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

Thanks, operator. With us today are Mike DePasquale, BIO-key's Chairman and CEO, and Ceci Welch, our CFO. Just a reminder: this call and webcast, along with the responses to investor questions, contain forward-looking statements. Those statements carry risks and uncertainties that could make actual results differ materially from what we currently expect. Terms such as anticipate, believe, expect, plan, and project — and similar expressions — identify and convey forward-looking statements. These are based on management's beliefs, assumptions, and information available as of today, made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a fuller description of these risks and uncertainties, which affect future performance, please refer to the Risk Factors in the company's annual report, Form 10-K, as filed with the SEC. Listeners are cautioned against placing undue reliance on such forward-looking statements made as of today, and the company undertakes no obligation to revise or disclose revisions to forward-looking statements in order to reflect circumstances or events that occur after today's call. With that, I'll hand the call over to Mike to begin.

Thanks, Bill, and I appreciate everyone being with us today. Following my comments and CC's review of the financials, we'll take investor questions on the call. Looking at the big picture, our revenue for Q3 '25 came in at approximately $1.55 million, which was roughly consistent with what we saw in the first 2 quarters of this year, and year-to-date revenue was a bit under $5 million. The decrease of roughly $600,000 in both third quarter and year-to-date revenue for 2025 versus last year is mostly attributable to variability between quarters driven by the timing of certain larger customer orders. The third quarter of last year stood out as especially robust, largely because of two sizable orders. One came from a banking client we've served for many years; that order was largely a matter of catching up as the customer broadened its deployment. The other came from a defense industry client we've worked with for a long time, as part of an ongoing rollout of solutions. Both of those customers are still extremely active. In October, after the quarter had closed, the defense customer submitted a $140,000 order — business we had genuinely anticipated closing in the third quarter, but which slipped into the fourth. Our expectation remains, and we do expect, that deployments and orders will keep coming in this quarter and beyond. Beyond that, we anticipate that our large banking customer will renew their contract — the subscription agreement — at the start of 2026, building on a deployment of our solution that keeps growing steadily. More than 29 million users are enrolled in our solution at that customer, and there is room for substantial additions down the road; they made a significant expansion of their investment in our solutions during 2023 and 2024, which included a $900,000 upgrade to our fingerprint only biometric customer identification technology. With this option, or solution, they can identify clients using only one fingerprint scan, so no other identifiers are needed — not a card, not an ID number. Essentially, that saves them roughly 30 seconds on each transaction, and since time is money, that matters to them. Their yearly license fee has grown to more than $1 million, and it comes up for renewal in early 2026. Depending on whether they sign a one-year or two-year deal, we anticipate between $1 million and $3 million in business and renewal during the first quarter. Generally speaking across our business, renewal rates are very strong — above 90% — which puts churn in the single digits. The unevenness in quarterly revenue stems largely from when renewals land, when new deployments happen, expansions at our big customers, and there can also be true-ups for extra software licenses. For us, the third quarter tends to be a slower stretch because of seasonality—especially in Europe, given the summer holidays. Even so, we anticipate finishing the year on a very strong note as we push forward with channel sales across the wider Europe, Middle East and Africa territory, where our entire focus is now on solutions carrying the BIO-key brand. On top of that, we are close to wrapping up work on fresh marketing messaging for both our website and our business development. That messaging, along with the related collateral, should launch in Q4, which positions us well as we head into the new year. To back this effort, we brought on an outside marketing firm earlier in the year to collaborate with us on content for our new website along with targeted marketing strategies. We're putting the finishing touches on a substantial website revamp, aimed at once again enhancing the content and navigation, with a plan to go live ahead of the Gartner IAM Conference, taking place in mid-December. We also intend to ship a major update to our PortalGuard identity platform. PortalGuard delivers a unified MFA, multifactor authentication experience, offering a wide array of 17 authentication factors — among them, naturally, our identity-bound biometric choices — to serve practically any use case. Version 7, which is our newest release, represents