SEC Form 10-Q filed by BIO-key International Inc.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT |
For the Transition Period from to
Commission file number
BIO-KEY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | |
| (State or Other Jurisdiction of Incorporation of Organization) | (IRS Employer Identification Number) |
(Address of Principal Executive Offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuance to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ |
| Accelerated filer ☐ |
| |
| Smaller Reporting Company |
|
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act) Yes
Number of shares of Common Stock, $.0001 par value per share, outstanding as of November 13, 2024 is
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Due from factor | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Capitalized contract costs, net | ||||||||
| Deposits and other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Note payable | ||||||||
| Government loan – BBVA Bank, current portion | ||||||||
| Deferred revenue, current | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Total current liabilities | ||||||||
| Deferred revenue, long term | ||||||||
| Deferred tax liability | ||||||||
| Government loan – BBVA Bank – net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock — authorized, shares; issued and outstanding; and of $ par value at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||
| September 30, |
September 30, |
|||||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||||
| Revenues |
||||||||||||||||||
| Services |
$ | $ | $ | $ | ||||||||||||||
| License fees |
||||||||||||||||||
| Hardware |
||||||||||||||||||
| Total revenues |
||||||||||||||||||
| Costs and other expenses |
||||||||||||||||||
| Cost of services |
||||||||||||||||||
| Cost of license fees |
||||||||||||||||||
| Cost of hardware |
||||||||||||||||||
| Cost of hardware - reserve |
||||||||||||||||||
| Total costs and other expenses |
||||||||||||||||||
| Gross profit |
||||||||||||||||||
| Operating Expenses |
||||||||||||||||||
| Selling, general and administrative |
||||||||||||||||||
| Research, development and engineering |
||||||||||||||||||
| Total Operating Expenses |
||||||||||||||||||
| Operating loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Other income (expense) |
||||||||||||||||||
| Interest income |
||||||||||||||||||
| Loss on foreign currency transactions |
( |
) | ||||||||||||||||
| Loan fee amortization |
( |
) | ( |
) | ||||||||||||||
| Change in fair value of convertible note |
||||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Total other income (expense), net |
( |
) | ( |
) | ||||||||||||||
| Loss before provision for income tax |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Provision for (income tax) tax benefit |
( |
) | ||||||||||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Comprehensive loss: |
||||||||||||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Other comprehensive income (loss) – Foreign currency translation adjustment |
||||||||||||||||||
| Comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Basic and Diluted Loss per Common Share |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Weighted Average Common Shares Outstanding: |
||||||||||||||||||
| Basic and diluted |
||||||||||||||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common Stock |
Paid-in |
Comprehensive |
Accumulated |
|||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
| Balance as of January 1, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Issuance of common stock for directors’ fees |
- | |||||||||||||||||||||||
| Issuance of common stock to employees |
- | |||||||||||||||||||||||
| Restricted stock forfeited |
( |
) | ||||||||||||||||||||||
| Exercise of warrants |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | ( |
) | ( |
) | |||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Issuance costs |
- | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of March 31, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Restricted stock forfeited |
( |
) | ||||||||||||||||||||||
| Issuance of common stock for Employee stock purchase plan |
||||||||||||||||||||||||
| Share based compensation for employee stock plan |
- | |||||||||||||||||||||||
| Share-based compensation |
48,315 | |||||||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of June 30, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| Restricted stock forfeited |
( |
) | ||||||||||||||||||||||
| Issuance of restricted common stock to employees and directors |
( |
) | ||||||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Exercise of prefunded warrants |
||||||||||||||||||||||||
| Exercise of warrants |
||||||||||||||||||||||||
| Issuance costs |
(134,392 | ) | ( |
) | ||||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of September 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated |
||||||||||||||||||||||||
| Additional |
Other |
|||||||||||||||||||||||
| Common Stock |
Paid-in |
Comprehensive |
Accumulated |
|||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
| Balance as of January 1, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Issuance of common stock for directors’ fees |
- | |||||||||||||||||||||||
| Issuance of common stock to employees |
||||||||||||||||||||||||
| Restricted stock forfeited |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of March 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Issuance of common stock for directors’ fees |
||||||||||||||||||||||||
| Restricted stock forfeited |
( |
) | ||||||||||||||||||||||
| Issuance of common stock for Employee stock purchase plan |
||||||||||||||||||||||||
| Share based compensation for employee stock plan |
- | |||||||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of June 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Issuance of common stock for directors’ fees |
||||||||||||||||||||||||
| Restricted stock forfeited |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Issuance of restricted common stock to employees |
( |
) | ||||||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance as of September 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: |
||||||||
| Depreciation |
||||||||
| Amortization of intangible assets |
||||||||
| Change in fair value of convertible note |
( |
) | ||||||
| Amortization of capitalized contract costs |
||||||||
| Amortization of Note Payable |
||||||||
| Reserve for inventory |
( |
) | ||||||
| Operating leases right-of-use assets |
( |
) | ||||||
| Share and warrant-based compensation for employees and consultants |
||||||||
| Stock based directors’ fees |
||||||||
| Deferred income tax benefit |
( |
) | ||||||
| Bad debts |
||||||||
| Change in assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ( |
) | ||||
| Due from factor |
( |
) | ||||||
| Capitalized contract costs |
( |
) | ( |
) | ||||
| Deposits |
( |
) | ||||||
| Inventory |
||||||||
| Prepaid expenses and other |
( |
) | ( |
) | ||||
| Accounts payable |
||||||||
| Accrued liabilities |
( |
) | ||||||
| Income taxes payable |
||||||||
| Deferred revenue |
||||||||
| Operating lease liabilities |
( |
) | ( |
) | ||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
( |
) | ||||||
| Net cash used in investing activities |
( |
) | ||||||
| CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds from Note Payable |
||||||||
| Offering costs |
( |
) | ( |
) | ||||
| Proceeds for exercise of warrants |
||||||||
| Receipt of cash from Employee stock purchase plan |
||||||||
| Repayment of government loan |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ||||||
| Effect of exchange rate changes |
||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | $ | ||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
| Nine Months Ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| Cash paid for: |
||||||||
| Interest |
$ | $ | ||||||
All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.
