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

Good morning, everyone. Thank you for standing by, and welcome to BIO-key International Second Quarter 2026 Conference call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 14, 2026. I will now turn the call over to Bill Jones of Investor Relations. Please go ahead.

Thank you, Chloe. Hosting today are BIO-key's Chairman and CEO, Mike DePasquale; and its CFO, Ceci Welch. As a reminder, today's call and webcast, as well as answers to investor questions, include forward-looking statements. These are subject to risks and uncertainties that may cause actual results to differ materially from current expectations. Words such as anticipate, believe, expect, plan, or project, and similar words identify and express forward-looking statements. These statements are made based on beliefs, assumptions, and information currently available to management, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. For a more complete description of these risks and uncertainties that affect future performance, please see risk factors in the company's annual report on Form 10-K and the current Form 10-Q with the SEC. Listeners are cautioned not to place undue reliance on forward-looking statements made as of today, and the company makes no obligation to revise or disclose revisions to forward-looking statements to reflect circumstances or events occurring after this call. Now I'll turn the call over to Mike to begin. Mike?

Thanks, Bill, and thank you all for joining us this morning. After my remarks, Ceci will review the financials, and then we will take investor questions. Let me start with the headline. Our second quarter bottom line improved 51% on 13% revenue growth. And for the first half of the year, our net loss improved almost 60% on 23% growth in revenues. To be clear, these results didn't meet our proposed expectations, not because of any softness in demand, but due to a delayed shipment for a hardware order that we had anticipated in Q2. The order was delayed, and we expect to ship it in the second half of the year. Considering that shift, combined with the opportunities already in our pipeline, we expect continued growth and are targeting profitability for the second half of 2026. So let me spend some time talking about what's driving our outlook. It's really about the broader momentum we're building, particularly across Europe, the Middle East, and Africa or EMEA, which is really starting to bear fruit. We're closing deals, adding productive channel partners, and developing new project discussions at an accelerated pace, all of which fundamentally underlie our business momentum. Our revenue gains are also supported by strong secular backdrops. According to Future Market Insights, the global market for authentication solutions is projected to grow rapidly over the next 10 years, from roughly $26 billion this year to over $114 billion by 2036. This represents a 16% compounded annual growth rate as organizations of all kinds and all sizes take action to defend against increasingly sophisticated cyber threats. In the area of passwordless authentication, where BIO-key delivers industry-leading solutions, a recent FIDO Alliance report found that 68% of organizations are actively deploying or piloting passkeys for employee sign-in. In addition to our biometric and Passkey:YOU passwordless solutions, our flexible authentication platform, PortalGuard, supports 16 different authentication factors and doesn't depend on any single device. This provides us with a unique ability to support complex authentication environments because when it comes to enterprise and government authentication needs, one size simply doesn't fit all. To put that in context, let me walk through several recent wins and partnerships, most of which were announced just in the past few weeks. In the Middle East, we partnered with Maktabi Tech to bring PortalGuard, including passwordless authentication and identity-bound biometrics, to educational institutions in Saudi Arabia, supporting their Vision 2030 digital transformation agenda, as well as to Jordan and the UAE. Separately, the Central Bank of Jordan is working with us on a national initiative to modernize authentication across the country's financial sector using our PortalGuard and WEB-key technologies to move away from passwords and tokens entirely. We believe growing examples of national scale mandates, including sovereign ID, represent the future of authentication in the region, a future where we intend to play a substantial role. Turning to Europe, a national security agency in Portugal selected BIO-key and our in-country partner, Visualforma, to deploy PortalGuard and WEB-key with our FBI-certified EcoID III fingerprint scanners. This follows our earlier nationwide public sector rollout and a digital identity contract we secured with Visualforma for deployment in a major Portuguese tourist