BIO-key International, Inc. (NASDAQ:BKYI) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET Company Participants William Jones - Vice President, Catalyst Global LLC Michael DePasquale - Chief Executive Officer Alex Rocha - Managing Director, EMEA Cecilia Welch - Chief Financial Officer Conference Call Participants Jack Vander Aarde - Maxim Group LLC Operator Good morning, ladies and gentlemen. Thank you for standing by, and welcome to BIO-key International Second Quarter Conference Call. During m ...

Financial Performance - Total revenues for the three months ended March 31, 2022, were $1,941,171, representing an increase from $1,888,638 in the same period of 2021, a growth of approximately 2.8%[12] - Gross profit for the three months ended March 31, 2022, was $1,603,730, compared to $1,122,003 for the same period in 2021, indicating a significant increase of approximately 43%[12] - Operating loss for the three months ended March 31, 2022, was $(999,534), compared to $(836,046) for the same period in 2021, reflecting a deterioration in operating performance[12] - Net loss for the three months ended March 31, 2022, was $(999,403), compared to $(851,431) in the same period of 2021, representing an increase in net loss of approximately 17.4%[12] - Cash flow from operating activities showed a net cash used of $1,952,925, a decrease from $3,464,575 in the previous year[17] - The company generated approximately $5,114,000 in revenue during 2021, which is below its average monthly operational requirement of $814,000[31] Assets and Liabilities - Cash and cash equivalents as of March 31, 2022, were $5,801,121, down from $7,754,046 as of December 31, 2021, a decrease of approximately 25.2%[9] - Total current assets as of March 31, 2022, were $13,806,139, slightly down from $14,012,873 as of December 31, 2021, a decrease of about 1.5%[9] - Total liabilities increased to $4,021,432 as of March 31, 2022, from $2,153,586 as of December 31, 2021, an increase of approximately 86.8%[9] - Total stockholders' equity as of March 31, 2022, was $15,381,555, down from $15,615,455 as of December 31, 2021, a decrease of about 1.5%[9] - The company reported a significant increase in accounts payable, which rose to $175,341 from $65,165 year-over-year[17] - The company recorded an allowance for doubtful accounts of $213,785 as of March 31, 2022, remaining unchanged from December 31, 2021[54] Accounts Receivable and Revenue Recognition - The company reported an increase in accounts receivable, net, to $2,553,331 as of March 31, 2022, compared to $970,626 as of December 31, 2021, an increase of approximately 163%[9] - Accounts receivable as of March 31, 2022, totaled $2,817,116, significantly higher than $1,234,411 at December 31, 2021, marking an increase of approximately 128%[54] - The company recognized revenue of approximately $234,000 from deferred revenue during the three months ended March 31, 2022, compared to $305,000 in the same period of 2021[47] - Deferred revenue increased to approximately $854,000 as of March 31, 2022, compared to $633,000 at December 31, 2021, reflecting a growth of around 35%[47] Expenses - Research, development, and engineering expenses for the three months ended March 31, 2022, were $805,266, up from $441,651 in the same period of 2021, an increase of approximately 82.2%[12] - Share-based compensation expenses for the three months ended March 31, 2022, were $109,697, a decrease from $141,148 in the same period of 2021, reflecting a reduction of about 22%[55] - The company recorded a depreciation expense of $11,220 for the three months ended March 31, 2022, down from $25,115 in the same period of 2021[17] - Factoring fees incurred during the three months ended March 31, 2022, amounted to $18,727, compared to $13,347 in the same period of 2021, representing an increase of approximately 40%[56] Acquisitions - The company acquired Swivel Secure for a total purchase price of $1,379,589 in estimated intangible assets and $450,643 in estimated goodwill[19] - The company completed the acquisition of Swivel Secure Europe, SA for a total purchase price consideration of $2,373,487, including a cash payment of $1,273,483 and common stock valued at $600,004[49][50] - The earn-out from the acquisition of Swivel Secure is contingent upon generating $3,000,000 in revenue and $1,000,000 in operating profit during the earn-out period[49] Inventory and Operating Costs - As of March 31, 2022, total inventory increased to $4,956,472 from $4,940,660 as of December 31, 2021, with finished goods at $4,854,866[59] - The company recorded a total operating lease cost of $55,219 for the three months ended March 31, 2022, compared to $63,973 for the same period in 2021[73] - As of March 31, 2022, operating lease liabilities totaled $211,440, down from $264,162 as of December 31, 2021[73] Strategic Focus and Risks - The company acknowledges the presence of forward-looking statements in its quarterly report, which are subject to risks and uncertainties that may lead to actual results differing materially from those anticipated[94] - The company has a history of losses and limited revenue, which poses a risk to its future financial position[94] - The ability to raise additional capital is crucial for the company's ongoing operations and growth[94] - The company faces competition in the biometric technology and identity access management industries, impacting market acceptance of its products[94] - The ongoing COVID-19 pandemic has affected the company's business operations, sales cycles, and personnel[94] - The company is focused on expanding into Asia, Africa, and other foreign markets, which presents both opportunities and challenges[94] - Integration of operations and personnel from acquisitions, such as PistolStar and Swivel Secure, is a key strategic focus[94] - The company is monitoring the impact of geopolitical events, such as the hostilities in Ukraine, on its European customers[94] - Delays in product development could hinder the company's ability to execute its business strategy effectively[94] - The company does not undertake any obligation to revise forward-looking statements unless required by law[94]

Financial Data and Key Metrics Changes - BIO-key's license revenue increased by 205% compared to Q1 2021 and by 267% from Q4 2021, reflecting growth in the customer base and contributions from the acquisition of Swivel Secure [7] - Gross profit margin rose to 82.6% in Q1 2022, up from 59.4% in Q1 2021, driven by an increase in annual recurring revenue from software licenses [7] - Q1 2022 revenue was $1.94 million, up from $1.89 million in Q1 2021, with a reported net loss of $1 million or $0.12 per share compared to a net loss of $900,000 or $0.11 per share in Q1 2021 [36][38] Business Line Data and Key Metrics Changes - Software license fees saw a 205% increase, while services revenue also rose, offsetting a decline in hardware revenue [36] - The PortalGuard solution gained traction in various sectors, including government and higher education, with significant customer wins [10][12] Market Data and Key Metrics Changes - The company is expanding its presence in the Nigerian market, with expectations of increased shipments of hardware and software in the coming months [44] - The Channel Alliance Program now accounts for approximately 50% of new sales, indicating strong market engagement [10][45] Company Strategy and Development Direction - BIO-key aims to enhance its software license revenue base through its PortalGuard IAM platform and is actively seeking value-enhancing M&A opportunities [22][23] - The company is focused on integrating Swivel Secure to expand its international operations and customer base [9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in reaching breakeven profitability and free cash flow at the lower end of the revenue guidance range of $10 million to $13 million for 2022 [24][25] - The company reiterated its growth outlook, expecting approximately 100% growth over 2021, primarily driven by software licenses [25] Other Important Information - BIO-key's recent enhancements to its MobileAuth solution integrate identity-bound biometrics with other authentication methods, improving security and ease of use [18][20] - The company has received several industry awards, enhancing its reputation and visibility in the market [21] Q&A Session Summary Question: What was the organic growth of licensing revenue versus Swivel Secure's contribution? - Management indicated that approximately $360,000 of licensing revenue in Q1 2022 came from Swivel Secure, with strong organic growth otherwise [42] Question: What are the expectations for shipments in Nigeria? - Management noted that there was a small contribution from hardware sales in Q1, with expectations for revenue to ramp up significantly in the second half of 2022 [44] Question: How many channel alliance partners does the company currently have? - Management stated that they have connected with approximately 200 to 400 partners, with potential growth to 5,000 to 10,000 partners through Intelisys [47]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, $0.0001 par value per share BKYI Nasdaq Capital Market ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___ COMMISSION FIL ...