the most significant update we have ever shipped. It delivers considerable platform modernization, more configurability, and improved deployment capabilities. We expect development to finish within the coming weeks, and following that we will subject it to rigorous internal and third-party security testing. We plan general availability for late Q1 or early Q2 of 2026. Additionally, in Q3 we introduced our new EcoID III fingerprint scanner, certified under FBI FAP 20, aimed primarily at regulated industries. Although BIO-key is mainly a software company, providing a complete solution that includes state-of-the-art hardware is essential to supporting our annual recurring revenue software model. The EcoID III reader combines encrypted device-to-host communications with liveness detection for quicker, safer authentication. We shipped initial volume EcoID III orders to defense and government customers during Q3. We likewise anticipate that government-related and heavily regulated sectors such as financial services, higher education and health care will be drawn to our new reader. Our PortalGuard platform, our IDaaS offering, and the Passkey:YOU solution all pair extremely well with the new EcoID III fingerprint sensor. As I noted on last quarter's call, we kicked off our cyber defense initiative in response to rising global defense spending — especially in Europe and the Middle East — and to our wins with several notable high-profile deployments in those markets. Built into these growing defense budgets is a strong emphasis on cyber resiliency and security as a priority. As of today, 2 of the 4 biggest global defense agencies by spending rely on BIO-key technology to protect all of their critical information. We're well positioned to take advantage of these expanding defense budgets and spending, and we're pushing forward a growing pipeline of opportunities stemming from deployments of our solutions by some of the most respected military security and defense ministries and agencies. To back this push, we're adding dedicated people whose job is to work with contractors who'll help extend how far our market reaches; from those efforts we expect a steadily expanding stream of new contract activity, carrying forward from deployments made this quarter and afterward. One crucial element for rollouts in the defense sector is our ability to serve critical infrastructure and reach sensitive environments through sophisticated biometrics and our multifactor authentication solutions, without relying on mobile devices or hardware tokens. For such engagements, biometric authentication is the better fit, since it delivers stronger security, improved accuracy, added convenience, and a greater capacity to prevent fraud and unauthorized access than conventional methods do. Biometrics cut down on false positives and sharpen how precisely access control works. Beyond that, binding each person uniquely to their actions and access events supports traceability monitoring and insider threat management, or better accountability and audit trails. Making access processes more efficient also cuts the time people spend logging in and lifts productivity for defense personnel, all while keeping security strict. For defense agencies that handle highly sensitive data and infrastructure, we think biometrics are increasingly the preferred option over traditional methods used on their own. And the references we hold in that space give us a competitive edge that is unique. As I just described, momentum is building throughout the defense sector as well as in banking, government, and higher education, because the growing number of security incidents draws attention to possible cybersecurity weaknesses. In addition, expanding regulatory mandates and cyber insurance underwriting criteria that become stricter and more often require MFA adoption have helped create opportunities for our superior biometrics and portable authentication options. We're excited about the growth prospects as we head into next year. However, because of our size and, as I just noted, the variability of our business, it may continue to fluctuate from quarter to quarter depending on when larger orders land. Even while we're growing the company, we'll stay intently focused on expenses—aiming to bring down the point where we break even and to back our objective of generating positive cash flow and turning a profit. Ceci will take you through the figures, though I want to point out that across the first 9 months of 2025 we reduced operating expenses by over 10%, even as we broadened both our worldwide footprint and the range of solutions we offer. Finally, regarding how we finance our path to profitability following the close of the third quarter: we brought in about $3 million, net of fees and related expenses, by way of a warrant exercise transaction with a price of $1.02 per share. That capital meaningfully increases our cash liquidity and leaves us better positioned to go after growth. And given what we anticipate will be a solid finish to 2025, our financial footing is very, very strong for expanding the business and in fact surpassing our goals as we enter the new year. On that note, I'll turn things over to Ceci for the financial review, after which we'll open it up for questions.

