Financial Performance - Total revenues for the three months ended September 30, 2023, increased to $1,817,108, a 32.3% rise from $1,373,549 in the same period of 2022[16] - License fees revenue for the nine months ended September 30, 2023, reached $4,664,341, up 31.7% from $3,540,592 in the prior year[16] - Gross profit for the three months ended September 30, 2023, was $1,340,504, compared to $979,766 for the same period in 2022, reflecting a gross margin improvement[16] - Total revenues for the nine months ended September 30, 2023, were $1,373,549, compared to $1,373,549 for the same period in 2022, indicating no growth year-over-year[32] - Services revenue for the three months ended September 30, 2023, was $280,192, a significant increase from $22,677 in the same period last year[32] - License fees for the three months ended September 30, 2023, totaled $468,090, compared to $450,170 in the same period last year, reflecting a growth of approximately 4%[32] - The company reported total revenues of $1,817,108 for the three months ended September 30, 2023, with North America contributing $768,697[33] - Total revenues for the three months ended September 30, 2023, were $6,829,804, a decrease of 8.1% compared to $5,261,835 for the same period in 2022[78] Losses and Expenses - Operating loss for the three months ended September 30, 2023, was $(765,558), significantly reduced from $(2,360,446) in the same quarter of 2022[16] - Net loss for the nine months ended September 30, 2023, was $(2,349,023), compared to $(5,120,869) for the same period in 2022, indicating a narrowing of losses[16] - Basic and diluted loss per common share for the three months ended September 30, 2023, was $(0.07), an improvement from $(0.29) in the same quarter of 2022[16] - Total costs and other expenses for the three months ended September 30, 2023, were $476,604, up from $393,783 in the same period of 2022[16] - The company reported a comprehensive loss of $(637,824) for the three months ended September 30, 2023, compared to $(2,402,509) in the same period of 2022[16] - The company reported a net loss of $1,422,878 for the six months ended June 30, 2023, compared to a net loss of $288,322 for the same period in 2022[40] Cash Flow and Assets - Cash used for operating activities decreased to $2,261,922 for the nine months ended September 30, 2023, down from $4,328,403 in the prior year, indicating a 47.7% improvement[44] - Accounts receivable increased to $3,423,003 as of September 30, 2023, compared to $2,096,569 at the end of December 2022, reflecting a growth of approximately 63.2%[58] - The total inventory as of September 30, 2023, was $4,289,213, a decrease from $4,434,369 at the end of December 2022, showing a reduction of about 3.3%[60] - The company recorded cash paid for interest amounting to $159,379 for the nine months ended September 30, 2023, compared to $3,661 in the same period last year[22] - The company acquired various assets from Swivel Secure, including intangible assets valued at $762,860 and goodwill of $1,067,372[22] - Total accounts receivable acquired from Swivel Secure amounted to $702,886, indicating significant asset acquisition activity[22] Stockholder Equity and Shares - As of September 30, 2023, total stockholders' equity was $3,314,451, a decrease from $5,301,556 as of January 1, 2023[40] - Weighted average common shares outstanding for the three months ended September 30, 2023, increased to 9,081,873 from 8,148,848 in the same quarter of 2022[16] - For the nine-month period ended September 30, 2023, total shares outstanding increased to 5,038,259 from 4,875,282 in the same period of 2022, reflecting a growth of approximately 3.34%[115] - The company issued 295,275 shares of restricted common stock during the nine months ended September 30, 2023, with a fair value of $170,974, compared to 275,000 shares valued at $592,075 in the prior year[72] - The Company issued 28,020 shares under the Employee Stock Purchase Plan during the three months ended September 30, 2023, resulting in a non-cash compensation expense of $3,563[94] Future Outlook and Strategic Initiatives - The company expects to meet revenue targets based on historical performance and increasing distribution by Swivel Secure, indicating confidence in future revenue growth[61] - The company expects to grow its business in government services and highly-regulated industries, driven by increased demand for security solutions, including biometrics[114] - The company anticipates that the portable biometric user experience for Windows 10 users will accelerate demand for its network log-on solutions and fingerprint readers[114] - The company plans to seek stockholder approval for a reverse stock split to regain compliance with Nasdaq listing requirements[129] - The company is not currently in compliance with Nasdaq's minimum bid price requirement of $1.00 per share and may face delisting if compliance is not regained by January 8, 2024[129] Compliance and Regulatory Matters - The company adopted ASU 2016-13 effective January 1, 2023, which changes the accounting for credit losses but did not have a material effect on the financial statements[26] - The company has a full valuation allowance against its net deferred tax assets, indicating a belief that these assets may not be realized[126] - The provision for income taxes for the period amounted to $142,811, with current income taxes totaling $162,811 and a deferred tax benefit of $20,000[127] Deferred Revenue - The company reported a deferred revenue of $128,253 for the nine months ended September 30, 2023, compared to $43,351 in the prior year, representing an increase of approximately 195.5%[44] - Deferred revenue as of September 30, 2023, was approximately $642,000, an increase from $515,000 as of December 31, 2022[78] - Revenue recognized from deferred revenue during the three months ended September 30, 2023, was approximately $67,000, compared to $62,000 for the same period in 2022[78]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) Presents unaudited condensed consolidated financial statements and notes for periods ended June 30, 2023, and December 31, 2022 [Item 1—Financial Statements](index=4&type=section&id=Item%201%E2%80%94Financial%20Statements) Provides unaudited condensed consolidated financial statements and comprehensive notes for periods ended June 30, 2023, and December 31, 2022 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Details the company's financial position, including assets, liabilities, and equity, as of June 30, 2023, and December 31, 2022 Table: Condensed Consolidated Balance Sheets ($) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | |:---|:---|:---| | Cash and cash equivalents | $565,513 | $2,635,522 | | Accounts receivable, net | $3,178,785 | $1,522,784 | | Inventory | $4,384,098 | $4,434,369 | | Total current assets | $8,531,330 | $8,984,881 | | Total assets | $10,583,245 | $11,344,255 | | Total current liabilities | $6,276,088 | $5,455,688 | | Convertible note payable | $2,498,780 | $2,596,203 | | Total liabilities | $6,738,154 | $6,042,699 | | Total stockholders' equity | $3,845,091 | $5,301,556 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Outlines revenues, expenses, and net loss for the three and six months ended June 30, 2023, and 2022 Table: Condensed Consolidated Statements of Operations and Comprehensive Loss ($) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Total revenues | $1,928,929 | $1,947,115 | $5,012,696 | $3,888,286 | | Gross profit | $1,322,818 | $1,223,162 | $3,586,311 | $2,826,892 | | Operating loss | $(1,178,527) | $(1,567,494) | $(1,536,926) | $(2,567,028) | | Net loss | $(1,422,878) | $(1,718,957) | $(1,711,200) | $(2,718,360) | | Basic and Diluted Loss per Common Share | $(0.16) | $(0.21) | $(0.19) | $(0.34) | | Weighted Average Common Shares Outstanding (Basic and diluted) | 9,021,426 | 8,098,020 | 9,008,631 | 7,992,102 | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Summarizes changes in stockholders' equity, including common stock and accumulated deficit, from January 1 to June 30, 2023 Table: Condensed Consolidated Statements of Stockholders' Equity ($) | Metric | January 1, 2023 | June 30, 2023 | |:---|:---|:---|\ | Common Shares | 9,190,504 | 9,262,853 | | Common Stock Amount | $919 | $926 | | Additional Paid-in Capital | $122,028,612 | $122,191,310 | | Accumulated Other Comprehensive Income (Loss) | $(242,602) | $(150,572) | | Accumulated Deficit | $(116,485,373) | $(118,196,573) | | Total Stockholders' Equity | $5,301,556 | $3,845,091 | - Issuance of common stock for directors' fees: **$12,002** (Q1 2023), **$16,002** (Q2 2023)[107](index=107&type=chunk) - Net loss for Q1 2023 was **$(288,322)** and for Q2 2023 was **$(1,422,878)**[107](index=107&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Reports cash flows from operating, investing, and financing activities for the six months ended June 30, 2023, and 2022 Table: Condensed Consolidated Statements of Cash Flows ($) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|\ | Net cash used for operating activities | $(2,095,192) | $(2,287,446) | | Net cash used for investing activities | $0 | $(559,466) | | Net cash used for financing activities | $(42,307) | $39,125 | | Effect of exchange rate changes | $67,490 | $(53,217) | | NET DECREASE IN CASH AND CASH EQUIVALENTS | $(2,070,009) | $(2,861,004) | | CASH AND CASH EQUIVALENTS, END OF PERIOD | $565,513 | $4,893,042 | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed explanations of accounting policies, financial instruments, and other disclosures supporting financial statements [Nature of Business and Basis of Presentation](index=10&type=section&id=1.