Financial Data and Key Metrics Changes - In 2021, the company achieved revenue growth of 80%, increasing from $2.8 million in 2020 to $5.1 million in 2021, while reducing net loss by approximately 50% [8][33] - Gross profit rose to $3.4 million in fiscal year 2021 from $2 million in fiscal year 2020, with a gross margin on license fee revenue of 93% in fiscal year 2021 [34] - Operating expenses increased to $8.4 million in FY 2021 from $7.2 million in FY 2020, reflecting higher investment in R&D and product introductions [35] Business Line Data and Key Metrics Changes - PortalGuard IDaaS revenue currently accounts for approximately 80% of total software and services revenue, with a significant increase in recurring software subscription revenue [10][15] - The company launched several new products, including MobilePOS Pro and EcoID II, enhancing its product offerings in the Identity and Access Management (IAM) space [10][11] Market Data and Key Metrics Changes - The company serves an installed base of over 500 IAM customers, with expectations that over 50% of revenues in 2022 will come from channel partners [15][16] - The company is targeting significant growth in the higher education, finance, and government sectors, with new customer acquisitions in these verticals [19][20] Company Strategy and Development Direction - The acquisition of Swivel Secure Europe for approximately $2.25 million is expected to enhance international operations and growth potential [12] - The company aims to focus on expanding its channel partner program and increasing recurring revenue streams through its IAM solutions [15][24] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's prospects, citing the increasing demand for biometric solutions and the importance of identity-bound biometrics in cybersecurity [14][15] - The company anticipates revenue guidance for 2022 in the range of $10 million to $13 million, representing a potential doubling of revenue compared to 2021 [16] Other Important Information - The company has been recognized as a Great Place to Work and received several industry awards for its technology and solutions [11] - The management highlighted the importance of cybersecurity in light of recent geopolitical events and the need for robust multi-factor authentication solutions [13][14] Q&A Session Summary Question: When will the 10-K be filed? - The company confirmed that the 10-K will be filed in the next day or so [39] Question: What suggests building momentum for the Africa contracts? - Management noted that financing for equipment deliveries in Africa is starting to process through banks, which is encouraging for future deployments [41] Question: Will the initial revenue from Africa contracts be hardware sales? - Management indicated that revenue will come from both hardware and recurring software, with a conservative approach taken for hardware guidance [43][44] Question: Why was Q4 license revenue down sequentially? - A large contract renewal off-cycle affected Q4 license revenue, but growth is expected in the upcoming quarters [46] Question: What is the expected growth for Swivel Secure's revenue in 2022? - Management expects all business, including Swivel Secure, to grow, particularly through cross-selling opportunities [49] Question: How will the acquisition of Swivel Secure impact operating expenses? - The acquisition is expected to be profitable and will not negatively impact operating expenses, with potential for upside [52] Question: Will revenue guidance be back-end loaded in 2022? - Management clarified that revenue is expected to be more even and predictable, not back-end weighted [62] Question: What barriers exist for competitors entering the market? - The company highlighted its unique biometric technology and integrated solutions as significant barriers to entry for competitors [68] Question: Is the company positioned well regarding the 2021 security executive order? - Management affirmed that the company is well-positioned to meet the requirements of the executive order, particularly in enhancing cybersecurity for government clients [70]

| --- | --- | |----------------------------------------------------------------------------------|-------| | | | | Identity & Access Management and IdentityBound Biometric Cybersecurity Solutions | | | March 2022 | | | www.BIO-key.com | | | | | | | | 2 Safe Harbor All statements contained herein other than statements of historical facts are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "estimate," "project," "intends," "expects," "anti ...

Report Information [Filing Details](index=1&type=section&id=Filing%20Details) This Form 10-Q quarterly report for BIO-KEY INTERNATIONAL, INC. covers the period ended September 30, 2021, identifying the company as a smaller reporting and non-accelerated filer - The company is classified as a **Smaller Reporting Company** and a **Non-accelerated Filer**[2](index=2&type=chunk) - As of November 12, 2021, **7,833,789 shares of common stock** were outstanding[2](index=2&type=chunk) PART I. FINANCIAL INFORMATION [Item 1 Condensed Consolidated Financial Statements (unaudited)](index=4&type=section&id=Item%201%20Condensed%20Consolidated%20Financial%20Statements%20(unaudited)) This section presents the company's condensed consolidated balance sheets, statements of operations, stockholders' equity (deficit), and cash flows, along with detailed notes to the financial statements [Balance sheets as of September 30, 2021 (unaudited) and December 31, 2020 (audited)](index=4&type=section&id=Balance%20sheets%20as%20of%20September%2030%2C%202021%20(unaudited)%20and%20December%2031%2C%202020%20(audited)) As of September 30, 2021, total assets decreased to **$20,728,106** from **$22,520,572** at December 31, 2020, driven by a decline in cash and an increase in receivables and inventory | Metric | September 30, 2021 (Unaudited) (USD) | December 31, 2020 (Audited) (USD) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $9,591,863 | $16,993,096 | | Accounts receivable, net | $1,541,239 | $548,049 | | Inventory | $4,634,835 | $330,947 | | Total current assets | $16,771,989 | $18,941,873 | | Total assets | $20,728,106 | $22,520,572 | | **Liabilities** | | | | Accounts payable | $1,437,045 | $244,158 | | Accrued liabilities | $699,422 | $508,487 | | Total current liabilities | $3,014,367 | $1,876,303 | | Total liabilities | $3,194,655 | $2,185,453 | | **Stockholders' Equity** | | | | Accumulated deficit | $(102,546,450) | $(99,509,689) | | Total stockholders' equity | $17,533,451 | $20,335,119 | [Statements of operations for the three and nine months ended September 30, 2021 and 2020](index=5&type=section&id=Statements%20of%20operations%20for%20the%20three%20and%20nine%20months%20ended%20September%2030%2C%202021%20and%202020) For the three months ended September 30, 2021, total revenue increased by **38%** to **$1,298,829**, driven by significant growth in license fees, while net loss narrowed substantially to **$1,023,647** | Metric | Three Months Ended September 30, 2021 (USD) | Three Months Ended September 30, 2020 (USD) | Nine Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | | | | | | Services | $318,500 | $491,535 | $985,163 | $928,561 | | License fees | $870,459 | $346,479 | $2,011,610 | $605,366 | | Hardware | $109,870 | $105,311 | $1,182,784 | $239,025 | | **Total Revenue** | **$1,298,829** | **$943,325** | **$4,179,557** | **$1,772,952** | | **Gross