Thanks, Mike. Our results were released this morning, and we plan to file the 10-Q later today. I'll walk you through a few highlights. Q3 '25 revenue was $1.5 million, versus $2.1 million in Q3 — a year-over-year drop of about $595,000, mainly because of the large orders Mike referenced for Q3 2024 that did not repeat this quarter. Those orders accounted for roughly $665,000 of the year-over-year difference, partly offset by some new orders. As a result, license fee revenue in Q3 '25 was $918,000, compared with $1.4 million in Q3 '24. In the third quarter of 2025, service revenue increased slightly to $268,000, up from $267,000 in the same quarter of 2024. Growth in recurring service revenue more than made up for the decline in customer service revenue, which had backed large customer upgrades during Q3 '24. Hardware sales dropped to about $364,000 in Q3 '25, compared with $436,000 in Q3 '24, which mirrors the timing of hardware shipments tied to ongoing customer rollouts. The sale of fully reserved inventory in Q3 '25 partly offset that timing difference. At present, we hold approximately $2.8 million in fully reserved inventory, and we have multiple potential customers for it. For the third quarter of 2025, gross margin remained solid at 77%, versus 78% during the same quarter of 2024; the lack of third-party licensed software compensated for a smaller share of revenue coming from licenses. BIO-key continued to trim operating costs as well, with those expenses dropping 8% to $2.1 million in Q3 '25, down from $2.3 million a year earlier. This reflects a reduction of 13%, or $208,000, in SG&A expense, which was partly offset by a 5%, or $31,000, rise in research, development and engineering costs required to support the generation product launch, including the EcoID III and the upcoming PortalGuard upgrade. BIO-key’s Q3 ’25 net loss came to $965,000, or $0.15 per share, as reduced revenue was offset by reduced operating expenses; that compares with $739,000, or $0.39 per share, in Q3 ’24. Across the first nine months of 2025, the net loss stood at $2.9 million, or $0.50 per share, versus a net loss of $2.9 million, or $1.69 per share, during the same period a year earlier. The per-share figures reflect weighted average shares outstanding of 6.6 million and 1.9 million in Q3 ’25 and Q3 ’24, respectively, and 5.8 million and 1.7 million for the first nine months of 2025, respectively. This reflects shares issued for warrant exercises and other finance-related activities. At the end of September 30, BIO-key's current assets stood at $3.7 million, which included $2 million in cash; by contrast, current assets at the close of 2024 were $1.9 million, with $438,000 held as cash. Accounts receivable and different factor rose 21%, reaching $959,000 on September 30, 2025, up from $792,000 at the end of 2024. In addition, BIO-key obtained gross proceeds of $1 million to fund working capital and back ongoing operations through a senior secured promissory note issued on September 30. As Mike noted, after the third quarter ended, we brought in net proceeds of $2.9 million when warrant agreements to purchase BIO-key shares, at an exercise price of $1.02, were exercised. So because of that, the financing’s cash proceeds didn’t show up on our Q3 balance sheet for ’25. And with that, everyone, operator, let’s move on to the question-and-answer session.

So, I believe it's been roughly 10 months now since the Bank of Egypt win was announced — was that structured as recurring revenue, or did it involve permanent licenses? And for 2026, do you anticipate comparable revenue coming from that customer?

Sure. On that question, yes — what we announced roughly 10 months ago, give or take a year, was a first deployment, and we're anticipating a broader rollout, which might even take place in Q4. So yes, the response there is that this deployment is expanding.

Understood. As a follow-up to that, given that you partnered with Raya on it, as I recall, would that imply your margins on that project end up being lower?

Absolutely not. When it comes to software, our gross margins sit at 90-plus percent, so from a gross standpoint they're still at 90-plus percent. Let me say something about partners, sort of as a side note. Over roughly the past month, you might have observed that we've issued several announcements involving partner companies that are taking us into local markets across the Middle East, Africa, and Europe, and more are on the way in the near term. That acts as a force multiplier; these deals are very significant. If you go through those press releases we've put out, these are substantial players holding substantial resources in local markets and carrying influence in specific industries — some in government, some in banking, health care, and so on; and what that gives you is local cultural backing, the ability to influence, and considering that 90-plus percent of business in EMEA — which generally means Europe, Middle East, Africa — arrives via partners. This expanding base in what we call our CAP Program, that is, Channel Alliance Program, will deliver significant dividends for us going forward. And each partner we've signed, such as Raya, arrives with a deal, correct, historically, right? A partner gets signed and then off you go with a license to hunt, attempting to locate an opportunity. What's occurring here, especially once more in EMEA, is that we're signing these partners since they have a deal; we've already been working alongside them and they wish to go out and represent what they view as the most unique and capable identity and access management platform, biometrically enabled, that's on the market. And you can see, again, from all those announcements we're getting, that we're making very, very solid progress.

Yeah, that helps. Staying with Bank of Egypt for a moment — the first move was taking care of the NBE employees, correct, and after that shifting over to B2B and B2C. For expansion beyond employees, should we think of that as a target of, say, 2027?