See accompanying notes to the condensed consolidated financial statements.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 (Unaudited)
| 1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
Nature of Business
The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at September 30, 2024 was derived from the audited financial statements, but does not include all of the disclosures required by GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on June 5, 2024.
Foreign Currencies
The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, all assets and liabilities are translated into U. S. dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive income (loss).
Recently Issued Accounting Pronouncements
Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. The adoption of ASU 2016-13 had a material effect on the consolidated financial statements of the Company.
In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 was effective for the Company on January 1, 2024 and should be applied on a full or modified retrospective basis. The adoption of ASU 2016-13 did not have a material effect on the consolidated financial statements of the Company.
Management does not believe that any other recently issued, but not yet effective, accounting standard, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
| 2. | GOING CONCERN |
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations all of which raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
As of the date of this report, the Company does not have enough cash for twelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its ability to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the Company's ability to continue as a going concern. In recent periods, the Company has reduced its marketing, research and development, and rent expenses. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is currently exploring other markets and opportunities to sell or return the product to generate additional cash.
| 3. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three month periods ended September 30, 2024 and September 30, 2023:
| North | September 30, | |||||||||||||||||||
| America | Africa | EMESA* | Asia | 2024 | ||||||||||||||||
| Services | $ | $ | $ | $ | $ | |||||||||||||||
| License fees | ||||||||||||||||||||
| Hardware | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| North | September 30, | |||||||||||||||||||
| America | Africa | EMESA* | Asia | 2023 | ||||||||||||||||
| Services | $ | $ | $ | $ | $ | |||||||||||||||
| License fees | ||||||||||||||||||||
| Hardware | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
The following table summarizes revenue from contracts with customers for the nine month periods ended September 30, 2024 and September 30, 2023:
| North | September 30, | |||||||||||||||||||
| America | Africa | EMESA* | Asia | 2024 | ||||||||||||||||
| Services | $ | $ | $ | $ | $ | |||||||||||||||
| License fees | ||||||||||||||||||||
| Hardware | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| North | September 30, | |||||||||||||||||||
| America | Africa | EMESA* | Asia | 2023 | ||||||||||||||||
| Services | $ | $ | $ | $ | $ | |||||||||||||||
| License fees | ||||||||||||||||||||
| Hardware | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
*EMESA – Europe, Middle East, South America
Deferred Revenue
Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is
| 4. | ACCOUNTS RECEIVABLE |
Accounts receivable are carried at original amount less an estimate made for credit losses based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions and other relevant factors, including specific reserves for certain accounts. Accounts receivable are written off when deemed uncollectible.
Accounts receivable at September 30, 2024 and December 31, 2023 consisted of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net of allowances for credit losses | $ | $ | ||||||
Bad debt expenses are recorded in selling, general, and administrative expense.
| 5. | SHARE BASED COMPENSATION |
The following table presents share-based compensation expenses included in the Company’s unaudited condensed interim consolidated statements of operations:
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Selling, general and administrative | $ | $ | ||||||
| Research, development and engineering | ||||||||
| $ | $ | |||||||
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Selling, general and administrative | $ | $ | ||||||
| Research, development and engineering | ||||||||
| $ | $ | |||||||
| 6. | INVENTORY |
Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and market conditions. Approximately $
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Fabricated assemblies | ||||||||
| Reserve on finished goods | ( | ) | ( | ) | ||||
| Total inventory | $ | $ | ||||||
| 7. | COMMITMENTS AND CONTINGENCIES |
Distribution Agreement
Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:
| 1. | The initial term of the agreement ends on January 31, 2027 and will be automatically extended for additional one-year terms thereafter unless either party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term. |
| 2. | SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in the EMEA (Europe, Middle East and Africa), excluding the United Kingdom and Republic of Ireland, for a defined discount on the sale price. |
| 3. | Swivel Secure is expected to generate a certain minimum level of orders of SSL products each year during the term of the agreement. If Swivel Secure fails to meet such minimum level of orders in any year, the exclusive distribution rights will terminate and Swivel Secure will serve as a non-exclusive distributer of SSL Products. |
The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.
Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, 2024, the Company was not a party to any pending lawsuits.
| 8. | LEASES |
The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong-Kong with lease termination dates in 2024. On August 11, 2023, the Company signed a new -year lease starting September 1, 2023 for office space in New Jersey. The property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases were:
| 3 Months ended | 3 Months ended | |||||||
| September 30, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| 9 Months ended | 9 Months ended | |||||||
| September 30, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| September 30, | December 31, | |||||||
| Balance sheet information | 2024 | 2023 | ||||||
| Operating right-of-use assets | $ | $ | ||||||
| Operating lease liabilities, current portion | $ | $ | ||||||
| Operating lease liabilities, non-current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term (in years) – operating leases | ||||||||
| Weighted average discount rate – operating leases | % | % | ||||||
| Cash paid for amounts included in the measurement of operating lease liabilities for the nine months ended September 30, 2024 and 2023: | $ | $ | ||||||
Maturities of operating lease liabilities were as follows as of September 30, 2024:
| 2024 (3 months remaining) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total future lease payments | $ | |||
| Less: imputed interest | ( | ) | ||
| Total | $ |
| 9. | NOTE PAYABLE |
Note Purchase Agreement dated June 24, 2024
On June 24, 2024, the Company entered into and closed a note purchase agreement (the “Purchase Agreement”) which provided for the issuance of a $
The principal amount of the 2024 Note is due eighteen months (
The 2024 Note is secured by a lien on substantially all of the Company’s assets and properties and the Company’s obligations under the Note are guaranteed by Pistol Star, Inc., a wholly owned subsidiary of the Company. The 2024 Note can be prepaid in whole or in part without penalty at any time. In the event that the Company receives any proceeds in connection with any fundraising or financing transaction (including any warrant exercises), it will be required to make a mandatory prepayment equal to the lesser of (i) forty percent (
The 2024 Note provides for customary events of default, including, among other things, the event of non-payment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, the bankruptcy or insolvency of the Company or of all or a substantial part of its property, and monetary judgment defaults of a specified amount. Upon the occurrence of an Event of Default, Lender may (i) cause interest on the outstanding balance to accrue at an interest rate equal to the lesser of twenty two (
The Company received gross proceeds of approximately $
| 10. | CONVERTIBLE NOTE PAYABLE |
Securities Purchase Agreement dated December 22, 2022
On December 22, 2022, the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) and issued a $
The principal amount of the Note was due six months following the date of issuance, subject to one six-month extension by the Company. Interest under the Note accrues at a rate of
In connection with the issuance of the Note, the Company issued to the investor
On October 31, 2023, the Company repaid $
As of December 31, 2023, the Note was paid in full.
| 11. | EARNINGS (LOSS) PER SHARE - COMMON STOCK (“EPS”) |
The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of preferred stock.
The following table sets forth options and warrants which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
| Three Months ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Total | ||||||||||||||||
| 12. | STOCKHOLDERS’ EQUITY |
Issuances of Common Stock
During the nine-month periods ended September 30, 2024, and 2023, there have not been any shares of common stock issued to anyone outside the Company, except as noted in this Note 12.
On June 18, 2021, the stockholders approved the Employee Stock Purchase Plan. Under the terms of this plan,
Issuances of Restricted Stock
Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Nonvested stock is expensed ratably over the term of the restriction period.
During the nine-month periods ended September 30, 2024 and 2023, the Company issued
During the nine-month periods ended September 30, 2024 and 2023,
Share based compensation for the nine-month periods ended September 30, 2024 and 2023, was $
Issuances to Directors
During the nine-month periods ended September 30, 2024, and 2023, the Company issued
Employees’ exercise options
During the nine-month periods ended September 30, 2024 and 2023, employee stock options were exercised.
3. Warrants
During the nine-month period ended September 30, 2024, the entered into a warrant inducement agreement with an existing institutional investor for the immediate exercise of certain outstanding warrants that the Company issued on October 30, 2023. Pursuant to the warrant inducement agreement, the investor agreed to exercise outstanding warrants to purchase an aggregate of
There were warrants issued for the nine-month period ended September 31, 2023.