city. It's an example of how one successful public sector deployment can help foster additional opportunities as trust and reference relationships continue to build over time. In the U.S., Alabama's AOD Federal Credit Union, which serves more than 37,000 members, deployed our phishing-resistant biometric-based authentication solution through our partner, BlueAlly, citing our platform's flexibility versus alternatives that they evaluated, as well as reduced help desk burden from eliminating frequent password resets. As phishing and MFA fatigue attacks escalate against financial institutions, our identity-bound biometrics is gaining traction as smart and powerful protection with a compelling cost of ownership. I'll also note, we continue to see attractive second half opportunities building in our EMEA pipeline. Our momentum in the region is broad-based, spanning government, defense, financial services, and now education. We believe this reflects rising urgency among these customers, driven both by increasing cybersecurity incidents and growing geopolitical tensions, and supported by generally more favorable regulatory frameworks that let us move from first conversation to signed contracts much more quickly. In the second quarter, we completed a 1-for-10 reverse stock split to support our continued Nasdaq listing. In July, we regained compliance with the Nasdaq listing rules and resumed trading on the Nasdaq Capital Market, which provides a visible and respected platform for our common stock. And earlier this week, we enhanced our financial liquidity and balance sheet through a warrant transaction that raised gross proceeds of $2.5 million. This new capital will continue to support our operations and more importantly, our growth initiatives and perceived financial strength with prospective customers, while also bolstering our compliance with current and proposed listing requirements. Most importantly, we are focused on executing against the significant opportunities in front of us. Our go-to-market model continues to scale efficiently through partners. Roughly half of our new U.S. business and virtually all of our international business is developed through our channel network. On the domestic public sector side, we're building out our working relationship with our new partner, DLT Solutions, a division of TD SYNNEX. This relationship provides a streamlined procurement path into DLT's very large base of public sector customers, most of whom must work with pre-approved vendors to meet zero trust and MFA mandates. On the product side, our major PortalGuard 7.0 platform upgrade is now being demonstrated to prospects and has already begun to roll out more broadly across our existing customer base. I will now touch on an area of exciting potential, which is the role biometric authentication can play in securing the AI ecosystem as we believe that human oversight of agentic operations really is a killer app opportunity for biometrics. Several recent high-profile AI control failures have helped to highlight the need and the potential for biometrics to play a critical role in providing non-repudiable authentication and approval for material AI agent actions. This isn't just our internal view. In January, the first governance framework built specifically for agentic AI was released at the World Economic Forum's annual meeting with a central pillar that humans must remain meaningfully accountable for decisions and actions taken by autonomous systems. We see biometrics as the ideal method for enabling such human control. Separately, the Cloud Security Alliance have described a governance vacuum around non-human identities as service accounts, bots, and AI agents now outnumber human users inside many enterprises by more than 100 to 1. And most organizations have no reliable way to tie an agent's actions back to an accountable person, and Chief Information Security Officers rank identity assurance for an AI world as a top security priority in 2026 and 2027. We think that's exactly the gap that biometric identity-bound authentication is built to close, anchoring high-stakes approvals to a real person rather than a device or a credential that can be shared, stolen, or cloned. We are actively working to develop strategies around our existing solutions, such as Passkey:YOU, and working to identify and develop strategic partners to build out AI governance connection points around this opportunity. Before I turn the call over to Ceci, I want to reiterate our excitement about the business progress so far this year and the strength of our outlook for the second half and moving forward. It's a genuinely exciting time for BIO-key, as the work we put into this business over many years is increasingly being recognized and more importantly, validated by a growing base of private and public sector customers around the world. With that, I'll turn the call over to Ceci for her financial review.

