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

Thanks, Chuck. Joining us on the line today from BIO-key are Mike DePasquale, our Chairman and CEO, along with Ceci Welch, our CFO. Before we go further, a quick note: this call and webcast, plus our responses to investor questions, contain forward-looking statements. Those are subject to risks and uncertainties, and because of them, actual results could end up differing materially from what we currently expect. When you hear terms like anticipate, believe, expect, plan, or project — or anything similar — those words signal forward-looking statements. We base such statements on our beliefs, our assumptions, and information management has available right now, and we make them under the safe harbor provisions of the Private Securities Litigation Reform Act. If you'd like a fuller picture of the risks and uncertainties that could affect future performance, please review the risk factors in the company's annual report, on Form 10-K as filed with the SEC. One caution for listeners: don't place undue reliance on any forward-looking statement made as of today, and the company isn't obligated to revise or disclose revisions to these statements to reflect circumstances or events occurring after this call. At this point, I'll hand things over to Mike to get us started.

Thank you, Bill, and I appreciate all of you taking the time to be with us. Once I finish my comments, Ceci will walk through the financials, and then we'll take questions from investors. The results we posted for Q1 '26, along with our outlook for Q2 '26, show what our team's dedication has delivered — especially across the past 12 months — and we're also witnessing greater recognition of the exceptional worth our biometric identity and access management solutions bring to protecting mission-critical applications and data. To borrow that familiar saying, BIO-key has assembled a robust portfolio of biometric offerings on the premise that if we build it, customers will arrive. That approach is now genuinely paying off for us, and I'll talk about that. Revenue in Q1 '26 came from both freshly won customers and expanding long-term deployments among defense and financial services clients. During the prior year, we introduced our defense and intelligence cybersecurity initiative, aimed mainly at overseas markets, to deliver more secure identity and access management solutions. Several of the most prominent and significant defense organizations in the world now sit within our customer base, and the success we've had serving their strategic needs is proving extremely valuable in unlocking new opportunities. Yet this isn't limited to government, defense, and heavily regulated sectors. We're likewise gaining momentum among enterprise customers, especially in EMEA and the EMEA markets. An expanding network of strong regional distribution partners, together with foreign regulatory frameworks that favor our robust biometric options, underpins our progress in those regions. Beyond EMEA, we've brought on additional partners in India and Vietnam, where solid opportunities lie ahead as those partners scale up their marketing and sales activities. To reach public sector opportunities in the U.S. more effectively — which frequently call for engaging a preapproved vendor — we recently formed a partnership with DLT Solutions, a division of TD Synnex, the largest IT distributor and solutions aggregator worldwide. Globally, TD Synnex has 23,000 employees and delivers an enormous portfolio spanning IT hardware, software, cybersecurity, and cloud services to more than 150,000 customers across over 100 countries, while DLT serves as their domestic public sector arm, so to speak. We're embedding our PortalGuard IAM and Passkey:YOU biometric solutions within DLT's offerings platform. This partnership creates a streamlined procurement path, letting their broad public sector customer base easily buy and deploy our solutions — many of whom confront mandates to adopt Zero Trust digital infrastructure and implement multifactor authentication. With what we offer, customers can readily satisfy those requirements and tie digital access to a person, not merely a device. We're collaborating closely with the DLT team to help them educate public sector customers about our solutions and the compelling ROI BIO-key can deliver. During our year-end call, I went through several factors currently shaping the market for our solutions. So I'll give just a quick recap of those. First, the ongoing growth of digital services and mobile use cases demanding secure authentication keeps widening our market opportunity. Next, we think the need for the secure digital access that only BIO-key delivers is going to keep growing, since organizations are facing a cybersecurity threat environment that is more advanced and more relentless. Then, we anticipate that passwordless authentication will keep building momentum and turn into the norm during this year and after, as companies seek to lower exposure to phishing, the reuse and misuse of credentials, and account takeover attacks. BIO-key offers passwordless solutions that are distinctive and extremely secure. After that, biometric authentication ought to be adopted more and more in the use cases of greatest value, just as we have observed in the military, defense, financial services, health care, and other heavily regulated sectors, where trust and security matter most. On top of that, the increase in threats powered by AI truly heightens the requirement for identity strategies that are more resilient and that go beyond authentication methods which are vulnerable yet widely used, such as phones. And last, the market is shifting toward access platforms that are more unified, bringing workforce, partner, and privileged access together beneath one adaptable foundation. These developments align squarely with what BIO-key does best, and we are beginning to observe them reflected in our financial results. At present, our company is mainly a subscription-based operation with recurring revenues. Roughly 50% of our new business arrives via our partnership model within the United States. And, as I have said on several occasions previously, 100% of what we sell internationally goes through channel partners, which gives us a model that is very, very efficient and, more importantly, scalable. I should also note that in mid-April we introduced a new website, built to help our partners and customers better grasp how BIO-key can serve their needs; in our view, it is a significant step toward supporting our growth objectives. I want to express thanks to our team, who devoted a great deal of hard work and effort to this launch, and I would encourage investors to take a look at it at www.bio-key.com. And, as ever, we are happy to receive whatever feedback you may have. Financially speaking, BIO-key sits in a strong position to keep funding our growth. We closed Q1 with a book value of $7.6 million, or about $7 per share, including more than $2 million, or $2.07 per share, in cash, and we anticipate that this position will hold or get better as we get closer to the second quarter — the close of the second quarter. As we said a few days back, our shares were recently suspended from NASDAQ. Right now, we are working hard to get our shares back onto the NASDAQ capital market and have obtained an appeals hearing, scheduled for June 16, which falls next month, roughly 4 weeks from tomorrow. Meanwhile, our shares keep trading on the OTC markets under the ticker BKYI. While we cannot know for sure whether the panel's decision will go our way or when it will come, our advisers see cause for optimism about a return to NASDAQ trading by the summer. To wrap up, our business has gotten off to a very strong beginning, and we have confidence in our first half outlook and feel very optimistic about the rest of the year and beyond. Following years of dedicated effort, we feel BIO-key is positioned for growth and better financial results to a degree it never has been before, and we'll keep updating all of you, our shareholders, regarding our business and the listing process as we move ahead. Having said that, I'll hand the call over to Ceci so she can go over the Q1 financial results.

