BIO-key International 2026 Q3 Earnings Call

Please go ahead. Thank you, operator, and good morning, everyone.

Joining me today are BIO-key's Chairman and CEO, Mike DePasquale, and its CFO, Cece Welch. Please note that 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, project, target, and similar words identify and express forward-looking statements. Such forward-looking statements are made based on the 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 the risks and uncertainties that affect future performance, please see risk factors in the company's annual report on Form 10-K as amended and latest Form 10-Q filed 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. With that, I'll turn the call over to Mike.

Thank you, David, and good morning, everyone. I'll start with an overview of the quarter and our business. Cece will then take you through the financials, and we'll close by taking your questions. Our third quarter results reflect the strength of our core software business. License fee revenue grew 39% year-over-year, and that high-margin recurring revenue lifted our gross margin to 90% from 77% a year ago, and helped reduce our operating loss by 8%. Our gross margin has improved every quarter since the second quarter of last year, and license fee revenue has now grown by double digits on a year-over-year basis for the past three consecutive quarters. Total revenue for the quarter was down 4% from last year's third quarter, as strong license growth largely offset lower hardware sales.

The third quarter is typically our slowest period of the year due to summer vacation schedules, and the first quarter tends to benefit from license renewal activity. For the first nine months of 2026, total revenue rose 14%, and our net loss has improved by 42%, a solid step in the right direction. I want to spend a moment on why we're seeing growing new business wins and how they relate to our core biometric expertise built over decades, which is gaining recognition as a real differentiator where identity assurance matters most. Areas such as government, defense, and financial services, the regulated industries, these customers know how, with uncertainty, that a person, the actual individual accessing a critical system, is who they claim to be.

That's what our Identity-Bound Biometrics deliver, tying access to the individual rather than to a device, a phone, a token, or a password that can be shared, stolen, or phished. Regulators are increasingly pushing in this direction. In response to growing incidents of systems compromise, in the UAE, for example, the central bank directed banks and other licensed financial institutions to phase out SMS and email one-time passwords earlier this year in favor of stronger methods, including biometrics and passkeys. Policies like these are important tailwinds for the value our solutions provide. That backdrop is showing up in who's choosing BIO-key and in the size of the opportunities. Our international team is increasingly winning larger, high-profile deals in highly regulated sectors, as I mentioned before, such as government and banking.

In the third quarter, the Central Bank of Jordan selected BIO-key for a national biometric authentication initiative to modernize how clients access digital services across the financial sector, which serves roughly 11.6 million people. We're working closely with the central bank as the initiative moves towards development deployment. In Portugal, a national security agency selected BIO-key and our partner, Visualforma, to secure access to its administrative systems, privileged accounts, and critical applications. We are seeing incredible upside in the international markets, in particular in the Middle East and in Europe. These awards bring us to eight new Middle East region customers in roughly seven months. These are among the most security-conscious organizations anywhere, and each deployment becomes an important proof of concept and reference for the next, and that's what we're seeing now.

This traction is built on strong local distribution and integration partners with strong connections and understanding of each customer's needs. We continue to expand our partner network, such as our recent partnership with Al Majlis Group to extend our reach across the Arabian Gulf. We have also begun establishing a BIO-key subsidiary in Saudi Arabia to support our growing government business there that will also be staffed with BIO-key resources. Overall, the opportunity is very large, and Gartner forecasts end-user information security spending in the Middle East and North Africa will reach approximately $4 billion in 2026. It's starting to be reflected in our results as the third quarter revenue from our Europe, Middle East, and South America region grew 39% with license fees more than doubling.

In Europe, we recently launched a technology integration with Cipher, the cybersecurity division of global security group Prosegur, bringing our IAM, biometric, and password technologies into their portfolio, starting in Portugal with plans to explore other markets where they operate, such as in Spain, the U.S., and in Brazil. In the U.S., our focus is on PortalGuard, our flexible IAM platform supporting 16 factors of authentication, including fingerprint, face, and palm biometrics. We continue to roll out our latest version, PortalGuard 7, across our customer base. In October, we recruited cybersecurity veteran Steve Morrow as President of PortalGuard to accelerate adoption. We are sharpening our U.S. go-to-market efforts through our DLT partnership, which is focused on the public sector, as well as with other channel partners on the commercial side. Benefits for these efforts are already taking shape.

Earlier this week, we announced that a major U.S. casino resort selected PortalGuard and our Identity-Bound Biometrics to secure workforce access across its 24/7 operations, marking our entry into the gaming and hospitality industry. This enterprise-wide prepaid three-year agreement was won against much larger competitors who were unable to provide the functionality we have. Most of the resort's highest value employees can't carry phones on the gaming floor, making our efficient biometric-driven solution a natural fit. In the realm of AI, our new internally developed Passkey:YOU authenticator received full FIDO Alliance certification this September. It is now in final testing ahead of its major launch, which will allow us to leapfrog the capabilities of our earlier outsourced solution.

Our Passkey:YOU solution lets employees sign in with a fingerprint scanner or badge rather than a phone or a token, and it positions us for one of the most important emerging identity challenge, AI agents. Machine identities, including AI agents, now outnumber human identities by over 100 to 1. It's an amazing statistics, and that's according to industry research. This year, the FIDO Alliance formed a working group to develop standards for trusted AI agent interactions. We believe that for the highest risk actions, the answer has to be verified human, not password or device acknowledgment. Our Identity-Bound Biometrics can tie approval of sensitive AI-driven actions to the actual person accountable. This agentic AI authentication and authorization is an important aspect of the integrated offering of our new Cipher relationship.

Steve Morrow, as I mentioned, the President of our PortalGuard group, is leading the development of the product plans in this area. We see this as a meaningful new market opportunity alongside our core workforce and customer authentication business. On the financial side, we strengthened our balance sheet considerably in the third quarter. We retired our remaining note and debt, leaving us effectively debt-free, and we currently have a solid cash and working capital position to fund our business. Looking ahead, our recent wins, growing base of recurring license revenue, and a solid pipeline of regulated industry opportunities across EMEA position us for a solid finish to 2026 and a really strong start to 2027, supported by the annual license renewal of our largest customer, which exceeds $1 million.

We expect roughly $1.2 million in annual license fee renewals in the first quarter alone, and we are targeting profitability as we approach that timeframe. Our deep biometric expertise, marquee government and financial customers, growing high-margin software revenue, streamlined cost structure, and cleaner balance sheet gives us a very strong foundation, and we believe it sets the stage for an exciting future period. I will hand the call over to Cece to take you through the financials in more detail.