Profit** | **$1,004,155** | **$731,716** | **$2,878,679** | **$1,288,626** | | Operating Loss | $(993,976) | $(1,089,738) | $(2,942,537) | $(3,781,617) | | **Net Loss** | **$(1,023,647)** | **$(3,293,552)** | **$(3,036,761)** | **$(8,236,543)** | | Basic and Diluted Loss Per Share | $(0.13) | $(0.51) | $(0.39) | $(2.28) | [Statements of Stockholders' Equity (deficit) for the three and nine months ended September 30, 2021 and 2020](index=6&type=section&id=Statements%20of%20Stockholders'%20Equity%20(deficit)%20for%20the%20three%20and%20nine%20months%20ended%20September%2030%2C%202021%20and%202020) Total stockholders' equity decreased to **$17,533,451** as of September 30, 2021, from **$20,335,119** at January 1, 2021, primarily due to net losses, despite increases in paid-in capital from stock issuances | Metric | Balance as of January 1, 2021 (USD) | Balance as of September 30, 2021 (USD) | | :--- | :--- | :--- | | Common stock shares | 7,814,572 | 7,825,299 | | Common stock amount | $782 | $783 | | Additional paid-in capital | $119,844,026 | $120,079,118 | | Accumulated deficit | $(99,509,689) | $(102,546,450) | | **Total Stockholders' Equity** | **$20,335,119** | **$17,533,451** | | Metric | Balance as of January 1, 2020 (USD) | Balance as of September 30, 2020 (USD) | | :--- | :--- | :--- | | Common stock shares | 1,812,483 | 7,808,110 | | Common stock amount | $182 | $782 | | Additional paid-in capital | $87,437,661 | $119,753,918 | | Accumulated deficit | $(89,723,016) | $(98,072,245) | | **Total Stockholders' Equity** | **$(2,285,173)** | **$21,682,455** | [Statements of cash flows for the nine months ended September 30, 2021 and 2020](index=8&type=section&id=Statements%20of%20cash%20flows%20for%20the%20nine%20months%20ended%20September%2030%2C%202021%20and%202020) For the nine months ended September 30, 2021, net cash decreased by **$7,401,233** due to significant outflows from operating, investing, and financing activities, contrasting with a substantial increase in cash during the prior year due to financing inflows | Cash Flow Activity | Nine Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2020 (USD) | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,108,122) | $(3,686,069) | | Net cash used in investing activities | $(37,883) | $(2,203,647) | | Net cash used in (provided by) financing activities | $(255,228) | $24,206,211 | | Net increase (decrease) in cash and cash equivalents | $(7,401,233) | $18,316,495 | | Cash and cash equivalents at beginning of period | $16,993,096 | $79,013 | | Cash and cash equivalents at end of period | $9,591,863 | $18,395,508 | **Non-cash investing and financing activities (Nine Months Ended September 30, 2020):** | Item | Amount (USD) | | :--- | :--- | | Accounts receivable from PistolStar acquisition | $184,792 | | Prepaid expenses from PistolStar acquisition | $9,485 | | Equipment from PistolStar acquisition | $36,467 | | Intangible assets from PistolStar acquisition | $1,480,000 | | Goodwill related to PistolStar acquisition | $1,154,526 | | Notes payable issued for PistolStar acquisition | $356,000 | | Accrued expenses from PistolStar acquisition | $20,017 | | Deferred revenue from PistolStar acquisition | $590,000 | | Right-of-use assets increased under ASC 842 | $141,761 | | Operating lease liabilities under ASC 842 | $141,761 | | Common stock issued under securities purchase agreement | $277,833 | | Warrants issued with convertible notes | $1,388,339 | | Common stock issued upon conversion of convertible notes | $3,789,000 | | Beneficial conversion feature | $641,215 | | Deemed dividend related to down-round feature | $112,686 | [Notes to condensed consolidated financial statements](index=10&type=section&id=Notes%20to%20condensed%20consolidated%20financial%20statements) This section provides detailed notes to the financial statements, covering business nature, accounting policies, going concern, revenue recognition, the PistolStar acquisition, receivables, share-based compensation, factoring, notes receivable, prepaid expenses, inventory, software licenses, debt securities, commitments, convertible notes, leases, earnings per share, stockholders' equity, fair value of financial instruments, major customers, and subsequent events [1. NATURE OF BUSINESS AND BASIS OF PRESENTATION](index=10&type=section&id=1.%20NATURE%20OF%20BUSINESS%20AND%20BASIS%20OF%20PRESENTATION) BIO-key International, Inc., founded in 1993, develops and sells proprietary fingerprint biometric technology and enterprise-grade identity access management software solutions, with financial statements prepared under US GAAP - The company develops and sells proprietary fingerprint biometric technology and enterprise-grade identity access management software solutions for commercial, government, and education clients[23](index=23&type=chunk) - The company effected an **1-for-8 reverse stock split** on November 20, 2020, with all share data presented on a post-split basis[26](index=26&type=chunk) [Recently Issued Accounting Pronouncements](index=11&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) The company is evaluating the impact of ASU 2016-13 (Financial Instruments—Credit Losses), effective March 31, 2023, which replaces the incurred loss model with an expected credit loss model - ASU 2016-13 (Financial Instruments—Credit Losses) will be effective for the company on **March 31, 2023**, replacing the incurred loss model with an expected credit loss model requiring estimation of lifetime expected credit losses for financial assets[28](index=28&type=chunk) - The company adopted ASU 2019-12 (Simplifying the Accounting for Income Taxes) on **January 1, 2021**, with no material impact on its consolidated financial statements[29](index=29&type=chunk) [2. GOING CONCERN](index=11&type=section&id=2.%20GOING%20CONCERN) The company's historical operations relied on capital market financing, with current monthly needs of **$710,000**, and expects sufficient cash for at least twelve months despite lower 2021 nine-month revenue - The company currently requires approximately **$710,000 per month** for operations[32](index=32&type=chunk) - For the first nine months of 2021, the company's revenue of **$4,179,557** was below its average monthly cash needs[32](index=32&type=chunk) - As of the filing date, the company believes it has **sufficient cash to support operations for at least twelve months**[32](index=32&type=chunk) [3. REVENUE FROM CONTRACTS WITH CUSTOMERS](index=11&type=section&id=3.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) Revenue is recognized under ASC 606, primarily from license fees, hardware, and services, with North America being the largest contributor and significant growth in Africa for the nine months ended September 30, 2021 **Revenue by Geography and Type for the Three Months Ended September 30, 2021 (USD)** | Revenue Type | North America | Africa | Europe, Middle East, South America* | Asia | Total September 30, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | License fees | $534,775 | $308,000 | $20,678 | $7,006 | $870,459 | | Hardware | $84,445 | $13,425 | - | $12,000 | $109,870 | | Services | $259,965 | $42,000 | $12,759 | $3,776 | $318,500 | | **Total Revenue** | **$879,185** | **$363,425** | **$33,437** | **$22,782** | **$1,298,829** | **Revenue by Geography and Type for the Nine Months Ended September 30, 2021 (USD)** | Revenue Type | North America | Africa | Europe, Middle East, South America* | Asia | Total September 30, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | License fees | $1,307,265 | $557,484 | $72,205 | $74,656 | $2,011,610 | | Hardware | $176,414 | $698,264 | $265,996 | $42,110 | $1,182,784 | | Services | $891,856 | $42,000 | $41,109 | $10,198 | $985,163 | | **Total Revenue** | **$2,375,535** | **$1,297,748** | **$379,310** | **$126,964** | **$4,179,557** | - Deferred revenue was approximately **$733,000** as of September 30, 2021, and **$702,000** as of December 31, 2020[46](index=46&type=chunk) [4. PISTOLSTAR, INC. ACQUISITION](index=14&type=section&id=4.