Okay, so I'd say there are two points here. First, as I recall, the initial rollout covered roughly 20,000 users or so, and that wasn't the entire employee population. So there's still room to expand within the existing enterprise employee base. And regarding your second question — what we refer to as CIAM, Customer Identity and Access Management — the answer there is yes, there's clearly an opportunity to bring this to customers. It's similar in nature to what we do with Capitec Bank in South Africa, where they use our biometric technology not just internally for employee and employee access, but for customer access as well.

Okay. So — but is that 2027? Is that by any chance next year?

My sense is that, for some, every one of these options remains a possibility — and to repeat, adding headcount is a possibility for this year. And in 2026, as I see it, they'll start examining the CIAM rollout.

Regarding defense, I believe during the Q2 call you talked about scaling up to several million dollars with your biggest defense ministry. Last week, you announced one of the region's largest Middle East sector deployments. That involved another defense organization that wasn't named. Does this contract match the scale of that longer-term defense ministry?

The potential here is actually larger. So yes, the answer is that they're quite big. Depending on how large the country is, most of these defense ministry opportunities are sizable; and their expansion potential is really strong, because typically you begin with a base population so they can get started, and then they expand to additional users and enroll more users. So these are big deals, they have a really long tail, and they're very sticky — meaning that once you get involved, they do a lot of betting and they look at a lot of different options. But once you're involved, you stay for a significant period of time.

That sounds really good. With all these wins in banking and defense, do you have any sense of where your ARR stands right now—the recurring revenue?

Our ARR keeps climbing. What I'd say is we definitely are in that position, since you need to strip things out—our overall figure counts both hardware and software. But my sense is that our ARR base, with renewals included from the traditional contracts, right, the legacy PortalGuard operation we acquired, probably sits somewhere between $6 million and $7 million at present. And churn, which I referenced in my prepared remarks, also lands within the single-digit range. So I'd call that a solid number.

Right, that churn number is really striking. The launch for Echo III ID, or EcoID III, mentioned that the price point for high-quality scanners came down a lot. So is that price lower than what EcoID II carried? Or is this third version going after a different scanner quality tier?

It certainly goes head-to-head with a better-grade device. Our customers are what I'd describe as FBI-certified, PIV-certified reader buyers. There's one named the PIVPro, a product we've offered for a great many years; it's an extremely high-quality optical unit, glass platinum. Against that device, the EcoID III competes at a cheaper price point — $49.99 at list price for quantity 1, compared with the PivPro, which sits in the high $60s to low $70s. That's the first point. Second, the new EcoID III delivers far better quality and includes liveness detection plus full on-device encryption. The EcoID II lacked that capability; it was priced somewhat lower at $44.99, yet it had no encryption and no liveness detection built into the device the way the EcoID III does. As I recall, the initial order came to roughly 7,500 — a bit under 10,000 units — from one of our defense customers right out of the gate, as soon as we could ship the product in Q3.

Alright. It's been roughly twelve months since that boomerang stock came your way. My understanding is the nine-month put window has closed, and you chose not to hand the stock back. Can you share any fresh update on what that asset is worth today?

I think we'll be assessing that during our audit for calendar 2025, fiscal 2025. But I know they've completed a number of small acquisitions, and I know they're involved in some strategic scenarios — nothing I can speak to — but it appears that value is certainly intact.

Alright, one more question for this round, I suppose. I think your — have you conducted any kind of research into — well, what I mean is, the stock has been trading anywhere between 1x and 100x the flow over the last 3 weeks, so is there any research you've done to determine what's causing that sort of activity?

That one's tough to answer. To start with, I figure news releases tend to drive trading activity, right? So for a handful of the announcements we issued, we saw heavy trading in our shares. The reason our stock might move 450 million shares in just one day and produce $400 million in trade value is almost beyond belief, and I don't really have a specific explanation for it. I believe there's significant interest in what we do. There's a tremendous amount of interest in security; and specifically, we offer something quite distinctive within a very robust niche in defense and banking, and we have excellent references. Looking at our market cap right now, the figures suggest we're significantly undervalued. That may be drawing interest from people who want to invest and stake a claim in a business with considerable upside potential. Still, these are just guesses — I honestly can't explain, on any level, why we see those days with that sort of volume.

Okay. Is there anybody else in the queue right now?

Operator?