There were prefunded warrants exercised during the nine-month period ended September 30, 2024.
| 13. | FAIR VALUES OF FINANCIAL INSTRUMENTS |
Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s government loan payable approximates fair value as the interest rate related to the financial instruments approximated market.
| 14. | MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE |
During each of the three month periods ended September 30, 2024, and 2023,
customers accounted for
| 15. | INCOME TAXES |
United States, Hong Kong and Nigeria
The Company recorded income tax expense for the three and nine months ended September 30, 2024 and 2023 because the estimated annual effective tax rate was . In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
As of September 30, 2024 and December 31, 2023, the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
Spain
Due to the current loss for the nine months ended September 30, 2024, the Company did record income taxes. The deferred tax liability presented on the condensed consolidated balance sheet relates to intangible assets from the acquisition of Swivel Secure.
| 16 | SUBSEQUENT EVENTS |
On November 7, 2024, the Company issued
The Company has reviewed subsequent events through the date of this filing.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “should,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. These statements are not guarantees of future performance or events and are subject to risks and uncertainties that may cause actual results to differ materially from those included within or implied by such forward-looking statements. These risks and uncertainties include, without limitation, our history of losses and limited revenue; our ability to raise additional capital to satisfy debt repayment obligations and working capital needs; our ability to continue as a going concern; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition in the biometric technology and identity access management industries; market acceptance of biometric products generally and our products under development; our ability to convert sales opportunities to customer contracts; our ability to expand into Asia, Africa and other foreign markets; our ability to integrate the operations and personnel of Swivel Secure into our business; fluctuations in foreign currency and exchange rates; the duration and extent of continued hostilities in Ukraine and its impact on our European customers; delays in the development of products, the commercial, reputational and regulatory risks to our business that may arise as a consequence the restatement of our financial statements; if we fail to increase our stockholders' equity to at least $2.5 million, our common stock will be delisted from the Nasdaq Stock Market which could negatively impact the trading price of our common stock and impair our ability to raise capital, our temporary loss of the use of a Registration Statement on Form S-3 to register securities in the future; any disruption to our business that may occur on a longer-term basis should we be unable to remediate during fiscal year 2024 certain material weaknesses in our internal controls over financial reporting, statements of assumption underlying any of the foregoing, and numerous other matters of national, regional and global scale, including those set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and other filings with the SEC. These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and our audited financial statements as of December 31, 2023.
Overview
BIO-key International, Inc. (the “Company,” “BIO-key,” “we,” or “us”) is a leading identity and access management, or IAM, platform provider enabling secure work-from-anywhere for enterprise, education, and government customers. Our vision is to enable any organization to secure streamlined and passwordless workforce, employee, customer, student and citizen access to any online service, workstation, or mobile application, without a requirement to use tokens or phones. Our products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, and accessory hardware to provide a complete solution for our customers.
Millions of people use BIO-key multi-factor-authentication, or MFA, solutions every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from all of their devices. We go beyond passwordless to offer phone-less and token-less authentication methods. This critical differentiator is particularly effective for retail, call center, manufacturing, shop-floor, and healthcare environments which utilize roving workers and shared workstations. Unlike most digital identity solutions, BIO-key also plays a role in securing in-person identity. For example, a banking customer has enrolled over 25 million of its customers’ biometrics with BIO-key as part of their know your customer, or KYC process, and then uses BIO-key fingerprint technology each time their customers access bank services to ensure positive identification before transacting with them.
BIO-key PortalGuard and hosted PortalGuard IDaaS authentication platforms enable our customers to assure that only the right people can access the right systems by utilizing our world-class biometric capabilities, among 17 other available authentication methods. PortalGuard goes beyond traditional MFA solutions by allowing roving users to biometrically authenticate at any workstation without using their phones or tokens which addresses sizeable security gaps, including eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.
Our customers use PortalGuard to manage and secure digital systems access by their employees, contractors and partners, which we call workforce identity. PortalGuard is also used to manage and secure the identities of an organization’s customers through integration of APIs we have developed and industry-standard federation standards, which we call customer identity. By using PortalGuard, our customers can securely collaborate with their supply chain and partners, and provide their customers with flexible, resilient user experiences online or in-person.
In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure Europe, a Madrid, Spain based provider of IAM solutions. Swivel Secure Europe is a distributer of the AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include PINsafe, a patented one-time-code extraction technology, helping enterprises manage the increasing data security risks posed by cloud services and “bring your own device” policies.
Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage enrollment, de-duplication and authentication for millions of users.
We sell our branded USB fingerprint and FIDO authentication hardware as accessories to our IAM platforms, so that customers can have a single vendor providing all components of their IAM solution. Our fingerprint biometric platform is certified by NIST and unique among fingerprint platforms in that it supports mixing and matching of different manufactures’ fingerprint scanners in a deployment. This provides our customers with the flexibility to select the right scanner for their specific use case, without mandating the use of a particular scanner.
We operate a SaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.