%20NATURE%20OF%20BUSINESS%20AND%20BASIS%20OF%20PRESENTATION) BIO-key develops biometric and IAM solutions, with unaudited GAAP financial statements using U.S. dollar as functional currency - BIO-key develops and markets proprietary fingerprint identification biometric technology and software solutions for identity access management (IAM) to commercial, government, and education customers[87](index=87&type=chunk) - The accompanying unaudited interim consolidated financial statements are prepared in conformity with GAAP and include all necessary recurring adjustments[88](index=88&type=chunk)[112](index=112&type=chunk) - The Company's functional currency is the U.S. dollar; assets and liabilities are translated at current exchange rates, and revenues/expenses at average rates, with translation adjustments included in accumulated other comprehensive income (loss)[113](index=113&type=chunk) [Going Concern](index=11&type=section&id=2.%20GOING%20CONCERN) Substantial net losses and negative cash flows raise going concern doubts, dependent on increased revenue and continuous financing - The Company has suffered substantial net losses and negative cash flows from operations in recent years, dependent on debt and equity financing, raising substantial doubt about its ability to continue as a going concern[17](index=17&type=chunk) - As of the report date, the Company does not have enough cash for twelve months of operations[116](index=116&type=chunk) - The Company is looking into other markets and opportunities to sell or return inventory purchased for delayed projects in Nigeria to generate additional cash[116](index=116&type=chunk) [Revenue from Contracts with Customers](index=11&type=section&id=3.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) Revenue disaggregated by type and geography; total revenues increased 29% YoY for H1 2023, driven by 42% license fee growth Table: Revenue from Contracts with Customers ($) | Revenue Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Services | $620,465 | $435,106 | $1,152,987 | $830,910 | | License fees | $1,235,771 | $1,162,148 | $3,714,327 | $2,622,331 | | Hardware | $72,693 | $349,861 | $145,382 | $435,045 | | **Total Revenues** | **$1,928,929** | **$1,947,115** | **$5,012,696** | **$3,888,286** | - For the three months ended June 30, 2023, total revenues decreased by **1%** YoY, with service revenue increasing **43%** and hardware revenue decreasing **79%**[181](index=181&type=chunk) - For the six months ended June 30, 2023, total revenues increased by **29%** YoY, with license revenue increasing **42%** and hardware revenue decreasing **67%**[189](index=189&type=chunk)[216](index=216&type=chunk) [Accounts Receivable](index=12&type=section&id=4.%20ACCOUNTS%20RECEIVABLE) Accounts receivable are net of an allowance for credit losses, which increased from **$573,785** to **$623,785** by June 30, 2023 Table: Accounts Receivable ($) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Accounts receivable | $3,802,570 | $2,096,569 | | Allowance for credit losses | $(623,785) | $(573,785) | | Accounts receivable, net | $3,178,785 | $1,522,784 | - Management determines the allowance for credit losses by regularly evaluating individual customer receivables and considering financial condition, credit history, economic conditions, and other relevant factors[119](index=119&type=chunk) - The adoption of ASU 2016-13 (expected credit loss model) did not have a material effect on the consolidated financial statements[15](index=15&type=chunk) [Share Based Compensation](index=13&type=section&id=5.%20SHARE%20BASED%20COMPENSATION) Share-based compensation totaled **$148,771** for H1 2023, a decrease from prior year, recognized in SG&A and R&D Table: Share Based Compensation ($) | Expense Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Selling, general and administrative | $59,966 | $66,152 | $115,419 | $158,578 | | Research, development and engineering | $17,430 | $17,547 | $33,352 | $34,818 | | **Total Share Based Compensation** | **$77,396** | **$83,699** | **$148,771** | **$193,396** | [Inventory](index=13&type=section&id=6.%20INVENTORY) Inventory is valued at lower of cost or realizable value, with a **$400,000** reserve for slow-moving Nigeria project inventory - Inventory is stated at the lower of cost (FIFO basis) or realizable value, with reserves for obsolescence, excess quantities, slow-moving goods, and other impairment[22](index=22&type=chunk) - A **$400,000** reserve on inventory is due to slow-moving inventory purchased for projects in Nigeria, with the Company exploring other markets or return options[22](index=22&type=chunk) Table: Inventory Components ($) | Inventory Component | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Finished goods | $4,714,372 | $4,764,643 | | Fabricated assemblies | $69,726 | $69,726 | | Reserve on finished goods | $(400,000) | $(400,000) | | **Total inventory** | **$4,384,098** | **$4,434,369** | [Commitments and Contingencies](index=13&type=section&id=7.%20COMMITMENTS%20AND%20CONTINGENCIES) Exclusive distribution agreement with Swivel Secure Limited until 2027, with no pending lawsuits as of June 30, 2023 - Swivel Secure has an exclusive distribution agreement with Swivel Secure Limited (SSL) for EMEA (excluding UK/Ireland) products, with an initial term ending January 31, 2027[96](index=96&type=chunk)[48](index=48&type=chunk) - The exclusive distribution rights are contingent on Swivel Secure meeting minimum annual order levels; failure to do so results in non-exclusive distributorship[146](index=146&type=chunk) - As of June 30, 2023, the Company was not a party to any pending lawsuits[122](index=122&type=chunk) [Leases](index=15&type=section&id=8.%20LEASES) Leases office space with 2023/2024 termination dates; new one-year New Jersey lease signed for September 1, 2023 start - The Company leases office space in New Jersey, Minnesota, New Hampshire, Madrid, and Hong Kong, with termination dates in 2023 and 2024[25](index=25&type=chunk) - A new one-year lease for New Jersey office space was signed on August 11, 2023, starting September 1, 2023[25](index=25&type=chunk) Table: Lease Costs and Metrics ($) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Total lease cost | $48,543 | $55,942 | $111,682 | $111,161 | | Operating right-of-use assets (June 30, 2023) | | | $84,610 | | | Operating lease liabilities, current portion (June 30, 2023) | | | $77,379 | | | Weighted average remaining lease term (in years) – operating leases | | | 0.93 | | | Weighted average discount rate – operating leases | | | 5.50% | | [Convertible Note Payable](index=15&type=section&id=9.%20CONVERTIBLE%20NOTE%20PAYABLE) A **$2.2 million** senior secured promissory note, due December 22, 2023, accrues 10-12% interest and is secured by Company assets - On December 22, 2022, the Company issued a **$2,200,000** principal amount senior secured promissory note, with proceeds used for general working capital[125](index=125&type=chunk) - The due date of the note was extended to December 22, 2023, with interest accruing at **10%** per annum for the first six months and **12%** per annum for months seven through twelve, payable monthly[51](index=51&type=chunk)[225](index=225&type=chunk) - The note is secured by a lien on substantially all of the Company's assets and properties and can be prepaid without penalty[51](index=51&type=chunk)[225](index=225&type=chunk) - In connection with the note, the Company issued **700,000** commitment shares (**$1.00**/share) and a warrant to purchase **200,000** shares (**$3.00**/share exercise price, 5-year term)[150](index=150&type=chunk) [Stockholders' Equity](index=17&type=section&id=11.