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

Thanks, Betsy. With us on today’s call are BIO-key’s Chairman and CEO, Mike DePasquale, and CFO Ceci Welch. Before we begin, please note that this call and webcast, along with responses to investor questions, contain forward-looking statements. These are subject to risks and uncertainties that could cause actual results to differ materially from what is currently expected. Terms such as anticipate, believe, expect, plan, and project, or any similar wording, identify and convey forward-looking statements. Such statements reflect management’s beliefs, assumptions, and information available as of today, and they are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a fuller explanation of the risks and uncertainties that could impact future performance, please refer to the risk factors in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission. Listeners should not place undue reliance on forward-looking statements made as of today, and the company is under no obligation to revise or disclose revisions to those statements to reflect circumstances or events occurring after this call. I’ll now hand the call over to Mike to get started. Mike?

Thank you, Bill, and I'm glad everyone could join us today. My remarks will be short, and then Ceci will take you through the financial results, after which we'll open the line for investor questions. BIO-key delivered a solid second quarter, with revenue climbing 49% versus the same period last year and rising 6% from the prior quarter. We additionally made headway on expense reduction, lowering SG&A 13.5% year over year, an amount that more than offset the larger R&D outlays we're funding to keep enhancing our solutions' capabilities. Beyond that, our note payable now stands at $447,000, compared with $1.5 million at the close of December 2024. Turning now to this quarter's business highlights. Alongside our partner Runlevel, BIO-key secured a major identity and access management deployment with the National Bank of Mozambique. In Q2 we likewise expanded further into the defense intelligence space, propelled by the strength and capabilities of our IAM products, particularly those featuring biometric functionality. Strict constraints govern what we can reveal about work with security and defense clients, yet I can report that we completed phase one of a deployment for a new international defense agency customer, and a highly regarded police force in the Middle East started a 3-year PortalGuard deployment. We additionally recorded $600,000 in follow-on orders from a prominent foreign defense ministry, which carries that continuing project beyond EUR 3 million in cumulative defense investment revenue across the next 4 years. Part of this backdrop is the Security Action for Europe, or SAFE, loan mechanism, which is mobilizing EUR 150 billion for defense readiness, spanning missile defense, drones and, of course, cybersecurity. Along similar lines, NATO members recently pledged to raise their defense and security spending to at least 5% of GDP by 2035 — more than twice the 2% of GDP goal that had long been in place. Of that new 5% target, 1.5% is specifically dedicated to cybersecurity and security-related investments, which encompasses strengthening network defenses against cyberattacks. The EU supports these initiatives through programs designed to secure 5G networks and critical infrastructure, along with a dedicated cybersecurity action plan for essential services including hospitals and health care providers. This enormous spending increase is seen as essential for deterring aggression and countering sophisticated hybrid threats. Outside of defense, we're particularly encouraged about wider growth prospects throughout the EMEA regions — Europe, the Middle East and Africa — where momentum has been building and interest is significant in our differentiated identity-bound biometric capabilities. After stepping back from the licensed Swivel Secure solutions and services we offered in 2024 and earlier, we've concentrated more sharply on BIO-key branded offerings in those markets. Rebuilding the opportunity pipeline and channel strategy around the BIO-key product suite alone takes time, but we're witnessing solid momentum and favorable year-over-year revenue comparisons as the year progresses. If you look at margins, focusing on BIO-key offerings provides greater leverage and improved gross margin levels, and that supports our expectations for the EMEA Group: growth and improved margins during the latter part of 2025. In addition, across the entire company, we have been assembling a fresh marketing initiative aimed at communicating our distinctive strengths and the strong value we offer more effectively. Since this space is so complex and competitive, we decided the moment had come to give our central value proposition a new voice and sharper focus, so we can better assist our channel partners and our direct sales teams. In North America, we continue strengthening the solid footing we hold in higher ed, health care and other public sector segments, along with finance and insurance. That stems from our expanding roster of reference accounts and IT professionals who have seen for themselves the competitive advantages and worth we deliver, especially in biometrics. Beyond that, we are working to reinvigorate direct and channel sales across North America by bringing in new leaders and fostering a sales culture that is more collaborative and more competitive, which should push results higher. We are likewise returning to an in-office arrangement for our sales, business development and marketing teams, exactly matching how we ran things prior to the COVID pandemic. To wrap up, we are confident that these strategic business development efforts, together with our expanding network of global channel partners, customers and reference accounts, leave BIO-key well positioned to produce better top and bottom line results in 2025 and afterward. We also keep looking for ways to cut costs throughout the company so we can bring down our breakeven point and stay on the road toward positive cash flow and profitability. I am eager about what we can achieve in the quarters ahead and grateful for the patience and backing of our investors, who helped us reach this point. At this time I will hand the call over to Ceci Welch for a look at BIO-key's financials, including the EUR 800 billion opportunity we see ahead.