Strategic Outlook
We plan to have a more significant role in the IAM market which continues to expand. With the adoption of MFA as a cybersecurity requirement, nearly all enterprises are beginning to adopt MFA for their user bases. We plan to continue to offer customers a suite of authentication options that complement our biometric solutions. Our ability to add value to or replace the first-generation MFA solutions deployed by these enterprises with our phone-less and token-less biometrics sets us apart from a crowded field of phone- and token-based MFA solutions. We believe that as enterprises experience the lifecycle costs associated with managing tokens and passwords, they will have an economic incentivize to consider adding BIO-key PortalGuard to their IAM solution. PortalGuard will allow them to continue to use their existing FIDO devices, while selectively augmenting their authentication options with tokenless and phoneless biometric choices.
We expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence including financial services, higher education, and healthcare. We believe that continued heightened security and privacy requirements in these industries, and as colleges and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer network log-on solutions and fingerprint readers. Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education platform providers, we will continue to grow our installed base. Through Swivel Secure Europe, we also expect to grow our business in EMEA.
Our primary sales strategies are focused on (i) increased marketing efforts into the IAM market, (ii) dedicated pursuit of large-scale identification projects across the globe, and (iii) growing our channel alliance program which we have grown to more than one hundred and fifty participants and continues to generate incremental revenues.
A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations.
Recent Developments
The current trend of continued remote work environments increases the risk of unauthorized users, phishing attacks, and hackers who are eager to take advantage of the challenges of securing remote workers. A growing trend of security incidents that highlight potential cybersecurity vulnerabilities, additional regulatory requirements, and increasingly stringent Cyber Insurance underwriting standards that mandate enhanced security solutions has resulted in many businesses requiring MFA for their employees, partners and customers to access their business systems and data. We believe that biometrics should continue to play a key role in remote user authentication.
Critical Accounting Policies and Estimates
For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements
For detailed information regarding recent account pronouncements, see Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED September 30, 2024 AS COMPARED TO September 30, 2023
Consolidated Results of Operations - Percent Trend
| Three Months Ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| Revenues |
||||||||
| Services |
13 | % | 33 | % | ||||
| License fees |
67 | % | 52 | % | ||||
| Hardware |
20 | % | 15 | % | ||||
| Total Revenues |
100 | % | 100 | % | ||||
| Costs and other expenses |
||||||||
| Cost of services |
5 | % | 7 | % | ||||
| Cost of license fees |
7 | % | 14 | % | ||||
| Cost of hardware |
10 | % | 5 | % | ||||
| Cost of hardware - reserve |
0 | % | 55 | % | ||||
| Total Cost of Goods Sold |
22 | % | 81 | % | ||||
| Gross profit |
78 | % | 19 | % | ||||
| Operating expenses |
||||||||
| Selling, general and administrative |
75 | % | 98 | % | ||||
| Research, development and engineering |
30 | % | 29 | % | ||||
| Total Operating Expenses |
105 | % | 127 | % | ||||
| Operating loss |
-27 | % | -108 | % | ||||
| Other expense |
-7 | % | 7 | % | ||||
| Loss before provision for income tax |
-34 | % | -101 | % | ||||
| Provision for income tax |
0 | % | 0 | % | ||||
| Net loss |
-34 | % | -101 | % | ||||
Revenues and cost of goods sold
| Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Revenues |
||||||||||||||||
| Service |
$ | 267,371 | $ | 587,893 | $ | (320,522 | ) | -55 | % | |||||||
| License |
1,441,011 | 950,015 | 490,996 | 52 | % | |||||||||||
| Hardware |
436,422 | 279,200 | 157,222 | 56 | % | |||||||||||
| Total Revenue |
$ | 2,144,804 | $ | 1,817,108 | $ | 327,696 | 18 | % | ||||||||
| Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Cost of Goods Sold |
||||||||||||||||
| Service |
$ | 110,723 | $ | 125,039 | $ | (14,316 | ) | -11 | % | |||||||
| License |
146,732 | 253,891 | (107,159 | ) | -42 | % | ||||||||||
| Hardware |
207,655 | 97,674 | 109,981 | 113 | % | |||||||||||
| Hardware - reserve |
- | 1,000,000 | (1,000,000 | ) | -100 | % | ||||||||||
| Total COGS |
$ | 465,110 | $ | 1,476,604 | $ | (1,011,494 | ) | -69 | % | |||||||
Revenues
For the three months ended September 30, 2024, and 2023, service revenues included approximately $214,000 and $279,000, respectively, of recurring maintenance and support revenue, and approximately $53,000 and $291,000 respectively, of non-recurring custom services revenue. Recurring service revenue decreased $65,000 or 24% in 2024 which was due to the loss of one large customer service agreement. Non-recurring custom services decreased 97% due to loss of one large customer for Swivel Secure customizations and upgrades. We expect the service revenue to remain at the current lower rate in future periods.
For the three months ended September 30, 2024, license revenue increased $490,996 or 52% to $1,441,011 from $950,015 in the corresponding period in 2023 , as several long-term customers expanded their license deployments.
