Earnings Call Transcript - BKYI Q2 2025

Operator, Operator

Good morning, everyone. Thank you for standing by, and welcome to BIO-key International's Second Quarter 2025 Call. As a reminder, this conference is being recorded today, Wednesday, August 13, 2025. I will now turn the call over to Bill Jones, Investor Relations. You may proceed.

William Jones, Investor Relations

Thank you, Betsy. 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, which are subject to risks and uncertainties that may cause actual results to differ materially from current expectations. Words like anticipate, believe, expect, plan and project or any similar words identify and express forward-looking statements. These statements are made based on the beliefs, assumptions and information currently available to management as of today and are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a more complete description of the risks and uncertainties that may affect future performance, please see risk factors in the company's annual report on Form 10-K as filed with the Securities and Exchange Commission. 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 such statements to reflect circumstances or events that may occur after this call. Now I will turn the call over to Mike to begin. Mike?

Michael W. DePasquale, CEO

Thanks, Bill, and thank you all for joining us today. After my brief remarks and Ceci's financial review, we will open the call to investor questions. BIO-key had a solid Q2 performance with revenue rising 49% versus last year and 6% on a sequential basis. We also advanced our expense reduction initiatives, trimming SG&A expenses by 13.5% versus last year, more than offsetting increased investments in R&D to further enhance the capabilities of our solutions. We've also reduced our note payable to a balance of $447,000 from $1.5 million at the end of December 2024. Turning to business highlights in the quarter. BIO-key and our partner, Runlevel, secured a major identity and access management deployment with the National Bank of Mozambique. Also, in Q2, we extended our penetration of the defense intelligence market based on the capabilities and strength of our IAM and in particular, our biometric-enabled solutions. We are highly limited in what we can say about security and defense customer engagements. But what I can say is that we completed the first phase of a deployment for a new international defense agency customer, and a respected Middle East police force commenced a 3-year PortalGuard deployment. In addition, we secured $600,000 of follow-on orders for a prominent foreign defense ministry that bring this ongoing project to over EUR 3 million in total revenue in defense investment over the next 4 years. Included within these efforts is the Security Action for Europe or SAFE loan mechanism, raising EUR 150 billion for defense readiness, including missile defense, drones and, of course, cybersecurity. Similarly, NATO members recently agreed to increase their defense and security spending to at least 5% of their GDP by 2035, more than doubling the previous long-standing target of 2% of GDP. Of the new 5% spending target, 1.5% is explicitly allocated to cybersecurity and security-related investments, including strengthening network defenses against cyberattacks. The EU complements these efforts through initiatives to secure 5G networks and critical infrastructures as well as a dedicated action plan for cybersecurity in vital services like hospitals and health care providers. This unprecedented increase in spending is deemed essential for deterring aggression and countering complex hybrid threats. Outside the defense sector, we are particularly encouraged about overall growth opportunities in the EMEA regions of Europe, the Middle East and Africa, where we have been seeing improved traction and a particular interest in our differentiated identity-bound biometric capabilities. We've refocused our efforts on BIO-key branded solutions in those markets following our transition away from the former licensed Swivel Secure solutions and services that we were selling in 2024 and previous to that. Though it takes time to rebuild the opportunity pipeline and channel strategy to focus solely on the BIO-key product suite, we are seeing good traction and positive year-over-year revenue comparisons as we progress through the year. From a margin perspective, our focus on BIO-key solutions provides us greater control and stronger gross margins, supporting our expectations for growth and enhanced margins from the EMEA Group in the back half of 2025. Finally, across the business, we have been developing a new marketing program to better articulate our unique capabilities and compelling value proposition. Given the complexity and competition that exists in our space, we realized it was time to bring a new voice and focus to our core value proposition to better support our channel partners and direct sales efforts. In North America, we continue to build on our strong position in higher education, health care and other public sector segments as well as finance and insurance. Benefiting from our growing base of reference accounts and IT professionals who have experienced firsthand the competitive strengths and value that we provide, in particular with our biometrics. In addition, we are taking steps to revitalize our North American direct and channel sales efforts by recruiting new leadership and cultivating a more collaborative and competitive sales culture to drive improved results. We are also moving back to an in-office model for our sales, business development and marketing teams once again, which is identical to the way we operated before the COVID pandemic. In closing, we believe these strategic business development initiatives, coupled with our growing base of global channel partners, customers and reference accounts, put BIO-key in a strong position to deliver improved top and bottom line results in 2025 and beyond. We also continue to seek opportunities to reduce costs across the business to lower our breakeven level and support our path to positive cash flow and profitability. I'm excited about our potential over the coming quarters and appreciate the patience and support of our investors who have helped us get to this place. Now I will pass the call to Ceci Welch to review BIO-key financials.