Thank you, Mike. We released our results after yesterday's close via press release and also filed our Form 10-Q. Let me walk you through some of the important highlights. Total revenue for Q2 '26 increased 13% to $1.92 million compared to $1.7 million in Q2 '25. That growth was driven by a 53% increase in license fee revenue to $1.2 million from $800,000 reflected several new customer license agreements signed during the quarter. Hardware revenue decreased 19% to $460,000 from $569,000, principally due to the timing of customer deployments, including the absence of a large order Mike mentioned that shifted from Q2 into our second half, with a large deployment for a long-term customer in prior year period. Service, maintenance and other revenue decreased 28% to $231,000 from $322,000 due to lower non-recurring service revenues tied to product customization and the timing of recurring revenue service agreements renewals. The first half of the year, total revenue grew 23%, they're also driven primarily by the license fee growth. Gross profit for the quarter increased 36% to $1.7 million from $1.2 million in Q2 '25, and gross margin improved to 87% up from 73% a year ago. That improvement reflects growth as well as larger concentration of high margin license fee revenue and increased benefit from sales of hardware inventory that had previously been fully reserved. Much of the reserved inventory relates to units originally purchased for projects that were delayed indefinitely during the pandemic. We have been selling that inventory into other markets and since it's been fully reserved, those sales carry 100% gross profit contribution. Total operating expenses decreased 5% to $2.2 million, principally reflecting lower selling, general and administrative expense from our ongoing cost containment efforts, partially offset by higher expenses related to the reverse stock split and audit and tax-related costs. In all, our Q2 '26 net loss improved to $577,000 or $0.56 per share, compared to a net loss of $1.17 million or $2.01 per share in Q2 '25, a 51% improvement. For the first half, our net loss improved 59% to $782,000 or $0.75 per share, compared to $1.9 million or $3.61 per share in the first half of 2025. Weighted average common shares outstanding, and per share results reflect an impact of the April 30 1-for-10 reverse stock split, as well as warrant exercises and other financing activities through June 30. Turning to the balance sheet, stockholders' equity was $4.3 million as of June 30, and we had $3.8 million of current assets at the quarter end, including $1.4 million of cash and $1.7 million of accounts receivable and $376,000 of inventory. Following the quarter end, we reduced the outstanding balance due for our outstanding note by $350,000 or 51% to $325,000 in exchange for the issuance of 81,100 BIO-key shares or approximately $4.32 per share. And as Mike mentioned, we raised gross proceeds of $2.5 million earlier this week through a warrant inducement transaction involving the sale of 681,334 shares of common stock upon the exercise price of $4.06 per share, and the new issuance of warrants to purchase 1.2 million shares of common stock at an exercise price also $4.06 per share. Given the effect of the financing proceeds, the company's current cash position is now over $4.5 million, which provides ample working capital support for our operations and growth. As Mike outlined, we expect continued growth and we are targeting profitability for the second half of the year. Operator, we can now proceed with questions and answers.

[Operator Instructions] The first question today comes from Jack Vander Aarde with Maxim Group.

Mike, maybe I'll start with a question on your business outlook for the back half of the year. You're expecting revenue growth and profitability, which is great to hear. Can you just maybe touch on that, I guess specifically that large hardware order that got pushed into the second half? Do you have any line of sight there, visibility, how that's going to be allocated as it ships? And is it going to be -- or is it going to be allocated across both the third and the fourth quarter?

It's hard for me to say right now. We'd like to see it all ship in the third quarter, but we'll see as things evolve. But more importantly, Jack, that's not the only large order or let's say project or contract that we're working for the second half. What I didn't mention in my prepared remarks is what we're really enthused and excited about is the size of our orders and the size of our contracts are going up significantly. So as we work in the regulated industries, especially in government, defense, and in banking, the opportunities in general themselves are bigger, right? The user counts and user population are larger, and so therefore, so are the value of those contracts. So the reason that we're enthused and excited about continued growth in the second half and obviously getting to profitability is we need just a couple of those large ones to fall, and we should easily get there. But that's -- so it's that order and many others that we're working in the second half as well in our pipeline.

Okay, great. Of course, things are -- it's really growth across the board here. If I look at your license revenue as well, that did look like it picked up a bit here in the second quarter. Just kind of housekeeping question, normally you have that slower third quarter sometimes in the licensing front because of EMEA. Now things have changed a little bit in your business model, but do we expect growth across, I guess, all the segments as well then in the back half, including license revenue?