Thanks, Mike. This morning we issued a press release covering our results, and I'd like to take you through some of the key points. For Q2 '25, revenue reached $1.7 million, a 49% increase from $1.1 million in Q2 '24, and each of our segments improved. The largest contributor was a $458,000 increase in hardware revenue, largely driven by additional deployments of finger biometric scanners for a major, long-standing customer. License fee revenue was up 4% in Q2 '25, reflecting growth in our subscription contract base. Service revenue climbed 11%, primarily due to customer service associated with a significant customer upgrade. Gross profit in Q2 '25 increased by $354,000, or 40%, to $1.2 million, versus $0.9 million in Q2 '24, helped by greater total revenue but partially offset by a modest decline in gross margin — 73% in Q2 '25 compared with 77% in Q2 '24. That margin contraction year over year occurred because hardware revenue represented a much larger portion of sales this period, and hardware margins are lower than those on license fees and services. In Q2 '24, BIO-key reduced expenses by $5 million, reflecting a 13.5% reduction in SG&A expenses stemming from decreased administrative sales personnel costs and professional service fees. As Mike mentioned, the SG&A gain was partly offset by increased research and development spending to support next-generation products such as our PortalGuard upgrade, along with exploration of new products and new product lines, reflecting higher expenses of $0.20 per share, $2.5 million, $217,000, $5.8 million, and $718,000, a margin of 8.5%, and the year 2030, compared with $1.7 million in Q2 '24, mainly related to share issuances from the warrant exercise and other financing activities. At June 30, 2025, BIO-key's current assets stood at $4 million, including $2.3 million in cash, up from current assets of $1.9 million at year-end, which included $438,000 in cash. Accounts receivable likewise increased 37% — '24. Operator, at this point, please prepare for the Q&A session.

Given the higher spending on the sales and support group for cyber defense, plus more R&D, should we anticipate that the recent shift toward lower operating expenses will turn around?

No. Well, Dan, once more, I want to give you a proper response to that. So no. What I'd say is that during the second quarter we experienced what I'd describe as a blip, caused by several factors. First, sounds correct — for those events counts as one factor. And my sense is that the expense run rate we had at the start of the year from — will basically be how we move ahead in Q3 and Q4. So once more, it amounted to roughly a $300,000 blip in Q2.

All right. Is there anything more you can share about what that meaningful contract activity in the first half of next year refers to — cybersecurity in Europe?