%20STOCKHOLDERS'%20EQUITY) Details changes in stockholders' equity, including common stock issuances for directors' fees and employee plans, and restricted stock - On March 8, 2022, **269,060** shares of common stock were issued at **$2.23** per share for the Swivel Secure stock purchase agreement, totaling **$600,004**[54](index=54&type=chunk) - During the six months ended June 30, 2023, **38,538** shares of common stock were issued to directors in lieu of fees, valued at **$28,004**[57](index=57&type=chunk) - During the six months ended June 30, 2023, **40,000** shares of restricted common stock were issued to employees and directors, with a fair value of **$31,200**, vesting over three years[130](index=130&type=chunk) - Restricted stock compensation for the six months ended June 30, 2023, was **$113,837**[32](index=32&type=chunk) - No warrants were issued during the three and six-month periods ended June 30, 2023 and 2022[155](index=155&type=chunk) [Fair Values of Financial Instruments](index=19&type=section&id=12.%20FAIR%20VALUES%20OF%20FINANCIAL%20INSTRUMENTS) Short-term financial instruments approximate fair value, categorized into a three-tier hierarchy based on input observability - Cash and cash equivalents, accounts receivable, due from factor, accounts payable, and accrued liabilities are carried at or approximate fair value due to their short-term nature[133](index=133&type=chunk) - The carrying value of the government loan payable approximates fair value as its interest rate approximates market rates[133](index=133&type=chunk) - GAAP establishes a three-tier fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs, direct or indirect), and Level 3 (significant unobservable inputs)[34](index=34&type=chunk)[156](index=156&type=chunk) [Fair Value Measurement of Convertible Note Payable](index=19&type=section&id=13.%20FAIR%20VALUE%20MEASUREMENT%20OF%20CONVERTIBLE%20NOTE%20PAYABLE) Convertible note measured at fair value using a Level 3 model, decreasing to **$2,498,780** at June 30, 2023 - The Company elected the fair value measurement option for the convertible note due to embedded derivatives, recording it at fair value upon issuance and remeasuring at each reporting date[28](index=28&type=chunk) Table: Convertible Note at Fair Value ($) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Convertible note at fair value | $2,498,780 | $2,596,203 | - Fair value of the convertible note is estimated using a probability-weighted discounted cash flow model with assumptions including a face amount of **$2,200,000**, nominal interest rate of **12%** (at June 30, 2023), default interest rate of **18%**, and a **50%** likelihood of default at the extended maturity date[35](index=35&type=chunk)[135](index=135&type=chunk)[158](index=158&type=chunk) Table: Change in Fair Value of Convertible Note ($) | Period | Change in Fair Value | |:---|:---|\ | Beginning balance (Dec 31, 2022) | $2,596,203 | | Change for three months ended March 31, 2023 | $(141,991) | | Balance at March 31, 2023 | $2,454,212 | | Change for three months ended June 30, 2023 | $44,568 | | Ending balance at June 30, 2023 | $2,498,780 | [Major Customers and Accounts Receivable](index=20&type=section&id=14.%20MAJOR%20CUSTOMERS%20AND%20ACCOUNTS%20RECEIVABLE) Significant customer concentration: three customers 63% of AR, one customer 12% of revenue for Q2 2023 - Three customers accounted for **63%** of current accounts receivable at June 30, 2023, while at December 31, 2022, one customer accounted for **35%** of current accounts receivable[60](index=60&type=chunk) - For the three months ended June 30, 2023 and 2022, one customer accounted for **12%** of revenue; for the six months ended June 30, 2023, two customers accounted for **30%** of revenue, and for 2022, one customer accounted for **14%** of revenue[135](index=135&type=chunk) [Income Taxes](index=20&type=section&id=15.%20INCOME%20TAXES) Income tax provision for H1 2023 was **$143,000**, with a full valuation allowance against net deferred tax assets - The provision for income taxes for the six months ended June 30, 2023, amounted to **$143,000**, comprising **$156,000** in current income taxes and a **$13,000** deferred tax benefit[37](index=37&type=chunk)[195](index=195&type=chunk) - The deferred tax liability relates to intangible assets from the acquisition of Swivel Secure[37](index=37&type=chunk) - The Company provides a full valuation allowance against its net deferred tax assets, believing it is more likely than not that they will not be realized[61](index=61&type=chunk) [Subsequent Events](index=20&type=section&id=16.%20SUBSEQUENT%20EVENTS) Subsequent events include common stock issuances to directors and employees, and cancellations of restricted stock due to departures - On August 10, 2023, the Company issued **13,236** shares of common stock to directors for meeting fees and **12,500** shares of restricted stock (three-year vesting) to two new employees, all at **$0.68** per share[162](index=162&type=chunk) - On July 19 and 20, 2023, **20,000** and **13,333** shares of restricted common stock, respectively, were cancelled due to employees leaving before vesting[62](index=62&type=chunk) [Item 2—Management's Discussion and Analysis of Financial Conditions and Results of Operations](index=22&type=section&id=Item%202%E2%80%94Management's%20Discussion%20and%20Analysis%20of%20Financial%20Conditions%20and%20Results%20of%20Operations) Analyzes BIO-key's business, strategy, financial performance, liquidity, and capital resources for periods ended June 30, 2023 [Overview](index=22&type=section&id=Overview) BIO-key is a leading IAM platform provider, offering secure MFA solutions like PortalGuard and WEB-key with biometrics for diverse customers - BIO-key is a leading IAM platform provider enabling secure work-from-anywhere for enterprise, education, and government customers using secure multi-factor authentication (MFA)[164](index=164&type=chunk) - Key products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, MobileAuth® mobile phone authentication application, and high-quality, low-cost accessory fingerprint scanner and FIDO-compliant hardware[164](index=164&type=chunk) - The PortalGuard platform goes beyond traditional MFA by allowing roving users to biometrically authenticate without phones or tokens, eliminating unauthorized account delegation, and detecting duplicate users[40](index=40&type=chunk)[65](index=65&type=chunk) [Strategic Outlook](index=23&type=section&id=Strategic%20Outlook) Plans IAM market expansion through diverse authentication, strategic acquisitions, and growth in regulated industries via enhanced marketing - The Company plans to have a more significant role in the IAM market by offering a suite of authentication options that complement its biometric solutions, allowing customers to customize their approach[43](index=43&type=chunk) - Growth strategies include pursuing strategic acquisitions in the IAM space to enter new market verticals or create synergies with existing operations[166](index=166&type=chunk) - Primary sales strategies focus on increased marketing efforts into the IAM market, dedicated pursuit of large-scale identification projects globally, and growing its channel alliance program[177](index=177&type=chunk) - The Company expects to grow its business within government services and highly-regulated industries (financial services, higher education, healthcare) due to heightened security and privacy requirements[176](index=176&type=chunk) [Critical Accounting Policies and Estimates](index=23&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Refers to Form 10-K for critical accounting policies; no material changes from previously disclosed estimates - There have been no material changes to the Company's critical accounting policies and estimates from those disclosed in its most recent Annual Report on Form 10-K[167](index=167&type=chunk) - For detailed information regarding recent accounting pronouncements, refer to the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report[168](index=168&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Analyzes the Company's financial performance, including revenues, costs, and net loss, for Q2 and H1 2023 compared to prior periods [Three Months Ended June 30, 2023 as Compared to June 30, 2022](index=24&type=section&id=THREE%20MONTHS%20ENDED%20JUNE%2030%2C%202023%20AS%20COMPARED%20TO%20JUNE%2030%2C%202022) Q2 2023 total revenues decreased **1%** to **$1.93 million**, with service revenue up **43%** and hardware down **79%**, R&D costs down **29%** Table: Three Months Ended June 30, 2023 vs 2022 ($) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | |:---|:---|:---|:---|:---|\ | Service Revenue | $620,465 | $435,106 | $185,359 | 43% | | License Revenue | $1,235,771 | $1,162,148 | $73,623 | 6% | | Hardware Revenue | $72,693 | $349,861 | $(277,168) | -79% | | **Total Revenue** | **$1,928,929** | **$1,947,115** | **$(18,186)** | **-1%** | | Cost of Service | $360,156 | $180,677 | $179,479 | 99% | | Cost of License | $198,147 | $358,136 | $(159,989) | -45% | | Cost of Hardware | $47,808 | $185,140 | $(137,332) | -74% | | **Total COGS** | **$606,111** | **$723,953** | **$(117,842)** | **-16%** | | Selling, general and administrative | $1,943,164 | $2,006,573 | $(63,409) | -3% | | Research, development and engineering | $558,181 | $784,083 | $(225,902) | -29% | | Net loss | $(1,422,878) | $(1,718,957) | $296,079 | -17% | | Basic and Diluted Loss per Common Share | $(0.16) | $(0.21) | $0.05 | -24% | - Non-recurring custom services revenue increased **179%** due to additional new customer customizations and upgrades[181](index=181&type=chunk) - The decrease in hardware sales was largely due to the absence of large deployments in 2023, compared to significant orders in 2022[182](index=182&type=chunk) - R&D costs decreased primarily due to reductions in personnel costs and outside services related to the completed MobileAuth application development[172](index=172&type=chunk) - Other income (expense) for Q2 2023 included interest expense of **$56,806** on the secured note and government loan, and a change in fair value of **$(44,568)** on the convertible note[173](index=173&type=chunk)[186](index=186&type=chunk) [Six Months Ended June 30, 2023 as Compared to June 30, 2022](index=26&type=section&id=SIX%20MONTHS%20ENDED%20JUNE%2030%2C%202023%20AS%20COMPARED%20TO%20JUNE%2030%2C%202022) H1 2023 total revenues increased **29%** to **$5.01 million**, driven by **42%** license revenue growth, hardware sales down **67%**, R&D costs down **21%** Table: Six Months Ended June 30, 2023 vs 2022 ($) | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | |:---|:---|:---|:---|:---|\ | Service Revenue | $1,152,987 | $830,910 | $322,077 | 39% | | License Revenue | $3,714,327 | $2,622,331 | $1,091,996 | 42% | | Hardware Revenue | $145,382 | $435,045 | $(289,663) | -67% | | **Total Revenue** | **$5,012,696** | **$3,888,286** | **$1,124,410** | **29%** | | Cost of Service | $514,957 | $391,590 | $123,367 | 32% | | Cost of License | $819,028 | $431,366 | $387,662 | 90% | | Cost of Hardware | $92,400 | $238,438 | $(146,038) | -61% | | **Total COGS** | **$1,426,385** | **$1,061,394** | **$364,991** | **34%** | | Selling, general and administrative | $3,874,896 | $3,804,571 | $70,325 | 2% | | Research, development and engineering | $1,248,341 | $1,589,349 | $(341,008) | -21% | | Net loss | $(1,711,200) | $(2,718,360) | $1,007,160 | -37% | | Basic and Diluted Loss per Common Share | $(0.19) | $(0.34) | $0.15 | -44% | - Non-recurring custom services increased **188%** in the first six months of 2023, largely due to additional service revenue from Swivel Secure customers[189](index=189&type=chunk) - License fees increased due to increased revenue and third-party software for Swivel Secure licenses[191](index=191&type=chunk) - Other income (expense) for H1 2023 included a loss on foreign currency of **$15,000**, a change in fair value of **$97,423** on the convertible note, and interest expense of **$113,724**[194](index=194&type=chunk)[220](index=220&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) Cash decreased to **$565,513** by June 30, 2023; Company relies on debt/equity to meet **$763,000** monthly operational needs Table: Liquidity Metrics ($) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Cash and cash equivalents | $565,513 | $2,635,522 | | Working capital | $2,411,000 | N/A | - Net cash used for operating activities during the six months ended June 30, 2023, was **$2,095,192**, primarily due to negative cash flows from changes in accounts receivable, due from factor, and accrued liabilities[84](index=84&type=chunk)[223](index=223&type=chunk) - The Company's capital needs have been principally met through proceeds from the sale of equity and debt securities[199](index=199&type=chunk) - The **$2.2 million** principal amount secured note is due on December 22, 2023, and the Company expects to need additional financing to repay this note and support operations[228](index=228&type=chunk) - The Company uses an accounts receivable factoring arrangement, extended to October 31, 2023, to assist with general working capital requirements[234](index=234&type=chunk) - The Company requires approximately **$763,000** per month to conduct operations, which it has been unable to consistently achieve through revenue generation[235](index=235&type=chunk) - The Company has approximately **$3.8 million** of inventory purchased for projects in Nigeria and is exploring other markets or return options to generate additional cash[235](index=235&type=chunk) [Item 4—Controls and Procedures](index=32&type=section&id=Item%204%E2%80%94Controls%20and%20Procedures) Addresses effectiveness of disclosure controls and internal control over financial reporting, including identified material weaknesses [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) CEO and CFO deemed disclosure controls ineffective as of June 30, 2023, due to material weaknesses in income tax provision and foreign subsidiary tax filings - The CEO and CFO concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2023[208](index=208&type=chunk) - A material weakness was identified relating to the effectiveness of management's review and controls over the income tax provision in financial footnotes[208](index=208&type=chunk) - A lack of control over foreign subsidiaries with respect to the timely filing of required tax returns was also identified[208](index=208&type=chunk) [Changes in Internal Control Over Financial Reporting](index=33&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) No material changes in internal control over financial reporting for Q2 2023; new controls and consultant engaged to remediate weaknesses - There have been no material changes in the Company's internal control over financial reporting during the fiscal quarter ended June 30, 2023[209](index=209&type=chunk) - The Company intends to implement new controls designed to remediate the material weaknesses and has engaged a consultant to review income tax transactions and assist with financial statement preparation[237](index=237&type=chunk) [PART II. OTHER INFORMATION](index=34&type=section&id=PART%20II.%20OTHER%20INFORMATION) Includes exhibits filed as part of the Quarterly Report on Form 10-Q and the required signatures from the Company's executive officers [Item 6—Exhibits](index=34&type=section&id=Item%206%E2%80%94Exhibits) Lists exhibits filed with Form 10-Q, including a waiver and amendment to a securities purchase agreement, CEO/CFO certificates, and XBRL data - Exhibits include Waiver and Amendment No. 1 to Securities Purchase Agreement, Certificates of CEO and CFO required under Rule 13a-15(f) and 18 U.S.C. Section 1350, and Inline XBRL Instance, Taxonomy Extension Schema, Calculation, Definition, Labels, and Presentation files[231](index=231&type=chunk) [Signatures](index=35&type=section&id=Signatures) Report signed by Michael W. DePasquale (CEO) and Cecilia C. Welch (CFO) on behalf of BIO-Key International, Inc. on August 18, 2023 - The report is signed by Michael W. DePasquale, Chief Executive Officer, and Cecilia C. Welch, Chief Financial Officer, on August 18, 2023[211](index=211&type=chunk)[233](index=233&type=chunk)

BIO-key International, Inc. (NASDAQ:BKYI) Q2 2023 Earnings Conference Call August 15, 2023 10:00 AM ET Company Participants Bill Jones – Investor Relations Mike DePasquale – Chairman and Chief Executive Officer Ceci Welch – Chief Financial Officer Conference Call Participants Jack Vander Aarde – Maxim Group Operator Good morning, everyone. Thank you for standing by, and welcome to BIO-key International Second Quarter 2023 Conference Call. During management’s prepared remarks all participants will be in list ...