Cecilia C. Welch, CFO

Thank you, Mike. Our results were released this morning via press release, and I will now talk about some of the highlights. Our Q2 '25 revenue increased 49% to $1.7 million versus $1.1 million in Q2 '24 with improvements in each segment. The most significant contributor was a $458,000 increase in hardware revenue, principally due to additional deployments of finger biometric scanners for a large long-time customer. License fee revenue increased 4% in Q2 '25, reflecting our growing base of subscription contracts. Our service revenue increased 11%, largely to the benefit of customer service for a large customer upgrade. Q2 '25 gross profit increased by $354,000 or 40% to $1.2 million from $0.9 million in Q2 '24 due to the increase in total revenue, offset by a modest decline in gross margin to 73% in Q2 '25 versus 77% in Q2 '24. The year-over-year margin decrease was the result of a large increase in hardware revenue as a percentage of sales in the current year period as it carries a lower margin than license fees and services. BIO-key reduced $5 million in Q2 '24 due to a 13.5% reduction in SG&A expenses resulting from reductions in administrative sales personnel costs and professional service fees. As Mike mentioned, the SG&A improvement was partially offset by higher research and development costs in support of development of next-generation products such as our PortalGuard upgrade and the exploration of new products and new product lines reflecting higher '25 compared to $1.7 million in Q2 '24 principally related to the share issuances from the warrant exercise and other financing-related activities. As of June 30, 2025, BIO-key had current assets of $4 million, including $2.3 million in cash, up from the current assets of $1.9 million, which included $438,000 of cash. Accounts receivable also increased 37% year-over-year.

Operator, Operator

The first question today comes from Dan Thomas, who is a private investor.

Unidentified Analyst, Analyst

With the increased cost for this, I guess, sales and support team on the cyber defense and increased R&D, should we expect the recent trend towards reduced operating expenses to reverse?

Michael W. DePasquale, CEO

No. Well, again, I want to answer that question the right way, Dan. So no. The answer to that question is we had a, I'll call it, a blip in the second quarter due to a few things. Number one, sounds right—for those events is one element. And I think we believe that the expense run rate that we started the year at will pretty much be the way we proceed through the third and fourth quarter. So again, it was about a $300,000 blip in Q2.

Unidentified Analyst, Analyst

Can you provide any additional information on what meaningful contract activity in the first half of next year means for cybersecurity in Europe?

Michael W. DePasquale, CEO

Yes, it's pretty significant. I think our challenge, in fact, we have contracts that we've closed already this quarter and late last quarter and this quarter that we really just can't discuss. We provide not only an MFA but an identity and access management platform with PortalGuard. And we're pretty much the only vendor that has a solid, proven biometric attachment to ratchet up the level of security for access management for these defense contractors and ultimately, the end-use defense agencies. And so because of our powerful references, that business is going to grow for us. And so, we announced the formal initiative. I mean, we've been working this for the past year, but we announced the formal initiative this morning to go after that business in a bigger way, and we'll be doing some marketing and some other things to ensure that all of the contractors and the end-use agencies know about BIO-key because many of these large contracts are hosted and managed by large primes, right? And on an international basis, we know who all of them are. We have very good partner relationships already in EMEA. And this is just making it more significant for us. It's no secret, right, that the U.S. has forced the EU and the Middle East to step up and spend more to defend themselves and to also acquire product, missiles, weapons, all kinds of drones and other technology from the U.S. as well. So, there's no doubt that the money is there. There's no doubt that the need is there. And with our references, in particular, with some very high-level agencies that we haven't even discussed or announced and we can't yet. We think we're in a really good position to capture that. And that's again on the government side, but we also have a very robust enterprise business. I mean, look at our business in banking and in health care, in education, we have well over 100 customers that represent millions and millions of users every day that use our technology. So, I don't want anyone to think that we're moving away in any way, shape or form from the enterprise business. But I think what we're trying to say here is we're going to take advantage of the thermals that exist now because of this increase in the defense and intelligence markets that's recently evolved.

Unidentified Analyst, Analyst

Okay. When you say you have contracts that you can't mention or — I'm just wondering, have you received the income from those contracts already in the second quarter? Or are those contracts scheduled to come in, in the first half of next year or something? I'm just trying to get a feel for how...

Michael W. DePasquale, CEO

No, both. I was very clear. I mentioned we have already contracts that we've, again, closed at the end of last quarter — this quarter in Q3, and they'll be reflected in the Q3 results, right? I mean, unfortunately, again, we can't really announce the names or any of that at this point. At some point, perhaps we will be able to do that. But at this point, we can't. And so I think even in Q2, the — certainly, at least I look at the stock price, and I don't think it's reflective of our performance today. And I think that the market just yet at this point doesn't realize, again, our opportunity. And unfortunately, it's going to happen — it's going to be shown in the results because a lot of the things that we are involved in right now are just not announceable. It's just the way it is. And I don't think we're the only company in this position, but certainly for us right now, that's our situation.

Unidentified Analyst, Analyst

Okay. But you're saying that these things you haven't announced that they'll be providing income in the next year, and that's some of what you're basing this idea of meaningful contract activity? Or are you just expecting that because of the increased market in Europe and EMEA? That's what I'm saying.