Yes, well, first of all, license revenue is growing, and that's really what we're after, right? I mean, that's what drives our gross margin and maintaining a high gross margin, because most of our customers who buy our biometric -- identity-bound biometric solutions, buy both hardware and software. But for sure, the third quarter, given again, EMEA like right now, virtually everyone is off, right, in August, so things don't pick up until first or so -- first, second week of September. But I still feel like we have enough in the pipeline to have growth in the third quarter and absolutely, certainly significant growth in the fourth quarter as we close out the year. So yes, I think we're going to continue to see growth across the board. And license is what we're after, right? That's the business here, recurring revenue, signing customers up, getting more contracts in play, and building a recurring revenue base. That and maintaining our expense levels. We had a little bit of a blip in the second quarter with one-time expenses, but that was a one-time event. Our expenses have been very stable, if not declining. So we need to hold in that realm and we need to build that license revenue. With gross margins in the 85% range, it's most of what we sell drops to the bottom line.

Yup, no, definitely. This is actually -- might be a historical record quarter on the gross margin front. I'm looking back at my model here, but no, that was great to see. And then plus you got this cash that came in with these warrant inducements and I think you're over $4 million of cash now pro forma-wise. As you look forward and you're going to be profitable, I mean, is this cash? What are the specific use cases for cash? Or is this just good working capital on hand to have and no further dilution expected?

Well, there's no further dilution expected, that's for sure. At this point, we have adequate cash resources to not only operate our business, but to continue to invest in the areas, as I mentioned, around agentic AI and securing that whole ecosystem right now is really a wonderful opportunity for biometrics, and no one does it better than us. I mean, it's pretty clear, and we've been validating this, as I mentioned in my prepared remarks, with many prospect customers and in particular, partners, that we have a very unique offering for roaming users and use cases where phones and tokens just don't work and because again users cannot have, for example, a phone in their hand if they're in a service bay, or they don't want them with a phone in a call center where you can take photographs of customer records and that kind of thing. So we've got the perfect solution, and our Passkey:YOU offering, which is now ramping is going to be a really big benefit for us. So we're just really optimistic about being able to take advantage of that. But yes, we're not anticipating any additional dilution at this point. We've got adequate cash on hand to continue to operate our business and we'd like to keep working capital 'at the highest level we can. It gives us credibility with our prospects and our customers and so that was the impetus behind doing this last raise that we did.

Okay, great to hear. And just because you mentioned it, maybe one more question on Passkey:YOU, just do you have like a rough sense, what percentage or just roughly how much of that is a business driver for your results, I guess, in the back half to get profitable or your revenues recently? Just kind of what does that make up in terms of BIO-key's overall revenue mix?

Well, we're just scaling. It's hard for me to give you a percentage, but it's the kind of solution -- maybe put it in context, it's a solution that can be sold anywhere to anyone even if they're running today a competitive offering. So let's just take a classic Okta, ForgeRock, Duo, SailPoint customer that has those use cases that I just mentioned. They have employees in the call center, they have service employees that cannot utilize a phone or a token. They can take advantage of our solution because it can just bolt on to their existing what we call IdP, so it can just bolt on and can be utilized today without changing out their infrastructure, so that's pretty powerful. We don't really know what the potential is over the next probably 12 months, but it's significant. And as we continue to -- right now, we're in a number of different evaluations and pilots with some large customers. As we get more data and information on that, I think we'll be able to predict. But at this point, we know it's large. We'll see how large. And by the way, if we can attach this directly to those partners for them to make available to their customers that are in those fringe use cases, it can be even bigger. It could be really significant. But we have work to do.

[Operator Instructions] The next question comes from Dan Camhis, Private Investor.

The Bank of Jordan, the release said that was a -- that the central bank was developing an initiative. Does that mean that they're studying what they want to do or have they been, are you contracted and actually receiving revenues like in the second quarter or expect in the third quarter?

Yes, we are, and we're expecting it to be much more significant going forward. So in the second half and then obviously into the first part of 2027, as we described in that press release, it's a significant initiative that could impact their entire user population. So if you think about our South African bank customer where we're generating well over $1 million in ARR, it certainly has that potential and capability, but will crescendo to that over the next probably two to three quarters.

I see. Will you be selling hardware?

Both hardware and software. But obviously our focus is on the software, right, the user accounts. That's always driving -- well, again, our blended gross margins are really, really good, 75%-plus. But obviously software is a higher gross margin.

I see. So what has to happen for you to actually ramp up and make some of these bigger sales? Is there some...