Accounts Receivable - As of March 31, 2023, accounts receivable increased to $3,985,988 from $2,096,569 as of December 31, 2022, representing a growth of approximately 90%[63] - The net accounts receivable after allowance for credit losses was $3,362,203 as of March 31, 2023, compared to $1,522,784 as of December 31, 2022, indicating a significant increase of about 121%[63] - As of March 31, 2023, two customers accounted for 45% of current accounts receivable, indicating a continued reliance on a limited number of customers for revenue[79] Revenue Concentration - For the three-month periods ended March 31, 2023, two customers accounted for 48% of revenues, while one customer accounted for 27% of revenues, highlighting a concentration in revenue sources[79] Business Growth and Market Demand - The company expects to grow its business in government services and highly-regulated industries, anticipating increased demand for security solutions, including biometrics, due to heightened security and privacy requirements[59] - The company anticipates that the superior portable biometric user experience for Windows 10 users will accelerate demand for its computer network log-on solutions and fingerprint readers[59] Business Model - The company operates a SaaS business model with subscription fees based on products used and the number of users, generating annual recurring revenue through noncancelable contracts with an average duration of approximately one year[58] Financial Instruments and Capital - The company issued a $2,200,000 principal amount senior secured promissory note on December 22, 2022, with $2,002,000 funded for general working capital[68] Compensation and Valuation - Restricted stock compensation for the three-month period ended March 31, 2023, was $59,056, compared to $39,840 for the same period in 2022, reflecting an increase of approximately 48%[73] - The company provided a full valuation allowance against its net deferred tax assets, indicating a belief that it is more likely than not that these assets will not be realized[80]

[Business Overview](index=5&type=section&id=Item%201.%20Business) [Company Overview](index=5&type=section&id=Overview) BIO-key International, Inc. is a leading Identity and Access Management (IAM) platform provider, offering secure, passwordless multi-factor authentication (MFA) solutions for enterprise, education, and government clients - BIO-key provides an IAM platform for secure access through MFA for enterprise, education, and government clients, aiming for passwordless access without tokens or phones[177](index=177&type=chunk) - Products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, MobileAuth® mobile phone authentication app, and high-quality, low-cost fingerprint scanners and FIDO-compliant hardware[177](index=177&type=chunk) - BIO-key's exclusive Identity Bound Biometric (IBB) authentication method addresses roaming user and shared workstation challenges by using the user as the credential, not a phone or token[398](index=398&type=chunk) [Development of Business](index=6&type=section&id=Development%20of%20Business) Established in 1993, the company focuses on fingerprint biometric technology and security software, expanding product lines and market reach through strategic acquisitions like PistolStar and Swivel Secure Europe, with plans for continued growth via acquisitions - BIO-key was founded in 1993 as BBG Engineering, later renamed SAC Technologies, and finally BIO-key International, Inc. in 2002[429](index=429&type=chunk) - On June 30, 2020, the company acquired PistolStar, Inc., enhancing its enterprise identity and access management solutions[401](index=401&type=chunk) - On March 8, 2022, the company expanded sales and support operations into Europe, Africa, and the Middle East (EMEA) through the acquisition of Swivel Secure Europe, SA[430](index=430&type=chunk) [Our Products](index=6&type=section&id=Our%20Products) The company offers diverse IAM products, including PortalGuard and PortalGuard IDaaS platforms supporting 17 MFA factors and various SSO federation options, along with WEB-key biometric platform, AuthControl series, and fingerprint readers for various industries - BIO-key PortalGuard and PortalGuard IDaaS platforms offer **17 MFA authentication factor options**, including server-secure IBB fingerprint scanning, palm scanning, facial selfie, or voice biometrics via the MobileAuth app[402](index=402&type=chunk) - PortalGuard supports multiple user directory options, including local, hybrid, or full Azure Active Directory, LDAP, IBM Domino, or custom SQL user directories, and provides various Single Sign-On (SSO) federation options like SAML, Open ID Connect (OIDC), OAUTH, CAS, and WS-Fed[402](index=402&type=chunk) - The company also offers the WEB-key scalable biometric service management platform for large-scale civil ID projects, AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product lines, and sells fingerprint readers like Piv Pro, SidePass®, EcoID II®, and SideSwipes® directly and through Amazon[427](index=427&type=chunk)[407](index=407&type=chunk)[406](index=406&type=chunk) [BIO-key PortalGuard and PortalGuard IDaaS](index=6&type=section&id=BIO-key%20PortalGuard%20and%20PortalGuard%20IDaaS) The PortalGuard platform provides an independent, client-controlled cloud identity platform integrating with any cloud or on-premise SaaS application, offering device-agnostic Identity Bound Biometric (IBB) authentication for secure access and self-service management - The PortalGuard platform offers an independent, client-controlled cloud identity platform that integrates with any cloud or on-premise SaaS application, service, or cloud host, and provides Windows device authentication through a single secure, reliable, and scalable IAM platform[431](index=431&type=chunk) - This platform provides "who you are" authentication options through BIO-key's Identity Bound Biometric (IBB) authentication, not relying on devices or "what you have" authentication, thereby actively identifying users accessing systems[431](index=431&type=chunk) - PortalGuard IDaaS secures employee and student populations, enhances partner network collaboration, offers a more secure user experience, and can serve as a core system for organizational connectivity, access, authentication, and identity lifecycle management[403](index=403&type=chunk) [BIO-key VST and WEB-key; Products; Civil and Large-Scale ID Infrastructure](index=8&type=section&id=BIO-key%20VST%20and%20WEB-key%3B%20Products%3B%20Civil%20and%20Large-Scale%20ID%20Infrastructure) WEB-key is a scalable biometric service management platform supporting regulatory compliance, enrollment, authentication, or identification, and the integrity of multi-tenant private or public cloud delivery platforms, utilized by government agencies for large-scale civil ID projects - BIO-key's WEB-key is a scalable biometric service management platform integrating key functions like regulatory compliance, enrollment, authentication or identification, and the integrity of multi-tenant private or public cloud delivery platforms[427](index=427&type=chunk) - Government agencies use BIO-key's WEB-key for large-scale civil ID projects due to its support for biometric identity ecosystems, cloud-readiness, and provision of a scalable, high-integrity trust platform compatible with over **30 interchangeable fingerprint scanners**[427](index=427&type=chunk) - The company developed highly accurate and effective fingerprint biometric technology, embedded in PortalGuard products, offering unique phone or token-free authentication for enterprise security in manufacturing, retail, call centers, and healthcare[435](index=435&type=chunk) [AuthControl Sentry; AuthControl Enterprise; AuthControl MSP](index=8&type=section&id=AuthControl%20Sentry%3B%20AuthControl%20Enterprise%3B%20AuthControl%20MSP) Swivel Secure is the exclusive distributor of AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product lines in EMEA (excluding UK and Ireland), offering patented one-time code extraction technology to manage data security risks from cloud services and BYOD policies - Swivel Secure is the exclusive distributor of the AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product lines in Europe, Africa, and the Middle East (EMEA), excluding the UK and Ireland[407](index=407&type=chunk) - These solutions incorporate patented one-time code extraction technology designed to help enterprises manage the increasing data security risks associated with cloud services and Bring Your Own Device (BYOD) policies[407](index=407&type=chunk) [Fingerprint Readers](index=8&type=section&id=Fingerprint%20Readers) The company offers a full range of easy-to-use fingerprint scanners for enterprise and consumer markets, including PIV Pro, SidePass®, EcoID II®, and SideSwipes®, connecting via USB A or C ports and supporting Windows Hello for enhanced security - The company offers a full range of easy-to-use fingerprint scanners for enterprise and consumer markets, including PIV Pro, SidePass®, EcoID II®, and SideSwipes®[406](index=406&type=chunk) - These fingerprint readers can be used with any laptop, tablet, or other device featuring a USB A or C port[406](index=406&type=chunk) - Compact fingerprint readers like SidePass®, SideSwipe®, or EcoID II® are used by commercial companies to replace Windows passwords and enable Windows Hello for Business without replacing or upgrading laptops or tablets[408](index=408&type=chunk) [Our Markets](index=8&type=section&id=Our%20Markets) The company's products simplify authentication for enterprise users and consumers while enhancing security to meet growing strong authentication demands, historically serving highly regulated sectors like government and healthcare, now