Michael W. DePasquale, CEO

No, no, no. This isn't a pipe dream. There will be results this quarter from some of these contracts in Q3. This is Q3. We're in Q3 and Q4 and obviously beyond. But these are real contracts that have generated revenue already and will continue to generate revenue through the end of this year and into next year, and beyond, right? Obviously, these are investments that are going to go on for 5-plus years, maybe even longer.

Unidentified Analyst, Analyst

Okay. Do you expect these to ramp, I guess? I guess I'm trying to understand will — I mean, we've lost $1 million, I think, in this quarter. So, these have to ramp for you to get to breakeven. So, are you expecting like a growth — significant growth from these in the first half? Is that what's going on?

Michael W. DePasquale, CEO

Absolutely. There's no question. I mean, again, it's iterative, right? These things will grow. The quantity of opportunities, customers will grow as well the size. And typically, these things start and then they iterate. If you look at that our first, our largest defense ministry, right, we've iterated to multimillion dollar to multiple millions of dollars in sales, both hardware and software with them over the last few years. And so, these are the things that continue, right? There — they start and then they iterate. They get bigger. More users get added, more touch points get added, i.e., that represents hardware. But one other point that I want to make, our blended gross margins still are 70-plus percent, which is very, very strong. They float, right, between 70% and 80%. But at the end of the day, those are very, very strong and powerful gross margins. And I think a testament to the quality and the nature of our solution set. Customers want one throat to choke, they want to be able to buy everything from us and know that we're there to support everything. So again, that's also very powerful for us.

Unidentified Analyst, Analyst

Okay. You mentioned some of this has happened in the third quarter. I think last call, you mentioned that during the summer, I guess, Europe shuts down in August and whatnot. Do we have a feel at all for whether we'll get growth in the third quarter or whether we might see a little bit of a slowdown before a ramp back up in the fourth quarter, anything like that?

Michael W. DePasquale, CEO

Yes. Well, we don't provide guidance. So I'm not going there, but there's no question that Europe right now, right? We're in the dead portion of the summer in Europe, and that will continue through the end of the month but in September, things will wake back up again. So, we're encouraged by our pipeline and the number of opportunities we have. And in the context of also on this kind of defense intelligence segment, it's typically a priority. So it's less impacted by the, I'll call it, the malaise that you see typically in the European summer because these things are mission-critical, right? So, they may obviously have less staff or a diminished focus, but the focus doesn't go away as it will — sometimes you'll see that in the enterprise or commercial markets in Europe. But you'll see less of that in the defense and intelligence sectors.

Unidentified Analyst, Analyst

Okay. That's helpful. How much of the reserve inventory did you sell? Can you give us that?

Michael W. DePasquale, CEO

Yes. We're selling it basically every quarter. We sold a bunch already this quarter in Q3. We continue to move that inventory. And our goal and objective is to, again, by the end of the year to have moved the bulk of it. So I keep mentioning, and I've mentioned this on a number of calls that we have a few larger opportunities to move higher volumes of those units, and that's starting to come to pass for us. So you'll see that reflected in the numbers as we evolve forward. And of course, as you know, they've all been written down. So it's all — it's revenue and it's also all cash. So it's good for us and all margin.

Unidentified Analyst, Analyst

Right. But can you tell us how much you have left?

Michael W. DePasquale, CEO

No.

Unidentified Analyst, Analyst

Do these hardware sales lead or lag software sales? I know a big increase.

Michael W. DePasquale, CEO

They usually come together. So typically, the initial contract or sale will include software and the hardware to get the solution up and going, users registered, deployed. And then the expansion will typically include software and maybe some hardware. So there might be less, there might be more. In the context of our large defense ministry customer, they've deployed, I believe, 40,000 touch points, meaning they've deployed 40,000 finger scanners in different locations throughout their infrastructure and they continue now to add users, right? More and more larger portions of their population are now getting enrolled because they have a wide distribution of touch points, and they fundamentally have mandated that anyone who accesses anything that has to do with their intelligence infrastructure must utilize the BIO-key solution. And every one of those touch points has a BIO-key logo on it, just FYI.

Unidentified Analyst, Analyst

Can you give us any update on Nigeria or Africa? That's still...

Michael W. DePasquale, CEO

We are still active in that region and have shifted our focus to supporting our core products. We have formed several partnerships through our EMEA team in Africa that will represent us, primarily for our core technology and products. The civil ID market has experienced significant volatility, but we successfully secured two banking deals in Africa during the first half of the year, specifically with the Bank of Mozambique and in Egypt. We are also working on another deal that we hope to finalize this quarter or next. Pursuing opportunities in the commercial enterprise market, especially with our biometric solutions, appears to be a strong focus for us in Greater Africa.

Operator, Operator

There are no further questions at this time. I would like to turn the call back over to Michael.

Michael W. DePasquale, CEO

Thank you for joining today's release, and feel free to reach out with any follow-up questions. We plan to take part in several conferences as we move forward through the end of the year, so stay tuned for those updates. We will keep you informed. Have a wonderful day, a good rest of the week, and enjoy the remaining summer. We are excited to provide updates on our call in mid to late fall, specifically in October. Have a great day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.