%20PISTOLSTAR%20INC.%20ACQUISITION) The company acquired PistolStar, Inc. on June 30, 2020, for **$2.5 million** (comprising **$2 million** cash and a **$0.5 million** promissory note), generating goodwill from expected synergies and an integrated workforce - The company acquired PistolStar, Inc. on **June 30, 2020**, for a total purchase price of **$2.5 million**, including **$2 million** in cash and a **$0.5 million** promissory note[49](index=49&type=chunk) - The acquisition resulted in **goodwill**, reflecting anticipated synergies and an integrated workforce[50](index=50&type=chunk) - The **$250,000** promissory note balance related to the PistolStar acquisition was fully paid as of **January 21, 2021**[49](index=49&type=chunk) [5. ACCOUNTS RECEIVABLE](index=15&type=section&id=5.%20ACCOUNTS%20RECEIVABLE) Accounts receivable, net, significantly increased to **$1,541,239** as of September 30, 2021, from **$548,049** at December 31, 2020, presented at original amounts less an allowance for doubtful accounts | Metric | September 30, 2021 (USD) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Accounts receivable - current | $1,605,024 | $561,834 | | Foreign currency loss | $(50,000) | - | | Allowance for doubtful accounts | $(13,785) | $(13,785) | | **Accounts receivable, net of allowance for doubtful accounts** | **$1,541,239** | **$548,049** | [6. SHARE-BASED COMPENSATION](index=15&type=section&id=6.%20SHARE-BASED%20COMPENSATION) Total share-based compensation for the three months ended September 30, 2021, was **$58,050**, with **$47,694** in selling, general, and administrative expenses and **$10,356** in research and development | Expense Category | Three Months Ended September 30, 2021 (USD) | Three Months Ended September 30, 2020 (USD) | Nine Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | Selling, general and administrative | $47,694 | $51,157 | $207,342 | $632,793 | | Research and development | $10,356 | $3,073 | $32,979 | $76,995 | | **Total** | **$58,050** | **$54,230** | **$240,321** | **$709,788** | [7. FACTORING](index=15&type=section&id=7.%20FACTORING) The company has a non-recourse accounts receivable factoring agreement, effective until October 31, 2022, with factoring fees ranging from **2.75% to 15%** based on collection days - The company has a non-recourse accounts receivable factoring agreement with a financial institution, effective until **October 31, 2022**[57](index=57&type=chunk) - Factoring fees range from **2.75% to 15%** of the invoice face value, depending on the number of days to collection[57](index=57&type=chunk) | Metric | Three Months Ended September 30, 2021 (USD) | Three Months Ended September 30, 2020 (USD) | Nine Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | Factoring fees | $1,055 | $15,934 | $33,302 | $81,164 | [8. NOTE RECEIVABLE](index=16&type=section&id=8.%20NOTE%20RECEIVABLE) The company provided a **$295,000** note receivable to Exponential Launch Partners (ELP) for an African contract, which is now in default and reclassified as a non-current asset, with a **$100,000** allowance for doubtful accounts - The company provided a **$295,000** note receivable to Exponential Launch Partners (ELP) to support an African contract[58](index=58&type=chunk) - The note is currently in default and was reclassified as a **non-current asset** on June 30, 2021[58](index=58&type=chunk) - The company has recorded a **$100,000 allowance for doubtful accounts** for this note[58](index=58&type=chunk) [9. PREPAID EXPENSES AND OTHER](index=16&type=section&id=9.%20PREPAID%20EXPENSES%20AND%20OTHER) Total prepaid expenses and other amounted to **$950,552** as of September 30, 2021, including approximately **$755,000** in inventory deposits for an African contract and EcoID II fingerprint readers | Item | September 30, 2021 (USD) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Inventory deposits | $755,205 | $66,995 | | Other prepaid expenses | $141,793 | $64,178 | | Insurance | $17,754 | $45,468 | | Software licenses | $35,800 | $24,866 | | **Total Prepaid Expenses** | **$950,552** | **$201,507** | [10. INVENTORY](index=18&type=section&id=10.%20INVENTORY) Inventory, measured at the lower of cost (FIFO) or net realizable value, primarily consists of finished goods and work-in-process, significantly increasing to **$4,634,835** as of September 30, 2021, from **$330,947** at December 31, 2020 | Item | September 30, 2021 (USD) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Finished goods | $4,459,012 | $221,130 | | Work-in-process | $175,823 | $109,817 | | **Total Inventory** | **$4,634,835** | **$330,947** | [11. RESALABLE SOFTWARE LICENSE RIGHTS](index=18&type=section&id=11.%20RESALABLE%20SOFTWARE%20LICENSE%20RIGHTS) The company purchased **$180,000** in third-party software licenses in 2015, amortized over 10 years or by actual unit cost, with a remaining book balance of **$51,294** as of September 30, 2021 - The company purchased **$180,000** in third-party software licenses in 2015[64](index=64&type=chunk) - As of September 30, 2021, **$128,706** had been amortized, leaving a book balance of **$51,294**[64](index=64&type=chunk) [12. INVESTMENT - DEBT SECURITY](index=18&type=section&id=12.%20INVESTMENT%20-%20DEBT%20SECURITY) A **$512,821** HKD-denominated bond certificate purchased in June 2020 matured in June 2021 but remains unpaid, leading to its reclassification as a non-current asset and a **$30,000** allowance for doubtful accounts - The company purchased a **$512,821** HKD-denominated bond certificate in June 2020, which matured in June 2021[65](index=65&type=chunk) - Due to non-receipt of principal and accrued interest, the debt security was reclassified as a **non-current asset** on September 30, 2021[65](index=65&type=chunk) - The company has recorded a **$30,000 allowance** for this debt security[65](index=65&type=chunk) [13. COMMITMENT](index=18&type=section&id=13.%20COMMITMENT) The company has a sales incentive agreement with Technology Transfer Institute (TTI) to pay **$500,000** in common stock for up to **$20 million** in contract revenue, with warrants issued for revenue exceeding that threshold - The company has a sales incentive agreement with TTI to pay **$500,000** in sales incentives, in the form of **62,500 shares of common stock**, for up to **$20 million** in contract revenue facilitated by TTI[67](index=67&type=chunk) - Warrants will be issued if revenue exceeds **$20 million** (up to **$25 million**)[68](index=68&type=chunk) - No revenue or sales incentives were generated or paid under this agreement for the nine months ended September 30, 2021, and 2020[70](index=70&type=chunk) [14. CONVERTIBLE NOTES PAYABLE](index=19&type=section&id=14.