expanding across all industries - The company's products simplify authentication processes for enterprise users and consumers while enhancing security levels to meet new, stronger authentication requirements and security best practices[409](index=409&type=chunk) - Historically, the company's largest market has been identity and access management in highly regulated industries such as government and healthcare[410](index=410&type=chunk) - Currently, organizations of all industries and sizes are embracing biometrics and MFA as security and workflow solutions, presenting significant and global market opportunities[410](index=410&type=chunk)[409](index=409&type=chunk) [Business Model](index=10&type=section&id=Business%20Model) The company's business model focuses on organic growth and strategic acquisitions, offering SaaS subscription software sold through direct sales and channel partners, targeting large identification projects, enterprise MFA, consumer mobile credentials, government services, and highly regulated industries - The company offers software through a SaaS subscription model, primarily selling through a direct sales team and a network of channel partners, including over **40 resellers, system integrators, and other distribution partners**[473](index=473&type=chunk)[3](index=3&type=chunk) - Key focus areas of the company's business model include large-scale identification projects (especially in Africa), enterprise MFA, consumer mobile credentials, government services and highly regulated industries, OEM customers, and collaboration with Microsoft[414](index=414&type=chunk)[440](index=440&type=chunk)[415](index=415&type=chunk)[442](index=442&type=chunk)[438](index=438&type=chunk)[471](index=471&type=chunk) - The company plans to continue actively developing its channel alliance program and seeks strategic acquisitions of IAM businesses and assets to enter new markets or create synergies with existing operations[3](index=3&type=chunk)[472](index=472&type=chunk) [Market Drivers](index=10&type=section&id=Market%20Drivers) Market drivers include the inability of mainstream MFA solutions to meet enterprise needs (e.g., roaming users, account sharing), supply chain vulnerabilities, ransomware attacks highlighting traditional MFA shortcomings, and remote authentication challenges from remote work models - Mainstream MFA phone app or token methods have failed to meet enterprise needs, while supply chain vulnerabilities, ransomware attacks, and compromised administrative access highlight the inadequacies of mainstream MFA and security approaches[412](index=412&type=chunk) - BIO-key's biometric authentication process thwarts human error and human weakness from compromising secure authentication, while making end-user access more convenient[412](index=412&type=chunk) - Remote authentication challenges arising from remote work models, including the shift to remote work due to the pandemic, have also increased demand for secure solutions[413](index=413&type=chunk) [OEM Customers](index=10&type=section&id=OEM%20Customers) The company prioritizes agreements with OEM customers, leveraging successful collaborations with companies like NCR, McKesson, Omnicell, and LexisNexis, enabling OEMs to embed solutions for enhanced security and optimized workflows without IAM infrastructure R&D investment - The company continues to prioritize agreements with OEM customers and plans to build upon successful experiences supporting companies like NCR, McKesson, Omnicell, and LexisNexis[438](index=438&type=chunk) - OEM customers benefit from embedding the company's solutions into their products through enhanced security, optimized workflows, and avoiding investment in IAM infrastructure R&D[438](index=438&type=chunk) - OEM customer order patterns are more predictable and typically require lower service and support resources[438](index=438&type=chunk) [Highly Regulated Industries](index=10&type=section&id=Highly%20Regulated%20Industries) Government ID projects, healthcare organizations (hospitals, clinics, private practices), and the financial services industry (banks, credit unions) present strong market opportunities for the company - Government ID projects and healthcare organizations, including hospitals, clinics, and small private practices, offer strong market opportunities for the company[438](index=438&type=chunk) - The financial services industry, including banks and credit unions, has also grown significantly[438](index=438&type=chunk) [Microsoft Partnership](index=10&type=section&id=Microsoft%20Partnership) The company is a Microsoft partner, with its compact fingerprint scanner series tested and certified by Microsoft to support Windows Hello and Windows Hello for Business - The company is a Microsoft partner, and its compact fingerprint scanner series has been tested and certified by Microsoft to support Windows Hello and Windows Hello for Business[438](index=438&type=chunk) [Partner Model](index=10&type=section&id=Partner%20Model) In 2022, the company continued to develop its Channel Alliance Partner (CAP) program, collaborating with selected value-added resellers, integrators, and distributors, and partnering with leading application, managed services, and infrastructure providers like Intelisys, Insight, and Amazon Web Services - In 2022, the company continued to develop its Channel Alliance Partner (CAP) program, focusing on collaborating with selected value-added resellers, integrators, and distributors[412](index=412&type=chunk) - The company partners with leading application, managed services, and infrastructure providers such as Intelisys, Insight, NGEN, Amazon Web Services, Pathify (formerly UCROO Campus), Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus[417](index=417&type=chunk) [Key Areas of Market Growth](index=10&type=section&id=Key%20Areas%20of%20Market%20Growth) The company identifies significant market growth potential in large-scale identification projects (especially in Africa), enterprise MFA, consumer mobile credentials (including payments and loyalty programs), government-funded projects, government services, highly regulated industries, and demand for BIO-key hardware from Windows Hello for Business users - The company identifies significant market growth potential in large-scale identification projects, especially in Africa and surrounding regions[414](index=414&type=chunk) - Enterprise MFA for accessing computer networks and applications presents a key growth area[440](index=440&type=chunk) - Consumer mobile credentials, including mobile payments, credit and payment card programs, data and application access, and commercial loyalty programs, offer substantial opportunities[415](index=415&type=chunk) - Government-funded projects, including state election commissions, represent another area of growth[441](index=441&type=chunk) - Government services and highly regulated industries, such as Medicare, Medicaid, Social Security, driver's licenses, campus and school IDs, and passports/visas, are also key growth sectors[442](index=442&type=chunk) - Demand for BIO-key hardware products from Windows Hello for Business users and Fortune 2000 companies is a significant market driver[471](index=471&type=chunk) [Marketing and Distribution](index=11&type=section&id=Marketing%20and%20Distribution) The company sells products through a direct sales team and channel partner network, actively developing its channel alliance program in 2023, and collaborating with leading application, managed services, and infrastructure providers to expand market reach - The company sells products directly through its direct sales team and internal sales team, and indirectly through a network of channel partners[3](index=3&type=chunk) - The company partners with over **40 resellers, system integrators, and other distribution partners** through its Channel Alliance Partner program and is committed to actively developing this program in 2023[3](index=3&type=chunk) - The company collaborates with leading application, managed services, and infrastructure providers such as Intelisys, Insight, NGEN, Amazon Web Services, Pathify (formerly UCROO Campus), Software House International (SHI), Virtual Graffiti, Atlassian, and ProCirrus[417](index=417&type=chunk) [Intellectual Property Rights](index=11&type=section&id=Intellectual%20Property%20Rights) The company possesses significant intellectual property, including multiple patented technologies and trade secrets covering fingerprint image enhancement, template protection, cybersecurity, biometric data utilization, and fingerprint lock design, with parallel patent protection in various countries - The company possesses significant intellectual property, including patented technologies and trade secrets, which are fundamental to its