Costs of goods sold
For the three months ended September 30, 2024, cost of service decreased approximately $14,000 or 11% to $110,723 from $125,039 in the three months ended September 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments. For the three months ended September 30, 2024, license fees decreased to $146,732 from $253,891 in the three months ended September 30, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings. For the three months ended September 30, 2024, hardware costs increased to $207,655 from $97,674 in the three months ended September 30, 2023, related to increase of hardware revenue.
Selling, general and administrative
| Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Selling, general and administrative |
$ | 1,607,925 | $ | 1,776,305 | $ | (168,380 | ) | -9 | % | |||||||
Selling, general and administrative expenses for the three months ended September 30, 2024, decreased 9% from $1,776,305 in the corresponding period in 2023 to $1,607,925 in the current quarter. The decreases included reductions in administration, sales personnel costs and marketing show expenses, offset by an increase in professional services incurred in connection with financing transactions.
Research, development and engineering
| Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Research, development, and engineering |
$ | 652,174 | $ | 529,757 | $ | 122,417 | 23 | % | ||||||||
For the three months ended September 30, 2024, research, development, and engineering costs increased 23% to $652,174 compared to $529,757 in the corresponding period in 2023. The increase consisted primarily in an increase in personnel costs.
Other income (expense)
| Three Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Interest income |
$ | 2 | $ | 5,917 | $ | (5,915 | ) | -100 | % | |||||||
| Loan fee amortization |
(60,000 | ) | - | (60,000 | ) | -100 | % | |||||||||
| Change in fair value of convertible note |
- | 167,283 | (167,283 | ) | 100 | % | ||||||||||
| Interest expense |
(98,556 | ) | (45,655 | ) | (52,901 | ) | -116 | % | ||||||||
| Other income (expense) |
$ | (158,554 | ) | $ | 127,545 | $ | (286,099 | ) | 224 | % | ||||||
Other income (expense) for the three months ended September 30, 2024 consisted of interest income of $2 and interest expense of $98,556 comprised of approximately $4,200 on the government loan through the BBVA bank and the balance on the 2024 Note, and a loan fee amortization amount of $60,000. Other income (expense) for the three months ended September 30, 2023 consisted of interest income of $5,917, interest expense of $45,655 on the secured note payable and the government loan through the BBVA bank net of interest, and change in fair value of $167,283 on the convertible note payable.
Nine MONTHS ENDED September 30, 2024 AS COMPARED TO September 30, 2023
Consolidated Results of Operations - Percent Trend
| Nine Months Ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| Revenues |
||||||||
| Services |
14 | % | 29 | % | ||||
| License fees |
76 | % | 64 | % | ||||
| Hardware |
10 | % | 7 | % | ||||
| Total Revenues |
100 | % | 100 | % | ||||
| Costs and other expenses |
||||||||
| Cost of services |
6 | % | 11 | % | ||||
| Cost of license fees |
8 | % | 17 | % | ||||
| Cost of hardware |
5 | % | 4 | % | ||||
| Cost of hardware - reserve |
0 | % | 42 | % | ||||
| Total Cost of Goods Sold |
19 | % | 74 | % | ||||
| Gross profit |
81 | % | 26 | % | ||||
| Operating expenses |
||||||||
| Selling, general and administrative |
98 | % | 99 | % | ||||
| Research, development and engineering |
34 | % | 30 | % | ||||
| Total Operating Expenses |
131 | % | 129 | % | ||||
| Operating loss |
-50 | % | -103 | % | ||||
| Other expense |
-4 | % | 2 | % | ||||
| Loss before provision for income tax |
-53 | % | -101 | % | ||||
| Provision for income tax |
0 | % | -2 | % | ||||
| Net loss |
-53 | % | -104 | % | ||||
Revenues and cost of goods sold
| Nine Months Ended |
||||||||||||||||
| September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Revenues |
||||||||||||||||
| Service |
$ | 764,062 | $ | 1,740,880 | $ | (976,818 | ) | -56 | % | |||||||
| License |
4,165,669 | 3,764,342 | 401,327 | 11 | % | |||||||||||
| Hardware |
537,562 | 424,582 | 112,980 | 27 | % | |||||||||||
| Total Revenue |
$ | 5,467,293 | $ | 5,929,804 | $ | (462,511 | ) | -8 | % | |||||||
| Cost of Goods Sold |
||||||||||||||||
| Service |
322,957 | 639,996 | (317,039 | ) | -50 | % | ||||||||||
| License |
443,384 | 1,022,919 | (579,535 | ) | -57 | % | ||||||||||
| Hardware |
260,684 | 240,074 | 20,610 | 9 | % | |||||||||||
| Hardware - reserve |
- | 2,500,000 | (2,500,000 | ) | -100 | % | ||||||||||
| Total COGS |
$ | 1,027,025 | $ | 4,402,989 | $ | (3,375,964 | ) | -77 | % | |||||||
Revenues
For the nine months ended September 30, 2024, and 2023, service revenues included approximately $682,000 and $899,000, respectively, of recurring maintenance and support revenue, and approximately $82,000 and $842,000 respectively, of non-recurring custom services revenue. Recurring service revenue decreased $217,000 or 24% in 2024 which was due to the loss of one large customer service agreement. Non-recurring custom services decreased 90% due to loss of one large customer for Swivel Secure customizations and upgrades. We expect the service revenue to remain at the current lower rate in future periods.