We're really in the deployment planning stage right now, it's how we go from point A to point B and there's a lot of work when you're doing a deployment this large, right? There's not only -- there's logistics, there's everything, right? Provisioning, logistics, all that kind of stuff. So we're in the planning stages with them right now.

I see. But my question is, is this like a pilot where they'll then decide whether they want to continue to ramp?

No, no, no. No, we're well beyond that. So we've been selected. I think the press release was clear on that, as was the quote from the senior cyber resource who's been working with us.

I see. And was that a competitive bid?

Yes. Believe it or not, it was a competitive situation, and we were selected sole source.

Okay. All right, let's switch to the Portugal release. How do we estimate the value of the rollout of BIO-key's IM and biometric authentication technologies to the Portugal's public sector ecosystem? Is your margin -- and what is your margin considering your partnering with Visualforma?

The margins are the same. Typically a partner, it could be Visualforma or it could be DLT, could be any one of our partners, domestic or international. Typically, they get a 25% -- anywhere from 20% to 30% on the high end discount off the software. But again, the gross margin to us, because it's software, is the same. So it's 85% of a lower number, but it's 85%. So typically, again, Dan, that's the classic partner discount that these partners get. And so generally they get a discount on the software and then they're providing services to the customer, right? And that's where they really make most of their money, right? They get -- obviously they get a margin on selling the product, but their real business is providing the services and all of the support to the end customers. And in EMEA, 100%, it doesn't matter how large the enterprise is or how small they are, they're generally buying through an MSP, MSSP, or reseller or distributor, so that's the way that model works. And it really is a force multiplier. And we bought the Swivel Secure Europe business, when we bought it 4 or 5, almost 5 years ago now, we bought that to get the distribution channel and the resources that we have there now in EMEA to sell through our products, right? And we were always planning on a transition from selling the Swivel product to BIO-key product, right? The Swivel product had a 50% gross margin, our BIO-key products have margins that are significantly higher than that. What's astounding to me, especially over the last year, given that we jettisoned the SSE product and decided not to renew that contract, it's amazing how these partners have very, very rapidly picked up on the BIO-key solutions and the biometric component in the BIO-key solutions that they're now selling through to all these customers. It really is amazing, and that's why we have such a significant pipeline there.

Okay, and the first part of that question was, how do we value the rollout to the public sector?

Well, you're talking about a country. You're talking about a public sector component in, I call it state and local, right? We did sell a large municipality a solution that now can be replicated into 50 or 100 types of scenarios like that and then you have what we announced last week or the week before was a federal government agency that secured our product for a very high profile defense-related initiative, so that was federal. We sold about 4 to 6 months ago a municipal-type scenario, and now, connect the dots, you got references. What is that potential? It's certainly in the millions of ARR over the next quarters. But again, that business will be developed in combination with that partner and other partners as well that are selling in that space.

I see. Now, I think Portugal's got about 1 million people in their public sector. So are you basically looking to get that whole niche over the next couple years or something like that? Is that what we're looking at?

Again, if you're thinking about state and local, that's one thing, but think about all the government-related initiatives in security, in military, in intelligence, right? These are all the things that are ramping up, not just in Portugal. They're ramping up in every country in the region, in the fuller EMEA region, not just in Europe, in the Middle East. I mean, look at the way the countries in the Middle East are ramping from a defense initiative perspective, from an intelligence perspective. And the fact that, and this is why I think our business there has just astounding potential, because we're now collaborative. As a country, we are collaborating more with those Middle Eastern countries than we ever have before. And they're buying a lot from us on the defense side, right? Not just weapons, but we're collaborating from an intelligence perspective, we're collaborating from a financial perspective. So I mean, I just think the potential is incredible. One other thing, Dan. And we have references, like real references, so when we find an opportunity or an opportunity comes to the doorstep through a partner, it's easy for us to refer them to someone who's already using the solution to solve a similar problem. To me, that's huge. That's 60% of what you need to continue to build and scale a business.

On Saudi Arabia, I found it interesting that they were interested in your technology for education, not necessarily for finance and defense. Is there an opportunity there?