Thanks, Mike. This morning we put out a press release with our results, and we intend to submit our 2025 10-K during this week, and following that we'll submit the 10-Q, which brings our filings current. So allow me to give a quick summary of what we saw in Q1. Please remember that the independent public accounting firm has not finished reviewing our financial statements, so the results could still be adjusted. During Q1 '26, revenues rose 34%, reaching $2.1 million, compared with $1.6 million in Q1 '25; the current year got a boost from a 1-year software license renewal that was expanded, coming from a banking customer of long standing that serves more than 30 million clients using our biometric identity solution. On the whole, license fee revenue climbed 24%, hitting $1.4 million. Our hardware revenue went up more than 100%, to roughly $531,000, driven by greater purchasing of biometrics hardware solutions, which includes hardware sales tied to a foreign Defense Ministry, defense expansion, plus sales from inventory we had previously fully reserved; consistent with revenue, Q1 gross profit rose 33% compared with Q1 '25, reaching $1.8 million, and we kept a robust gross margin of 82% in both periods. That compares with a first year gross margin of 77.5% in 2025 and 81% in 2024. Gross margin gained from growth in high-margin license fee revenue and from selling the fully reserved inventory. Our operating expenses came to about $2 million in Q1 '25 and Q1 '26, since higher R&D was offset by lower SG&A expenses in Q1 2026. Higher revenue and gross profit, together with operating expenses that stayed relatively flat, produced a net loss improvement of $165,036, or $0.15 per share, in Q1 2026, against the net loss of $736,545, or $1.57 per share, in Q1 '25. Per share amounts and weighted average shares outstanding reflect the impact of the company's April 30, 1-for-10 reverse split, warrant exercises and other financing activities. Share counts appear in today's press release. Moving to our financial position at 03/31/26, book value stood at $7.6 million, or $7.04 per share, versus $7.7 million, or $7.07 per share, at year-end. BIO-key had current assets of roughly $4.5 million, among them $2.2 million of cash and cash equivalents and $1.6 million of accounts receivable. That compares with December 31, '25, when BIO-key had current assets of $4.5 million, among them $2 million — $2.7 million of cash and $1.2 million of accounts receivable. As Mike said, we anticipate being profitable and cash flow positive in Q2. Operator, we can now move on to the questions and answers.

Ceci, congratulations on those impressive results and the solid fundamental picture. Clearly, there's a bit of noise around right now, and the NASDAQ delisting is unfortunate, but from what we're hearing, everything remains on track. It sounds like you're feeling good about it. So I suppose maybe just a few housekeeping items, Mike, quickly. The NASDAQ appeal meeting is coming up, I believe you mentioned next month — and that puts you on course to be relisted. Just to go over those remarks briefly. And then the 10-K sounds quite confident that it's going to be filed by next week. Can I get a confirmation on that?