For the nine months ended September 30, 2024, license revenue increased $401,327 or 11% to $4,165,6699 from $3,764,342 in the corresponding period in 2023. Several long-term customers expanded their license deployments which contributed to the increase.
Costs of goods sold
For the nine months ended September 30, 2024, cost of service decreased approximately $317,000 or 50% to $322,957 from $639,996 in the nine months ended September 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments. For the nine months ended September 30, 2024, license fees decreased to $443,384 from $1,022,919 in the nine months ended September 30, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings. For the nine months ended September 30, 2024, hardware costs increased to $260,684 from $240,074 in the nine months ended September 30, 2023, related to costs associated with increased hardware revenue.
Selling, general and administrative
| Nine Months Ended |
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| September 30, |
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| 2024 |
2023 |
$ Change |
% Change |
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| Selling, general and administrative |
$ | 5,332,764 | $ | 5,851,201 | $ | (518,437 | ) | -9 | % | |||||||
Selling, general and administrative expenses for the nine months ended September 30, 2024, decreased 9% from $5,851,201in the corresponding period in 2023 to $5,332,764. The decreases included reductions in administration, sales personnel costs and marketing show expenses, offset by an increase in professional fees incurred in connection with financing transactions.
Research, development and engineering
| Nine Months Ended |
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| September 30, |
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| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Research, development and engineering |
$ | 1,850,929 | $ | 1,778,097 | $ | 72,832 | 4 | % | ||||||||
For the nine months ended September 30, 2024, research, development, and engineering costs increased 4% to $1,850,929 compared to $1,778,097 in the corresponding period in 2023. The increase consisted primarily of changes in personnel costs and reductions in outside services.
Other income (expense)
| Nine Months Ended |
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| September 30, |
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| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| Interest income |
$ | 53 | $ | 5,944 | $ | (5,891 | ) | -99 | % | |||||||
| Loss on foreign currency transactions |
- | (15,000 | ) | 15,000 | 100 | % | ||||||||||
| Loan fee amortization |
(64,000 | ) | - | (64,000 | ) | -100 | % | |||||||||
| Change in fair value of convertible note |
- | 264,706 | (264,706 | ) | -100 | % | ||||||||||
| Interest expense |
(108,823 | ) | (159,380 | ) | 50,557 | 32 | % | |||||||||
| Other income (expense) |
$ | (172,770 | ) | $ | 96,270 | $ | (269,040 | ) | 279 | % | ||||||
Other income (expense) for the nine months ended September 30, 2024 consisted of interest income of $53 and interest expense of $108,823 comprised of approximately $8,100 on the government loan through the BBVA bank and the balance accrued on the 2024 Note, and a loan fee amortization amount of $64,000. Other income (expense) for the nine months ended September 30, 2023 consisted of interest income of $5,944, a loss on foreign currency of $15,000, a change in fair value of $264,706 on the convertible note payable, and interest expense of $159,379 on the secured note payable and the government loan through the BBVA bank.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating activities overview
| Net cash used in operations during the nine months ended September 30, 2024 was $2,399,508. Items of note included: |
| ● |
Net positive cash flows related to adjustments for non-cash expenses of approximately $667,000. |
| ● |
Net positive cash flows related to inventory, amount due from factor, accounts payable, and deferred revenue of approximately $875,000. |
| ● |
Negative cash flows related to changes in accounts receivable, prepaid expenses, and accrued liabilities of approximately $469,000, due to working capital management. |
Financing activities overview
Net cash provided by financing activities during the nine months ended September 30, 2024 was $3,660,414 which included $2,000,000 of proceeds from the 2024 Note, $1,906,528 from the exercise of warrants, $1,571 from the exercise of prefunded warrants, and $1,939 from the purchase of shares in the Employee Stock Purchase Plan, which amounts were offset by $101,762 in repayment of the government loan through the BBVA bank and $147,862 for offering costs.
Investing activities overview
Net cash used in investing activities during the nine months ended September 30, 2024 was $23,047 for capital expenditures.
Liquidity and Capital Resources
Since our inception, our capital needs have been met through proceeds from the sale of equity and debt securities, and revenue. We expect capital expenditures to be less than $100,000 during the next twelve months.
