen to use; say, whether you happen to be on Okta or on Ping or SailPoint, whichever one you happen to use, our biometric agentic solution can be layered on top of that, correct, with no need to load enormous quantities of software and infrastructure. We genuinely view that as a killer app, and during this quarter we'll be rolling it out to customers. Looking ahead into 2027, we believe this will become a truly, truly major partner-centric, correct, solution, in which those partners already have customers; they're able to offer it as an upsell and an add-on, which they adore, correct, since they're always eager to add services and support and technologies for the base they already have. That's the way they earn money. We believe it is a killer app.

Are you referring to the U.S. market?

The U.S., plus international. In terms of where that could apply, I don't believe there's much distinction.