%20CONVERTIBLE%20NOTES%20PAYABLE) As of September 30, 2021, and December 31, 2020, the company had no outstanding convertible notes, with all notes issued in 2020 fully repaid through public offering proceeds - As of September 30, 2021, and December 31, 2020, the company had **no outstanding convertible notes payable**[71](index=71&type=chunk) - Convertible notes issued in May and June 2020 (totaling approximately **$4.226 million** in principal) were fully repaid in the third quarter of 2020 using proceeds from a public offering[85](index=85&type=chunk)[88](index=88&type=chunk) - On March 12, 2020, the company issued **$3,789,000** in amended notes, replacing original notes and accounted for as a debt extinguishment, resulting in the write-off of unamortized discounts and debt issuance costs[75](index=75&type=chunk) [15. LEASES](index=21&type=section&id=15.%20LEASES) The company leases office spaces in New Jersey, Hong Kong, Minnesota, and New Hampshire, with operating lease costs of **$63,973** for the three months ended September 30, 2021 - The company leases office spaces in New Jersey, Hong Kong, Minnesota, and New Hampshire, with lease terms expiring in **2023 and 2022**, respectively[89](index=89&type=chunk) | Metric | Three Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2021 (USD) | | :--- | :--- | :--- | | Operating lease cost | $63,973 | $191,919 | | Operating lease right-of-use assets | - | $313,607 | | Operating lease liabilities, current portion | - | $206,004 | | Operating lease liabilities, non-current portion | - | $118,800 | | **Total Operating Lease Liabilities** | - | **$324,804** | [16. EARNINGS (LOSS) PER SHARE - COMMON STOCK ("EPS")](index=23&type=section&id=16.%20EARNINGS%20(LOSS)%20PER%20SHARE%20-%20COMMON%20STOCK%20(%22EPS%22)) Basic and diluted loss per share for the three and nine months ended September 30, 2021, were **$0.13** and **$0.39**, respectively, with numerous stock options and warrants excluded from diluted EPS due to anti-dilutive effects | Metric | Three Months Ended September 30, 2021 (USD) | Three Months Ended September 30, 2020 (USD) | Nine Months Ended September 30, 2021 (USD) | Nine Months Ended September 30, 2020 (USD) | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common stockholders (basic and diluted) | $(1,023,647) | $(3,293,552) | $(3,036,761) | $(8,349,229) | | Basic and diluted loss per share | $(0.13) | $(0.51) | $(0.39) | $(2.28) | | Securities Excluded from Diluted EPS Calculation | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Stock options | 212,545 | 200,382 | 212,545 | 200,382 | | Warrants | 4,689,387 | 706,487 | 4,689,387 | 706,487 | | **Total** | **4,901,932** | **906,869** | **4,901,932** | **906,869** | [17. STOCKHOLDERS' EQUITY](index=24&type=section&id=17.%20STOCKHOLDERS'%20EQUITY) The company is authorized to issue **5 million** shares of preferred stock and **170 million** shares of common stock, with significant common stock issuances in 2020 from a public offering and convertible note conversions - The company is authorized to issue **5,000,000 shares of preferred stock** and **170,000,000 shares of common stock**[95](index=95&type=chunk)[96](index=96&type=chunk) - On July 23, 2020, the company completed a public offering, generating approximately **$22.7 million** in net proceeds and issuing **4,264,312 shares of common stock**[100](index=100&type=chunk) - For the first nine months of 2021, the company issued **5,727 shares of common stock** (valued at **$19,023**) to directors and **6,250 shares of restricted common stock** (valued at **$18,456**) to employees[102](index=102&type=chunk)[104](index=104&type=chunk) - In the first quarter of 2020, a down-round anti-dilution feature of 2015 warrants was triggered, increasing exercisable common shares to **48,078** at an exercise price of **$5.20 per share**, and recording a **$41,688 non-cash deemed dividend**[111](index=111&type=chunk) [18. FAIR VALUES OF FINANCIAL INSTRUMENTS](index=26&type=section&id=18.%20FAIR%20VALUES%20OF%20FINANCIAL%20INSTRUMENTS) The carrying amounts of the company's cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, factored receivables, notes payable, and operating lease liabilities approximate their fair values - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, factored receivables, notes payable, and operating lease liabilities approximate their fair values[112](index=112&type=chunk) [19. MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE](index=26&type=section&id=19.%20MAJOR%20CUSTOMERS%20AND%20ACCOUNTS%20RECEIVABLE) For the three months ended September 30, 2021, one customer accounted for **28%** of revenue, while a Nigerian customer represented **41%** of current accounts receivable as of September 30, 2021 - For the three months ended September 30, 2021, one customer contributed **28% of revenue**; for the nine months, one customer contributed **16% of revenue**[113](index=113&type=chunk) - As of September 30, 2021, a Nigerian customer accounted for **41% of current accounts receivable**, and a second customer accounted for **26%**[114](index=114&type=chunk) - The Nigerian customer's payment terms have been verbally modified, with payment processing contingent on World Bank and local bank task completion[114](index=114&type=chunk) [20. SUBSEQUENT EVENTS](index=26&type=section&id=20.%20SUBSEQUENT%20EVENTS) As of November 11, 2021, the company issued **1,615 shares of common stock** to directors for meeting fees and **6,875 restricted shares** to three new employees with a three-year vesting period - On November 11, 2021, the company issued **1,615 shares of common stock** to directors as meeting fees[115](index=115&type=chunk) - The company issued a total of **6,875 restricted shares** to three new employees, with a three-year vesting period[115](index=115&type=chunk) [Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations](index=27&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Conditions%20and%20Results%20of%20Operations) This section provides management's discussion and analysis of the company's financial condition and operating results, including business overview, strategic outlook, recent developments, key accounting policies, recent accounting pronouncements, operating performance, liquidity, capital resources, and off-balance sheet arrangements [OVERVIEW](index=27&type=section&id=OVERVIEW) BIO-key is a leading Identity Access Management (IAM) platform provider, offering secure access solutions for enterprises and large-scale customers using biometrics and other strong authentication factors through its PortalGuard® and hosted PortalGuard IDaaS platforms - The company is a leading Identity Access Management (IAM) platform provider, leveraging its biometric core platform and **14 other strong authentication factors**[120](index=120&type=chunk) - The company operates on a **SaaS business model**, with customers subscribing to software for annual recurring revenue[126](index=126&type=chunk) - Subscription fees are primarily based on product usage and the number of registered users on the platform, with an average contract term of approximately **one year**[126](index=126&type=chunk) [Strategic Outlook and Recent Developments](index=28&type=section&id=Strategic%20Outlook%20and%20Recent%20Developments) The company's strategic focus is to expand market share in highly regulated industries like government, financial services, and healthcare, with plans to grow biometric authentication in election offices and pursue strategic acquisitions - The company's strategic focus is to expand market share in highly regulated industries such as **government, financial services, and healthcare**[128](index=128&type=chunk)[131](index=131&type=chunk) - The company has secured large-scale identification project contracts in Africa and Nigeria totaling **$75 million**[129](index=129&type=chunk) - Key sales strategies include increasing IAM marketing, actively pursuing global large-scale identification projects, and developing channel alliance programs[132](index=132&type=chunk) - The company plans to drive growth through **strategic acquisitions** of selected businesses and assets in the IAM space[133](index=133&type=chunk) - The COVID-19 pandemic has increased demand for secure remote work solutions, with biometrics playing a critical role in remote user authentication[135](index=135&type=chunk) [Critical Accounting Policies](index=29&type=section&id=Critical%20Accounting%20Policies) Detailed information on the company's critical accounting policies and estimates can be found in the notes to the financial statements within this report and the Form 10-K annual report for the period ended December 31, 2020 - No material changes were made to critical accounting policies and estimates in this report[137](index=137&type=chunk) [Recent Accounting Pronouncements](index=29&type=section&id=Recent%20Accounting%20Pronouncements) Detailed information on recent accounting pronouncements is provided in the notes to the condensed consolidated financial statements in Part I, Item 1 of this report [RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2021, AS COMPARED TO SEPTEMBER 30, 2020](index=29&type=section&id=RESULTS%20OF%20OPERATIONS%20-%20THREE%20MONTHS%20ENDED%20SEPTEMBER%2030%2C%202021%2C%20AS%20COMPARED%20TO%20SEPTEMBER%2030%2C%202020) For the three months ended September 30, 2021, total revenue increased by **38%** to **$1,298,829**, driven by a **151%** rise in license fees, while net other income (expense) significantly improved **Revenue and Cost of Sales (Three Months Ended September 30, 2021, Compared to September 30, 2020) (USD)** | Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Services Revenue | $318,500 | $491,535 | $(173,035) | -35% | | License Revenue | $870,459 | $346,479 | $523,980 | 151% | | Hardware Revenue | $109,870 | $105,311 | $4,559 | 4% | | **Total Revenue** | **$1,298,829** | **$943,325** | **$355,504** | **38%** | | Services Cost | $176,976 | $173,823 | $3,153 | 2% | | License Cost | $45,986 | $10,775 | $35,211 | 327% | | Hardware Cost | $71,712 | $27,011 | $44,701 | 165% | | **Total Cost of Sales** | **$294,674** | **$211,609** | **$83,065** | **39%** | **Operating Expenses (Three Months Ended September 30, 2021, Compared to September 30, 2020) (USD)** | Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Selling, General and Administrative | $1,385,534 | $1,490,241 | $(104,707) | -7% | | Research and Development | $612,597 | $331,213 | $281,384 | 85% | | **Other Income (Expense), Net** | **$(29,671)** | **$(2,203,814)** | **$2,174,143** | **99%** | [RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2020, AS COMPARED TO SEPTEMBER 30, 2019](index=31&type=section&id=RESULTS%20OF%20OPERATIONS%20-%20NINE%20MONTHS%20ENDED%20SEPTEMBER%2030%2C%202020%2C%20AS%20COMPARED%20TO%20SEPTEMBER%2030%2C%202019) For the nine months ended September 30, 2021, total revenue surged by **136%** to **$4,179,557**, driven by strong growth in license fees (**232%**) and hardware sales (**395%**), while net other income (expense) significantly improved **Revenue and Cost of Sales (Nine Months Ended September 30, 2021, Compared to September 30, 2020) (USD)** | Metric | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Services Revenue | $985,163 | $928,561 | $56,602 | 6% | | License Revenue | $2,011,610 | $605,366 | $1,406,244 | 232% | | Hardware Revenue | $1,182,784 | $239,025 | $943,759 | 395% | | **Total Revenue** | **$4,179,557** | **$1,772,952** | **$2,406,605** | **136%** | | Services Cost | $511,360 | $336,940 | $174,420 | 52% | | License Cost | $133,328 | $29,486 | $103,842 | 352% | | Hardware Cost | $656,190 | $117,900 | $538,290 | 457% | | **Total Cost of Sales** | **$1,300,878** | **$484,326** | **$816,552** | **169%** | **Operating Expenses (Nine Months Ended September 30, 2021, Compared to September 30, 2020) (USD)** | Metric | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Selling, General and Administrative | $4,276,016 | $4,083,568 | $192,448 | 5% | | Research and Development | $1,545,200 | $986,675 | $558,525 | 57% | | **Other Income (Expense), Net** | **$(94,224)** | **$(4,454,926)** | **$4,360,702** | **99%** | [LIQUIDITY AND CAPITAL RESOURCES](index=33&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) For the nine months ended September 30, 2021, the company experienced net cash outflows from operating, investing, and financing activities, resulting in a decrease in cash and cash equivalents to **$9.6 million** from **$17 million** at December 31, 2020 - For the nine months ended September 30, 2021, net cash used in operating activities was approximately **$7,108,000**[161](index=161&type=chunk) - For the nine months ended September 30, 2021, net cash used in investing activities was approximately **$38,000** for capital expenditures[164](index=164&type=chunk) - For the nine months ended September 30, 2021, net cash used in financing activities was approximately **$255,000**, primarily for promissory note repayments[166](index=166&type=chunk) - On July 23, 2020, the company completed a public offering, generating approximately **$22.7 million** in net proceeds, with about **$4.2 million** used to repay convertible notes[169](index=169&type=chunk) **Cash and Cash Equivalents (USD)** | Date | Amount | | :--- | :--- | | September 30, 2021 | $9,600,000 | | December 31, 2020 | $17,000,000 | - The company requires approximately **$710,000 per month** for operations, and 2021 nine-month revenue (**$4,179,557**) was below this requirement[172](index=172&type=chunk) - As of the filing date, the company anticipates **no need for additional financing** within the next twelve months[172](index=172&type=chunk) [Off-Balance Sheet Arrangements](index=35&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has no off-balance sheet arrangements that could have a current or future material effect on its financial condition or results of operations - The company has no off-balance sheet arrangements that could have a current or future material effect on its financial condition or results of operations[174](index=174&type=chunk) [Item 4 Controls and Procedures](index=35&type=section&id=Item%204%20Controls%20and%20Procedures) This section discusses the effectiveness of the company's disclosure controls and procedures and changes in internal control over financial reporting as of September 30, 2021 [Disclosure Controls and Procedures](index=35&type=section&id=Disclosure%20Controls%20and%20Procedures) As of September 30, 2021, the company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective at a reasonable assurance level - As of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[176](index=176&type=chunk) [Changes in Internal Control Over Financial Reporting](index=37&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) There were no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2021 - There were no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2021[178](index=178&type=chunk) PART II. OTHER INFORMATION [Item 6 Exhibits](index=37&type=section&id=Item%206%20Exhibits) This section lists the exhibits filed with the Form 10-Q report, including certifications from the Chief Executive Officer and Chief Financial Officer, and Inline XBRL data files - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer as required by the Securities Exchange Act and 18 U.S.C. Section 1350[179](index=179&type=chunk) - Exhibits also include Inline XBRL instance, taxonomy extension schema, calculation, definition, label, and presentation files[179](index=179&type=chunk) [Signatures](index=38&type=section&id=Signatures) This report was formally signed by Michael W. DePasquale, Chief Executive Officer, and Cecilia Welch, Chief Financial Officer of BIO-key International, Inc. on November 15, 2021 - The report was signed by Chief Executive Officer Michael W. DePasquale and Chief Financial Officer Cecilia Welch on **November 15, 2021**[182](index=182&type=chunk)