The following sets forth our investment sources of capital during the previous two years:
On September 12, 2024, we entered into a warrant exercise agreement with an existing investor (the “Investor”) to exercise certain outstanding warrants to purchase an aggregate of 1,030,556 shares of the Company’s common stock. The warrants were originally issued to the Investor on October 31, 2023 and had an original exercise price of $3.15 per share. In consideration for the immediate exercise of the warrants, we reduced the exercise price of the warrants to $1.85 per share and issued to the Investor unregistered Series A Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock and unregistered Series B Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock, each with an exercise price of $1.85 per share. The Series A and Series B warrants share substantially the same terms, are immediately exercisable and will expire five years from the date of issuance. The forgoing transaction resulted in gross proceeds of approximately $1.9 million prior to deducting placement agent fees and estimated offering expenses.
On June 24, 2024, we entered into and closed a note purchase agreement which provided for the issuance of a $2,360,000 principal amount senior secured promissory note (the "2024 Note"). This resulted in gross proceeds of approximately $1,826,000 after deducting placement agent fees, estimated offering expenses, and the original issue discount. The 2024 Note is due eighteen months (18) following the date of issuance, accrues interest at a rate of nine percent (9%) per annum, and commencing six months after the date of issuance of, the lender shall have the right to redeem up to $270,000 of principal amount each month. For a more complete description of the 2024 Note, please see Note 9 to Our Condensed Consolidated Financial Statements included in Part I Item 1 of this report. In connection with the warrant exercise agreement described above, we prepaid approximately $762,600 of the amount due under the 2024 Note.
On November 20, 2023, we completed a private placement of shares of common stock and warrants resulting in net proceeds of approximately $435,000, after deducting placement agent fees and estimated offering expenses.
On October 30, 2023, we completed a public offering of units consisting of shares of common stock, pre-funded warrants to purchase shares of common stock, and warrants to purchase share of common stock. Each Unit was sold at a public offering price of $0.175. resulting in net proceeds of $3.3 million, after deducting the placement agent fees and offering expenses.
In December 2022, we entered into and closed a securities purchase agreement with AJB Capital Investments, LLC under which we issued a $2,2 million principal amount senior secured promissory note (the “Note”). The principal amount of the Note was due six months following the date of issuance, subject to one six-month extension. Interest under the Note accrued at a rate of 10% per annum, payable monthly through month six and at 12% per annum in months seven through twelve, payable monthly. The Note was secured by a lien on substantially all of our assets and properties. The Note was repaid in December 2023.
We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2025 and may be discontinued at that time. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 per quarter of certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to us (the “Advance Amount”), with the remaining balance, less fees, forwarded to us once the Factor collects the full accounts receivable balance from the customer. In addition, from time to time, we receive over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice. We expect to continue to use this factoring arrangement periodically to assist with our general working capital requirements due to contractual requirements.
Liquidity outlook
At September 30, 2024, our total cash and cash equivalents were $1,801,137, as compared to $511,400 at December 31, 2023. At September 30, 2024, we had negative working capital of approximately $1,320,000.
As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $732,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. We also have approximately $3.5 million of inventory (currently reserved) purchased for projects in Nigeria. We continue to explore other markets and opportunities to sell the product to generate additional cash. If we are unable to generate sufficient revenue to fund current operations and execute our business plan, we will need to obtain additional third-party financing. Unless we generate sufficient positive cash flow from operations or liquidation of existing inventory, we expect that we will need to obtain additional financing during the next twelve months to support operations.
In addition, as reported in our Current Report on Form 8-K filed June 14, 2024, we are no longer in compliance with Nasdaq Capital Market continued listing rules which require us to maintain stockholders' equity of at least $2,500,000. Our plan to regain compliance will require us to raise additional equity capital in the near term, or engage in a strategic transaction. There can be no assurance that we will be able to raise such capital or regain compliance with the continued listing requirements.
Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or in the extreme case, not continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective.
As previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, in connection with the audit of our financial statements as of and for the year ended December 31, 2023, our management identified a lack of control over properly assessing revenue, allowances for accounts receivable and certain reserves for inventory. This resulted in certain errors in the manner in which we recognized revenue generated by our European subsidiary, Swivel Secure Europe, SA, in the first quarter of 2023. In addition, certain allowances for accounts receivable and certain reserves for inventory were understated. We are currently working to implement appropriate corrective actions to remediate the material weakness to strengthen our internal controls over the recording of revenues. This has included thoroughly accessing all accounts for potential adjustments required for proper presentation of the value of the accounts, changing management of our Swivel Secure operation, and implementing additional revenue recognition controls.
Changes in Internal Control Over Financial Reporting
Other than as described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any pending lawsuits.
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
During the nine months ended September 30, 2024, of our directors or “officers” (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Securities and Exchange Commission Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BIO-Key International, Inc. |
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| Dated: November 14, 2024 |
/s/ Michael W. DePasquale |
|
| Michael W. DePasquale |
||
| Chief Executive Officer |
||
| (Principal Executive Officer) |
||
| Dated: November 14, 2024 |
/s/ Cecilia C. Welch |
|
| Cecilia C. Welch |
||
| Chief Financial Officer |
||
| (Principal Financial Officer) |