biometric and IAM product operations[4](index=4&type=chunk) - The company has secured multiple US patents covering technologies such as fingerprint image enhancement, template protection, cybersecurity, biometric data utilization, and fingerprint lock design, and has obtained parallel patent protection in many foreign countries[445](index=445&type=chunk)[419](index=419&type=chunk)[420](index=420&type=chunk)[6](index=6&type=chunk)[447](index=447&type=chunk)[7](index=7&type=chunk)[421](index=421&type=chunk)[448](index=448&type=chunk)[8](index=8&type=chunk) - The company holds unregistered trademarks like "PortalGuard Nebula™", "Password Power™", and "Scooch™", and implements measures to ensure copyright and licensing protection for software releases, as well as the confidentiality of trade secrets[9](index=9&type=chunk)[450](index=450&type=chunk) [Patents](index=11&type=section&id=Patents) The company holds multiple US patents covering key technologies like fingerprint image enhancement, template protection, cybersecurity, biometric data utilization, and fingerprint lock design, with expiration dates ranging from 2024 to 2039, and has secured parallel patent protection internationally - The company holds multiple US patents, including: - US Patent No. 7,359,553 (issued April 15, 2008), covering core algorithms for image enhancement and data extraction, valid until January 3, 2025[445](index=445&type=chunk) - US Patent No. 7,155,040 (issued December 26, 2006), covering image processing technology, valid until January 29, 2025[474](index=474&type=chunk) - US Patent No. 7,454,624 (issued November 18, 2008), covering methods for matching template protection in biometric security systems, valid until May 17, 2025[419](index=419&type=chunk) - US Patent No. 7,502,938 (issued March 10, 2009), covering "trusted biometric devices", valid until October 25, 2025[475](index=475&type=chunk) - US Patent No. 8,055,027 (issued November 8, 2011), covering methods for generating directional information in image processing, valid until October 10, 2027[446](index=446&type=chunk) - US Patent No. 8,196,193 (issued June 5, 2012), covering "methods for retrofitting password-enabled computer software using redirected user authentication", valid until November 1, 2030[6](index=6&type=chunk) - US Patent No. 8,214,652 (issued July 3, 2012), covering "biometric network security", valid until April 24, 2024[420](index=420&type=chunk) - US Patent No. 8,397,077 (issued March 12, 2013), covering "client authentication redirection", valid until August 7, 2030[476](index=476&type=chunk) - US Patent No. 9,646,146 (issued May 3, 2017), covering "biometric data utilization", valid until March 6, 2035[447](index=447&type=chunk) - US Patent No. 10,002,244 (issued June 19, 2018), covering "biometric data utilization" for continuous, passive user authentication on mobile devices, valid until March 6, 2035[7](index=7&type=chunk) - US Patent No. 10,025,831 (issued July 27, 2018), covering "adaptive short list and biometric database search acceleration", valid until August 10, 2036[7](index=7&type=chunk) - US Patent No. 10,400,481 (issued September 3, 2019), covering "fingerprint locks", valid until June 27, 2037[421](index=421&type=chunk) - US Patent No. 10,410,040 (issued September 10, 2019), covering "fingerprint lock control methods and fingerprint lock systems", valid until July 26, 2037[477](index=477&type=chunk) - US Patent No. 10,984,085 (issued April 20, 2021), covering "biometrics in uncontrolled acquisition environments", valid until March 13, 2039[448](index=448&type=chunk) - The company has also obtained parallel patent protection for its US patents in many foreign countries to protect its intellectual property globally[8](index=8&type=chunk) [Trademarks](index=12&type=section&id=Trademarks) The company has registered trademarks like "BIO-key", "True User Identification", "WEB-key", "SideSwipe", "SidePass", "EcoID", "PistolStar®", "PortalGuard", "MobileAuth", and "PASSIVEKEY®" in the US and internationally, and also holds unregistered trademarks - The company has registered trademarks such as "BIO-key", "True User Identification", "Intelligent Image Indexing", "WEB-key", "SideSwipe", "SidePass", "EcoID", "PistolStar®", "PortalGuard", "MobileAuth", "PASSIVEKEY®", and "PISTOLSTAR®" with the US Patent and Trademark Office and in many foreign countries[478](index=478&type=chunk) - The company also holds unregistered trademarks including "PortalGuard Nebula™", "Password Power™", and "Scooch™"[9](index=9&type=chunk) [Copyrights and trade secrets](index=13&type=section&id=Copyrights%20and%20trade%20secrets) The company implements measures to ensure copyright and licensing protection for software releases and to safeguard the confidentiality of trade secrets, with its PortalGuard IAM product line and VST/WEB-key biometric platforms being mature and widely deployed - The company takes measures to ensure copyright and licensing protection before software releases, and where possible, ensures that only licensed and activated software can fully function through licensing[450](index=450&type=chunk) - The company also takes measures to protect the confidentiality of its trade secrets[450](index=450&type=chunk) - The PortalGuard IAM product line is mature with hundreds of active customers, continuously adding additional authentication factors and features, while enhancing the self-management capabilities of PortalGuard IDaaS[479](index=479&type=chunk) [Research and Development](index=13&type=section&id=Research%20and%20Development) The company invested **$3,252,236** in 2022 and **$2,355,056** in 2021 for R&D, primarily focusing on enhancing existing software products like PortalGuard, PortalGuard IDaaS, MobileAuth, WEB-key, and VST, and developing new innovative solutions Research and Development Expenses | Year | R&D Expenses ($) | | :--- | :--- | | 2022 | 3,252,236 | | 2021 | 2,355,056 | - R&D efforts primarily focus on enhancing the functionality, reliability, and integration of existing software products (such as PortalGuard, PortalGuard IDaaS, MobileAuth, WEB-key, and VST)[480](index=480&type=chunk) - These products are crucial for supporting the anticipated growth in enterprise IAM[480](index=480&type=chunk) [Competition](index=13&type=section&id=Competition) The IAM, MFA, and SSO markets are highly competitive, with the company differentiating itself through unique server-secure biometric authentication capabilities among 17 factors, while facing competition from FIDO-compliant keys and other biometric technologies - The IAM, MFA, and SSO markets have multiple solution providers, with the company's unique differentiation being its unparalleled server-secure biometric authentication capabilities, included among **17 authentication factors**[12](index=12&type=chunk) - Fingerprint recognition is considered accurate, inexpensive, and non-invasive, making it the dominant biometric technology currently and for the foreseeable future[454](index=454&type=chunk) - The company faces competition from FIDO-compliant keys (e.g., Yubico's YubiKey) but offers FIDO 2.0 keys with equivalent functionality and quality at a lower cost, emphasizing its Identity Bound Biometric differentiation[13](index=13&type=chunk) - Other biometric technologies like palm scanning (expensive, technically sensitive, mobile challenges), facial recognition (privacy concerns, reliance on ambient light), and iris scanning (accurate but expensive hardware) each have advantages and disadvantages[14](index=14&type=chunk)[15](index=15&type=chunk)[455](index=455&type=chunk) [Government Regulations](index=14&type=section&id=Government%20Regulations) The company actively participates in industry privacy working groups to influence and understand state, federal, and EU privacy laws regarding biometric data, with its WEB-key platform including compliance features for informed consent and strict auditing of data retention and deletion requests - The company actively participates in industry privacy working groups as a recognized biometric subject matter expert to influence and understand any proposed changes to these regulations[16](index=16&type=chunk) - The WEB-key platform includes compliance features ensuring automatic adherence to these laws, including collecting informed written consent during enrollment workflows and strict auditing of biometric data retention and deletion requests[455](index=455&type=chunk) - Beyond these regulations, the company is not currently subject to direct regulation by any government agency, except for regulations generally applicable to businesses or those related to specific project requirements[16](index=16&type=chunk) [Environmental Regulations](index=14&type=section&id=Environmental%20Regulations) As of the