BIO-key International, Inc.

Thank you for standing by, and welcome to BioKey International's second quarter 2025 call. During management's prepared remarks, all participants will be in a list of only notes. Afterwards, listeners will be invited to participate in a question and answer session. As a reminder, this conference is being recorded today, Wednesday, August 13, 2025. I will now turn the call over to Bo Jones, Investor Relations. You may proceed.

Thank you, Betsy. Hosting today are BioKeys Chairman and CEO, Mike DiPasquale, and its CFO, CeCe 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 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?

Thanks, Bill, and thank you all for joining us today. After my brief remarks and CC's financial review, we will open the call to investor questions. BioKey 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, BioKey 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 three-year portal guard deployment. In addition, we secured $600,000 of follow-on orders for a prominent foreign defense ministry that bring this ongoing project to over $3 million in total revenue over the last few years. Building on our success with a growing list of foreign military and defense customers, Today we announce the formation of the BioKey Cyber Defense Initiative. We plan to staff this effort with sales and support executives that have strong military and intelligence experience to guide our efforts and to expand our market reach by building engagement with leading defense industry contractors. The initial focus of the Cyber Defense Initiatives will be in the EU, in Europe, where we have key reference accounts and member countries have committed to substantially expanding military and defense investments. Europe's Readiness 2030 framework and ReArm Europe plans aim to mobilize over 800 billion euros in defense investment over the next four years. Included within these efforts is the Security Action for Europe, or SAFE, loan mechanism, raising 150 billion euros 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 longstanding 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 healthcare 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 BioKey branded solutions in those markets, following our transition away from the former licensed Swivl 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 BioKey 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 BioKey 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 ed, healthcare, 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 BioKey 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 break-even level, and support our path to positive cash flow and profitability. I am 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 CeCe Welch to review BioKey Financials.

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 $458,000 increase in hardware revenue, principally due to additional deployment of finger biometric scanners for a large, long-time customer. License fee revenue increased 4% in Q2-25, reflecting our growing base of Saracen 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 350,000, 54,000 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 licensees and services. BioKey reduced operating expenses by approximately 217,000 or 8.5% to 2.3 million in Q2 25 versus 2.5 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 portal guard upgrade, and the exploration of new products and new product lines. Reflecting higher revenues and lower operating costs, IFK's Q2 25 net loss improves to 1.2 million or 20 cents per share from a net loss of 1.7 million or a dollar per share in Q2 24. Our per share amounts are based on 5.8 million weighted average shares outstanding in Q2 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, BioKey had current assets of $4 million, including $2.3 million in cash, up from the year-end current assets of $1.9 million, which included $438,000 of cash. Accounts receivable also increased 37% to $984,000 in June 2022, from 718,000 at year end in 2024. And now, operator, at this time, please prepare for Q&A session.

We will now begin the question and answer session. To ask a question, you may press the top part and 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Once again, if you would like to ask a question, please press star then one to join the question queue. That's star then one. The first question today comes from Dan Comis, who's a private investor. Please go ahead.

Hi, guys. With the increased costs 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?

No. Well, again, I want to answer that question the right way, Dan. By the way, good morning. 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, some restructuring in sales. I mentioned in my prepared remarks we were doing some changes in leadership and sales and business development resourcing. So that's number one. Number two, events, and that's just the timing. You know, we attend a couple of core events each year. One of them is Gartner. One is Identiverse. ISC Squared, we attend that event as well. And so the timing of and the payment, right, for those events is one element. And I think we believe that. The expense run rate that we started the year at from, you know, 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.

Okay. Can you give us any at all additional color on that? What meaningful contract activity in the first half of next year means? Cybersecurity in Europe, I think.

Yeah, 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. It's a very robust market, in particular for us, for our very specific solutions. So, you know, 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 BioKey. Because many of these large contracts are hosted and managed by, you know, large primes, right? And on an international basis, You know, 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. You know, 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 agency Enterprise business. I mean, look at our business in banking and in healthcare. In education, we have well over 100 customers that, you know, represent millions and millions of users every day that use our technology. So, you know, 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.

Okay. When you say you have contracts that you can't mention, 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... No, both.

Both. I was very clear. I mentioned we have already contracts that we've, you know, again, closed at the end of 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, you know, 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.

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 trying to find out.

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, you know, this spending initiatives that are in particular in the EU and in the Middle East are multi-year. Right. These are not just, you know, one time kind of blips. These are investments that are going to go on for five plus years, maybe even longer.

Okay. Do you expect these to ramp, I guess? I guess I'm trying to understand. We've lost a million dollars, I think, in this quarter, so these have to ramp for you to get the break-even. So are you expecting a significant growth from these in the first half? Is that what's going on?

Oh, absolutely. There's no question. I mean, you know, again, it's iterative, right? These things will grow. The quantity of opportunities customers will grow as will the size. And typically these things start and then they iterate. If you look at that, first, our largest defense ministry, right, we've iterated to multi-million dollar, to multiple millions of dollars in sales, both hardware and software with them, over the last few years. And so, you know, these are the things that continue, right? They start and then they iterate. They get bigger. More users get added. More touchpoints get added, i.e., that represents hardware. But one other point that I want to make, you know, our blended gross margins still are 70 plus percent, which is very, very strong. You know, 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, you know, again, that's also very powerful for us.

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?

Yeah, 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 zone. We're in the dead portion of the summer in Europe, and, you know, that will continue through the end of the month. But in September, you know, 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, you know, 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.

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

Yeah, 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 revenue and it's also all cash. So it's good for us and all margin.

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

No.

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

They usually come together. They usually come together. So typically the initial contract or sale will include software and the hardware to get the solution up, 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 touchpoints, and they fundamentally have mandated that anyone who accesses anything that has to do with their intelligence infrastructure must utilize the BioKey solution. And every one of those touchpoints has a BioKey logo on it, just FYI.

Can you give us any update on – Nigeria or Africa?

You know, we still operate there, and we really have turned our focus to supporting our core products right now. You know, we have a number of partners that we've signed up to our EMEA group in Africa that will be representing us, but more for our core technology and core products. The volatility on the other side of the market, you know, I call it the civil ID market, it's just not worth our effort at this point. We do believe, though, in Africa as an emerging market, but more on the – as you see, we closed two deals in – two banking deals in Africa in the first half, right, the Bank of Mozambique and Egypt. We have another one in the pipeline that – We hope we'll close this quarter or next. So going after the commercial enterprise market, in particular with our biometric solutions, seems like a very powerful opportunity. So that's our focus right now in greater Africa. I see.

Last question, you think you have enough cash and equivalents to get you through the end of the year?

Yes, we do.

Okay, I'll get back in the queue. Thank you for the time.

Thanks, Dan.

As a reminder, if you would like to ask a question, please press star then 1 to join the question queue. That's star then 1 to ask a question. If there are no further questions at this time, I'd like to turn the call back over for any closing remarks.

Thank you, everyone, for taking the time with us today. You may reach out to our IR team, whose contact information is in today's press release with any follow-up questions. Also, we expect to participate in a number of conferences as we evolve forward through the end of the year, and stay tuned for those announcements. We certainly will keep you posted. With that, have a great day. A great rest of the week and a great rest of the summer. We look forward to updating you on our call in the late fall, in the mid-fall, in October. Have a great day.

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