Yeah, it's quite substantial. Honestly, the difficulty for us is that we've already signed deals this quarter, plus late in the prior quarter and in this one, that we simply aren't able to talk about. What we deliver is not just an MFA — we offer an identity and access management platform called PortalGuard. And we're essentially the sole vendor with a strong, demonstrated biometric component that raises the security level for access management, serving these defense contractors and, in the end, the defense agencies that use the technology; so given our strong references, that business will expand for us; and so, we put out the formal initiative. I mean, we've spent the past year working on this, but this morning we announced the formal initiative to pursue that business on a larger scale, and we'll do some marketing and other efforts to make sure every contractor and end-use agency is aware of BIO-key since a lot of these big contracts are hosted and managed by large primes, correct? And globally, we know exactly who they all are. We already have strong partner relationships in EMEA. And this simply makes it more significant for us; it's no secret, right, that the U.S. has pushed the EU and the Middle East to increase their spending on defense and to also buy product, missiles, weapons, all kinds of drones and other technology from the U.S. as well. So, the money is unquestionably there. The need is unquestionably there. And with our references, especially with certain very high-level agencies we haven't even talked about or announced and still can't. We believe we're positioned really well to capture that; and that's again on the government side, but we also have a very strong enterprise business. I mean, consider our business in banking and in health care, in education, we have well over 100 customers representing millions and millions of users every day who use our technology. So, I don't want anybody to think that we're stepping away in any way, shape or form from the enterprise business. But I think what we're trying to convey here is we're going to capitalize on the thermals that exist now because of this rise in the defense and intelligence markets that's recently evolved.

Alright. So when you mention having contracts you're not able to name — I'm simply curious, did that revenue already come through for those contracts during the second quarter? Or do those contracts have a timeline to arrive in the first half of next year, or something like that? I'm only trying to understand how...

No, it's both. I made that quite clear. I said we already hold contracts that we've, once again, finalized at the close of last quarter — during this quarter, Q3, and those will show up in the Q3 results, correct? I mean, sadly, once again, we truly cannot disclose the names or anything of that sort right now. Eventually, maybe we'll be in a position to do so. But right now, we can't. And so I believe even in Q2, the — definitely, at minimum I watch the stock price, and I don't believe it mirrors our performance as of today; and I think the market simply, as of now, hasn't grasped, once again, our opportunity. And sadly, it will occur — it will be demonstrated through the results since a great deal of what we're engaged in at present simply cannot be announced. That's just how things are; and I don't believe we're alone in facing this, yet definitely for us at this moment, that's where we stand.

Alright. But what you're telling me is that for these items where no announcement has been made about them delivering income over the coming year, that's part of what's behind your thinking on this meaningful contract activity? Or is it simply that you anticipate it given the bigger market across Europe and EMEA? That's my point.

No, no, no. This is not some fantasy. Results will come this quarter from certain of these contracts in Q3. Q3 is where we are now. We're sitting in Q3 and Q4 and clearly past that; but these are genuine contracts that already have produced revenue and will keep producing revenue all the way to the close of this year and on into next year. and past that, correct? Clearly, these are — these spending programs that exist, especially in the EU and in the Middle East, span multiple years, correct? These aren't merely one-off type of blips; these are commitments that will continue for 5-plus years, possibly even more.

All right. Should we expect these to scale up, I suppose? Let me try to get at this — what I mean is, I believe we burned $1 million during this quarter. So for you to reach breakeven, these have to scale; so do you anticipate something like growth — meaningful growth from these during the first half? Is that the situation?

Without a doubt. There's no question about it. Again, it's iterative, correct? These will expand. The number of opportunities and customers will increase, and so will the size. And usually, they begin and then they iterate. Consider our first, our biggest defense ministry — over the last few years, we've iterated to multimillion dollar, to multiple millions of dollars in sales, covering both hardware and software, with them. So these are the kinds of things that keep going, right? They — they begin and then they iterate. They become larger. Additional users come on, additional touch points come on, that is, which means hardware; but there's one more point I'd like to raise, our blended gross margins remain at 70-plus percent, which is extremely, extremely strong. They fluctuate, right, somewhere between 70% and 80%. But ultimately, those are extremely, extremely strong and powerful gross margins. And I believe that's a testament to the quality and the character of our solution set. Customers want one throat to choke, they want to purchase everything from us and know that we're there to back everything. So once more, that's also extremely powerful for us.