Yes. So yes, our hearing had been set for Friday, then we received notice that it was scheduled for the 16th of June; so we're getting ready for that; we anticipate that, as I said in my prepared remarks, we will make it through that process and God willing, with no bumps along the way, be fully compliant in every respect and return to the capital markets, certainly, perhaps late June or July. It hinges on the timing for that panel. So everything is underway there, and our advisers are quite confident that we have — we should feel optimistic about being able to accomplish that. As you know, we traded for 9 days above $1 before we got suspended, which was a statutory scenario with the NASDAQ, it's their process. And so that was our only issue at that time; and so we will get back on, and we'll keep everybody updated as we move forward. So that's definitely going to happen. As it pertains to the filings, yes, we expect that we'll get everything filed; we're hoping to have both the K and the Q filed this week, so we will be fully compliant and current on everything out there; that's it.

Understood, and thanks — that explanation was very straightforward. Those numbers, I'd say, put you in a solid position in that race to return to status. Good to hear, Mike. Now, turning to cash and the balance sheet, and with the recent results you've reported — it sounds like you're on a path toward possibly becoming profitable — is there anything to worry about when it comes to financing the growth plans you already have, or in your conversations with customers? Any fallout or things pulling focus for the tech team and NASDAQ? Just one more point to nail down.

No. Honestly, no. Our customer base is extremely diverse, spanning just about every industry out there. A lot of these relationships go back a long way — some stretch back to when we were still trading over the counter, before we moved up to the NASDAQ. So none of what's happening is really affecting our operations. Financially, we're probably standing on firmer ground than we have in a very long time. We've got the capital we need to run the business and keep putting money into our growth efforts. Like I said, scale is the whole focus for us at this point. Our product is excellent. We keep enhancing and refining that offering whenever it's needed and called for, and we've established a really robust partner ecosystem, particularly abroad. At this point, it's simply up to us to keep growing this operation, and as you can tell, that growth will come with strong profitability. For years our gross margins have stayed around the 75% to 85% mark, and that pattern should hold as we push revenue up toward $5 million and then $10 million each quarter — you can picture how much of that will flow down to the bottom line.

Great. And Mike, when I look at what you're projecting for Q2 and the opening six months of this year, it's clearly a big step up versus last year, and even by recent historical standards. So I'm curious what's happening in your pipeline, in your go-to-market? Do you feel like you've got — is visibility better now than what you've had? Over the last 2 or 3 years, when it comes to that demand funnel, suddenly there's this $5 million of revenue that appears lined up for the first half. What does the back half look like from where you sit? Are you even looking that far out yet?

Well, it looks very good. It looks very strong. I said as much during my prepared comments. So without a doubt, our visibility has improved. What's going on, Jack, is that we are — number one, we're chasing bigger opportunities. So when your pipeline contains deals worth $500,000 to $1 million or above $1 million, and those are with bigger partners holding really strong positions in those end-user customer environments, confidence rises, correct? And that doesn't mean, once again, that you take every deal, but our pipeline for 2026 is very strong. The full year, right? The first half, definitely, is where we're laser-focused, and we know precisely where we stand right now. As for the remainder of the year, we have quite a few contracts already won, but that need to be — that have been awarded, yet still need to be papered, which means getting orders and so forth and so on. So we feel really good about all of 2026.

Great. Perhaps, if I'm considering, I suppose, the type of — it appears as though revenue from hardware truly accelerated during this quarter. Is this merely — I realize it may be uneven, yet is this something that represents a fresh pattern being incorporated into the majority of your agreements that you're currently observing? You certainly have robust gross margins when it comes to hardware; but it's simply intriguing to examine since hardware may fluctuate somewhat whereas license revenue appears steadier. Regarding the agreements you're presenting, what are you observing on the hardware front?

Well, I believe that when you finalize these bigger license possibilities, the need for hardware is likewise considerable; thus, numerous Ministry of Defense clients of ours who employ our technology must establish many contact points for access on behalf of every one of their force personnel or their employees; so once more, the two can move together. As you noted, we preserved quite strong gross margins on our hardware. And Ceci stated during her prepared comments that at present we are moving our completely reserved inventory in larger quantities. Consequently, that flows directly to the bottom line. And clearly, it's entirely cash along with entirely margins. So that is assisting us definitely in this year and will keep assisting us as we progress throughout the year, yet once more, hardware forms an integral component of our bigger possibilities. Therefore, it will perpetually be present. And indeed, it is definitely more uneven compared to how the software and license revenue is, but it remains an extremely robust component of our full and complete offering, which is what clients desire. They desire a full and complete offering from a single vendor, and we deliver that for them.