BIO-key International, Inc. (NASDAQ:BKYI) Q2 2021 Earnings Conference Call August 17, 2021 10:00 AM ET Company Participants Kimberly Johnson - VP, Product Marketing Michael DePasquale - Chairman and CEO Fred Corsentino - Chief Revenue Officer Cecilia Welch - Chief Financial Officer Conference Call Participants Jack Vander Aarde - Maxim Group Operator Good morning, ladies and gentlemen. And thank you for standing by and welcome to BIO-key International’s Second Quarter 2021 Conference Call. During management ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis of financial condition, and disclosures on internal controls [Item 1. Condensed Consolidated Financial Statements](index=4&type=section&id=Item%201%E2%80%94Condensed%20Consolidated%20Financial%20Statements%20(unaudited)) This section presents the unaudited condensed consolidated financial statements, highlighting significant revenue growth, narrowed net losses, and strategic investments in inventory [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a comparative overview of the company's financial position at two distinct periods Balance Sheet Comparison (as of June 30, 2021 vs. December 31, 2020) | Financial Metric | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $11,479,691 | $16,993,096 | | Accounts receivable, net | $1,347,677 | $548,049 | | Inventory | $2,290,628 | $330,947 | | Total current assets | $17,292,416 | $18,941,873 | | TOTAL ASSETS | $20,943,710 | $22,520,572 | | **Liabilities & Equity** | | | | Total current liabilities | $2,211,252 | $1,876,303 | | TOTAL LIABILITIES | $2,444,662 | $2,185,453 | | TOTAL STOCKHOLDERS' EQUITY | $18,499,048 | $20,335,119 | - Key changes from year-end 2020 include a **$5.5 million** decrease in cash, a significant increase in accounts receivable and inventory, and a **$1.8 million** decrease in total stockholders' equity[7](index=7&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's financial performance, including revenue, gross profit, and net loss over specified periods Statement of Operations Highlights (Unaudited) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $992,090 | $307,142 | $2,880,728 | $829,627 | | Gross Profit | $752,521 | $158,688 | $1,874,524 | $556,910 | | Operating Loss | ($1,112,515) | ($1,371,813) | ($1,948,561) | ($2,691,879) | | Net Loss | ($1,161,683) | ($1,572,709) | ($2,013,114) | ($4,942,991) | | Basic & Diluted Loss Per Share | ($0.15) | ($0.60) | ($0.26) | ($2.24) | - Revenues for the second quarter and first six months of 2021 grew by **223%** and **247%** year-over-year, respectively. Net losses narrowed significantly in both periods, and loss per share improved accordingly[13](index=13&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the company's cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for the Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used for operating activities | ($5,242,477) | ($1,969,640) | | Net cash used for investing activities | ($15,700) | ($1,906,042) | | Net cash (used in) provided by financing activities | ($255,228) | $4,683,333 | | **Net (Decrease) Increase in Cash** | **($5,513,405)** | **$807,651** | - The company experienced a significant net cash decrease of **$5.5 million** in the first six months of 2021, contrasted with a net cash increase in the same period of 2020. The cash outflow was primarily driven by operating activities, including a large investment in inventory and prepayments[24](index=24&type=chunk)[174](index=174&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed disclosures and explanations supporting the condensed consolidated financial statements - **Going Concern:** The company requires approximately **$735,000** per month for operations. While revenue has not consistently met this level, management believes its cash balance of **$11.5 million** as of June 30, 2021, is sufficient to fund operations for at least the next twelve months[43](index=43&type=chunk) - **PistolStar Acquisition:** The company acquired PistolStar, Inc. on June 30, 2020, for a total price of **$2.5 million**, consisting of **$2.0 million** in cash and a **$500,000** promissory note. The note was fully paid in January 2021[60](index=60&type=chunk)[62](index=62&type=chunk) - **Inventory and Prepayments:** As of June 30, 2021, the company had made significant investments in inventory (**$2.3 million**) and prepaid deposits for hardware (**$1.4 million**), primarily to support recently secured license contracts in Africa[72](index=72&type=chunk)[74](index=74&type=chunk) - **Major Customers:** The company has significant customer concentration. For the first six months of 2021, two customers accounted for **34%** of total revenue. As of June 30, 2021, two customers represented **47%** and **19%** of accounts receivable[121](index=121&type=chunk)[122](index=122&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=28&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITIONS%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial performance, attributing revenue growth to acquisitions and African projects, while addressing liquidity and strategic outlook [Overview and Strategic Outlook](index=28&type=section&id=Overview%20and%20Strategic%20Outlook) This section provides an overview of the company's business model and its key strategic initiatives for future growth - The company is an Identity Access Management (IAM) platform provider, offering solutions like PortalGuard® for enterprise, customer, and civil ID applications[129](index=129&type=chunk) - Key strategic developments include securing two large-scale identification project contracts in Africa valued at a combined **$75 million**, with initial purchase orders received in late 2020 and early 2021[138](index=138&type=chunk) - Primary growth strategies are focused on: (i) increased marketing into the IAM market, (ii) pursuing large-scale identification projects globally, and (iii) expanding the channel alliance program[141](index=141&type=chunk) [Results of Operations (Q2 2021 vs. Q2 2020)](index=30&type=section&id=Results%20of%20Operations%20(Q2%202021%20vs.%20Q2%202020)) This section analyzes the company's financial performance for the second quarter of 2021 compared to the prior year Q2 Revenue Comparison (in thousands) | Revenue Type | Q2 2021 | Q2 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Service | $286.6 | $229.5 | $57.1 | 25% | | License | $662.2 | $23.5 | $638.7 | 2,713% | | Hardware | $43.3 | $54.1 | ($10.8) | -20% | | **Total Revenue** | **$992.1** | **$307.1** | **$685.0** | **223%** | - The dramatic increase in Q2 revenue was driven by a **2,713%** surge in license revenue, largely from PistolStar software and cloud migrations, particularly in the higher education market[151](index=151&type=chunk) - Selling, general and administrative (SG&A) expenses increased **13%** to **$1.37 million**, while Research, development and engineering (R&D) costs rose **54%** to **$491,000**, mainly due to costs associated with the PistolStar acquisition and new product development[154](index=154&type=chunk)[155](index=155&type=chunk) [Results of Operations (H1 2021 vs. H1 2020)](index=34&type=section&id=Results%20of%20Operations%20(H1%202021%20vs.%20H1%202020)) This section analyzes the company's financial performance for the first half of 2021 compared to the prior year H1 Revenue Comparison (in thousands) | Revenue Type | H1 2021 | H1 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Service | $666.7 | $437.0 | $229.7 | 53% | | License | $1,141.2 | $258.9 | $882.3 | 341% | | Hardware | $1,072.9 | $133.7 | $939.2 | 702% | | **Total Revenue** | **$2,880.7** | **$829.6** | **$2,051.1** | **247%** | - The **702%** increase in hardware sales during the first half of 2021 was primarily attributable to sales in Nigeria for an international government agency[166](index=166&type=chunk) - Operating expenses increased moderately, with SG&A up **11%** and R&D up **42%**, reflecting the integration of PistolStar and investments in marketing and personnel[168](index=168&type=chunk)[170](index=170&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash position, cash flow activities, and ability to meet its financial obligations - Cash and cash equivalents decreased from **$17.0 million** at Dec 31, 2020, to **$11.5 million** at June 30, 2021[180](index=180&type=chunk) - Net cash used in operations for H1 2021 was approximately **$5.2 million**, largely due to a **$4.3 million** use of cash for working capital, including a **$4 million** investment in inventory and deposits to support African contracts[173](index=173&type=chunk)[174](index=174&type=chunk)[179](index=179&type=chunk) - The company requires approximately **$735,000** per month to operate. Despite not consistently achieving this through revenue, management believes current cash reserves are sufficient for the next twelve months[181](index=181&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls during the quarter - Based on an evaluation as of June 30, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[185](index=185&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[186](index=186&type=chunk) [PART II. OTHER INFORMATION](index=39&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section includes additional information such as exhibits filed with the report [Item 6. Exhibits](index=39&type=section&id=Item%206%E2%80%94Exhibits.) This section lists the exhibits filed with the Form 10-Q, including required certifications and financial data files - The exhibits filed include certifications by the CEO and CFO as required by Rule 13a-15(f) and 18 U.S.C. Section 1350, along with Inline XBRL financial data files[188](index=188&type=chunk)

Financial Performance - Total revenues for the three months ended March 31, 2021, were $1,888,638, a significant increase from $522,485 in the same period of 2020, representing a growth of approximately 262%[12] - Gross profit for the first quarter of 2021 was $1,122,003, compared to $398,222 in Q1 2020, indicating a gross margin improvement[12] - Operating loss for the three months ended March 31, 2021, was $(836,046), an improvement from $(1,320,066) in the same period of 2020[12] - Net loss available to common stockholders for Q1 2021 was $(851,431), compared to $(3,482,968) in Q1 2020, reflecting a reduction in losses[12] - The company reported a net loss of $851,431 for the three months ended March 31, 2021, compared to a net loss of $3,370,282 for the same period in 2020, representing a 74.7% improvement[22] Cash and Liquidity - Cash and cash equivalents as of March 31, 2021, were $13,528,521, down from $16,993,096 as of December 31, 2020[8] - The company had approximately $13,500,000 in cash as of March 31, 2021, which is expected to sustain operations for twelve to fifteen months[37] - Cash used in operating activities for the three months ended March 31, 2021, was $3,198,559, compared to $1,022,805 for the same period in 2020[22] - Cash and cash equivalents at the end of the period were $13,528,521, down from $16,993,096 at the beginning of the period[22] Assets and Liabilities - Total current assets decreased to $17,730,006 as of March 31, 2021, from $18,941,873 at the end of 2020[8] - Total liabilities decreased to $1,861,018 as of March 31, 2021, from $2,185,453 as of December 31, 2020, indicating improved financial stability[8] - Stockholders' equity as of March 31, 2021, was $19,622,127, down from $20,335,119 at the end of 2020[8] - The company reported an increase in accounts receivable to $1,432,248 as of March 31, 2021, compared to $548,049 at the end of 2020, indicating higher sales activity[8] - Accounts receivable increased to $1,446,033 as of March 31, 2021, compared to $561,834 at December 31, 2020, indicating a growth in sales and customer credit[59] Revenue Recognition - Total revenues for the period reached $1,888,638, with a significant contribution from license fees of $478,958 and hardware sales of $1,029,658[40] - Deferred revenue amounted to approximately $574,000 as of March 31, 2021, down from $702,000 at December 31, 2020, reflecting revenue recognition from previously deferred amounts[53] - The company recognized revenue from deferred revenue of approximately $305,000 during the three months ended March 31, 2021, compared to $72,000 in the same period of 2020[53] Expenses and Costs - The company incurred capital expenditures of $13,307 during the three months ended March 31, 2021[22] - Interest paid during the three months ended March 31, 2021, was $18,000[25] - The company reported factoring fees of $13,347 for the three months ended March 31, 2021, compared to $32,000 for the same period in 2020, indicating a reduction in costs associated with factoring[62] - Share-based compensation expenses for the three months ended March 31, 2021, totaled $141,148, a decrease from $512,719 in the same period of 2020[60] Operational Challenges - The company has been impacted by the ongoing threat of COVID-19, which may affect future revenue and operations[37] - The company has a history of losses and limited revenue, which may impact future operations and financial position[116] Financing Activities - The company raised approximately $24,000,000 from financing activities during 2020[37] - The Company issued a $3,789,000 convertible note, which was converted into 728,654 shares of common stock in 2020[80] - The Company issued a $2,415,000 convertible note, which was fully repaid in the third quarter of 2020, resulting in an expense of $1,218,163 for remaining debt discounts[86] Acquisitions and Investments - The company acquired PistolStar, Inc. for a total purchase price of $2.5 million, which included a cash payment of $2.0 million and a $500,000 promissory note[56] - The Company purchased a bond certificate for 4,000,000 Hong Kong dollars, equivalent to $512,821 U.S. dollars, with a 5% annual interest rate[69] Customer Concentration - For the three months ended March 31, 2021, two customers accounted for 52% of revenues and three customers accounted for 71% of revenues[112]