Understood. And Mike, considering every one of your main verticals, clearly defense has performed really well, and it appears there's no lack of geopolitical developments happening right now to keep fueling that. Setting defense aside, thinking about education plus financial services, I guess. Where do you think — what would you say is the next step up for you in those 2 segments? Do you believe you're expanding at — is there a chance in education for your business, along with financial services, that you're witnessing similar to defense?

For sure. So as you're aware, we possess a truly solid, substantial foundation in education, and that keeps on maturing. And so indeed, education is an excellent market for us; however, does it possess hyper-growth capability similar to financial services? No. My view is financial services offers considerable growth for us. Together with our partners abroad, we've been aiming at national banks, correct? Meaning the banks in nations that control the currency. And we've achieved quite a few wins; there are multiple prospects in our pipeline that you will learn about eventually as we close them. And they possess an extremely, extremely particular requirement for ultra-strong authentication. And on the international stage, they face no limitations or very few limitations when it comes to privacy and similar matters that we contend with here in the U.S., right, every single day; and therefore biometrics represent a truly excellent choice for them since they can definitively verify individual staff members and the like who access their portals or applications. So my belief is financial services is an extremely, extremely robust and expanding vertical for us, and you will be hearing far more regarding that moving forward.

Great. Mike, could I ask you one more question, this one more thematic in nature? I'm curious whether you'd be willing to offer any perspective you might hold. There are a couple of dynamics developing within the industry that have become trends, particularly when it comes to the legal sector. The Clarity Act is on the horizon and appears to be gaining momentum. That ties into tokenization of real-world assets and crypto broadly, which relates to your financial services business. Then there's cybersecurity and the protection of biometrics more generally, where quantum has emerged as something of a theme drawing people's attention. I'd love to hear your thoughts on where BIO-key fits, or where you see it fitting, within these themes of quantum further out, along with tokenization and crypto becoming more mainstream.

Those are two excellent questions. So RWA — real-world tokenization — all of that material that everybody keeps hearing and talking about is definitely progressing. However, it's moving far more slowly than anybody expected. And this year, I believe, you're watching it derail somewhat, since other priorities have taken over. So I actually feel quite positive about our position, because we serve the real world right now — its needs and its requirements. At the same time, we're putting money into areas such as quantum; every one of the newest and most current generation encryption concepts involving quantum proofing and similar matters sits on our agenda at this moment and is being researched by us. My advice regarding both of those situations, though, is: don't get swept up by the hype. Examine where we stand right now, examine the real-world problems confronting us right now, and examine real-world solutions that address those problems right now, while also keeping a view toward where the puck is headed and where we'll be tomorrow; and without question, we're squarely in the middle of that. So again, if you consider where spending is happening at present and which direction things are heading, it's taking far, far longer. That explains why you're watching quite a few businesses that essentially lack any present technology for tackling issues and problems, and are only peering into the future, struggle badly. Now once more, it resembles AI, doesn't it? There's no question AI is already affecting our lives, both personally and professionally, and it will keep developing, yet it still needs to establish its footing, and the firms involved in that technology will arrive and depart. We've existed for quite a while, delivering extremely fundamental yet refined, highly secure solutions for a number of the most critical applications anywhere in the world. And once again, I believe we'll keep doing exactly that, correct? And we've demonstrated our ability to do so; we've been here for more than 30 years. That's how I see it, Jack.

Great. That's a really useful way to look at it, and I appreciate you walking through all of that. From what you're saying, BIO-key is doing quite well at the moment.

Yeah, really solid quarter. That's pretty good. I guess I have a few administrative-type questions. By any chance, can you give me a cash flow from operations figure for Q1? I realize that's not something you typically provide, but I was just curious.

I would need to check with Ceci on that. My recollection is that we finished the year with roughly $2.7 million in cash, and the first quarter closed at around $2.3 million; so, doing a rough calculation, that's not exactly precise, correct? Likely it comes down to usage and the timing of collections, receivables, and similar items. So I'd say our position is fairly strong. To put it another way, we're not bleeding money the way we did previously.

OK, so Mike, what does your ARR run rate look like at present? Has it gotten better thanks to a few of those contracts?

I suppose the response is comparable — it comes in episodes, correct? Therefore, when examining what we're owed, correct, comparing one quarter with the next, even so I'd say yes, once those bigger projects come in, clearly the amounts owed are fairly substantial. Thus indeed, in my view it's definitely getting better alongside the business getting better.

I'll just mention as well that it hinges on the timing of certain larger deliveries; a few land toward the close of the quarter, while others arrive right at the start, since we hadn't received them during the preceding period. So, as Mike noted, it's episodic and driven by timing.