report date, the company has not incurred any significant costs for complying with federal, state, or local environmental laws and anticipates no such costs in the foreseeable future - As of the report date, the company has not incurred any significant costs for complying with federal, state, or local environmental laws and anticipates no such costs in the foreseeable future[456](index=456&type=chunk) [Seasonality](index=14&type=section&id=Seasonality) The company's revenue generally does not exhibit seasonal patterns but is influenced by customer budgets, government fiscal year planning, and capital budgeting - The company's revenue generally does not exhibit seasonal patterns, but will be affected by customer budgets, government fiscal year planning, and capital budgeting[484](index=484&type=chunk) [Human Capital Resources](index=14&type=section&id=Human%20Capital%20Resources) As of the report date, the company employs **52 individuals**, with **51 full-time employees** across engineering, customer support, R&D, finance, administration, sales, and marketing, maintaining good employee relations with no unionized staff - As of the report date, the company employs **52 individuals**, of whom **51 are full-time employees**[17](index=17&type=chunk) - Full-time employees are distributed as follows: **20 in engineering, customer support, and R&D; 9 in finance and administration; and 22 in sales and marketing**[17](index=17&type=chunk) - The company also has two part-time employees (one providing engineering services, one administrative services) and two contractors at its China factory; all employees are non-unionized, and the company believes its employee relations are good[17](index=17&type=chunk) [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) - Due to historical losses and insufficient revenue, independent registered public accounting firms have expressed substantial doubt about the company's ability to continue as a going concern[19](index=19&type=chunk)[458](index=458&type=chunk) - The company may require additional financing to execute its long-term business plan, and if funding is unavailable or sufficient revenue is not generated, the company may be unable to continue operations[20](index=20&type=chunk)[488](index=488&type=chunk) - Biometric technology has not achieved widespread market acceptance, the scale of market development is uncertain, and the company faces intense competition from traditional security methods and emerging technologies[22](index=22&type=chunk)[23](index=23&type=chunk)[490](index=490&type=chunk)[520](index=520&type=chunk) [Business and Financial Risks](index=15&type=section&id=Business%20and%20Financial%20Risks) The company faces multiple business and financial risks, including going concern doubts, need for additional financing, limited market acceptance of biometrics, intense competition, potential product defects, reliance on third-party manufacturers, international operational risks, intellectual property protection challenges, resource mismanagement, cybersecurity threats, ESG disclosure risks, and acquisition integration difficulties [Going Concern and Financing](index=15&type=section&id=Going%20Concern%20and%20Financing) Due to continuous losses and insufficient revenue, the independent registered public accounting firm has expressed substantial doubt about the company's ability to continue as a going concern, requiring approximately **$798,000** monthly for operations against **$7 million** in 2022 revenue, and facing default risk on a **$2.2 million** secured promissory note due December 22, 2023 - Due to historical losses and insufficient revenue, independent registered public accounting firms have expressed substantial doubt about the company's ability to continue as a going concern[19](index=19&type=chunk)[458](index=458&type=chunk) - The company requires approximately **$798,000** per month for operations, but 2022 revenue of approximately **$7 million** was insufficient to continuously cover operating expenses[488](index=488&type=chunk) - The company issued a **$2.2 million** secured promissory note on December 22, 2022, due in six months with a six-month extension option, at an interest rate of **10%-12%**; failure to repay could lead to default risk and significant dilution of existing shareholders' equity[21](index=21&type=chunk)[460](index=460&type=chunk) [Market Acceptance and Competition](index=16&type=section&id=Market%20Acceptance%20and%20Competition) Biometric technology has not achieved widespread market acceptance, particularly in the private sector, with market uncertainty regarding performance, reliability, cost, privacy concerns, and geopolitical events, while facing intense competition from traditional security methods and well-funded rivals - Biometric technology has not achieved widespread market acceptance, especially in the private sector, and the scale of market development remains uncertain[22](index=22&type=chunk)[490](index=490&type=chunk) - Market acceptance depends on the performance and reliability of biometric solutions, adoption and integration costs, privacy concerns, and the impact of national or international events[23](index=23&type=chunk)[462](index=462&type=chunk) - The company faces intense competition from established biometric companies, startups, and providers of traditional access control methods, many of whom possess greater financial and marketing resources[520](index=520&type=chunk) [Product Defects and Third-Party Dependence](index=17&type=section&id=Product%20Defects%20and%20Third-Party%20Dependence) Although the company's core biometric technology is developed, its limited commercial use may hide undetected design flaws and software errors, potentially causing delivery delays or requiring modifications, thus impacting competitiveness, while success also relies on third-party manufacturers and developers over whom the company lacks control - The company's core biometric technology, though developed, is used by a limited number of commercial customers and may contain undetected design flaws and software errors, leading to delivery delays or requiring modifications[52](index=52&type=chunk) - Any defects or errors could adversely affect the company's competitive position and result in the loss of potential customers or opportunities[52](index=52&type=chunk) - As a technology licensing company, its success depends on the ability of third-party manufacturers and developers to effectively integrate its technology, but the company lacks control over these licensees and cannot guarantee they have sufficient resources to successfully develop and distribute products[53](index=53&type=chunk)[464](index=464&type=chunk) [International Operations and Foreign Exchange Risk](index=17&type=section&id=International%20Operations%20and%20Foreign%20Exchange%20Risk) The company's international growth faces risks from foreign exchange fluctuations, difficulties in enforcing international contracts and collecting receivables, and compliance with diverse and conflicting international laws (privacy, security, data use, tax, export, anti-corruption), with the Russia-Ukraine conflict adding geopolitical and economic uncertainty - The company's continued growth in international operations faces risks, including foreign exchange fluctuations, difficulties in enforcing international contracts and collecting receivables, and challenges in complying with diverse and conflicting international laws and regulations (e.g., privacy, security, data use, tax laws, export restrictions, and anti-corruption laws)[29](index=29&type=chunk)[58](index=58&type=chunk)[493](index=493&type=chunk)[26](index=26&type=chunk) - The Russia-Ukraine conflict has created significant political and economic uncertainty, potentially adversely affecting global trade, exchange rates, and regional economies, which could impact the company's financial condition or operating results[34](index=34&type=chunk) - The company generated revenue from Africa and the European Union in 2021 and 2022 and expects to continue doing so, but its financial performance will be subject to risks associated with changes in the value of the US dollar against local currencies[25](index=25&type=chunk) [Intellectual Property Risks](index=19&type=section&id=Intellectual%20Property%20Risks) The company cannot guarantee its core technology's intellectual property protection will provide a sustainable competitive advantage or entry barrier, as third parties may claim infringement, leading to costly litigation and diverted management resources, while international IP protection efforts may be insufficient against misappropriation - The company cannot guarantee that its intellectual property protection for core technologies will provide a sustainable competitive advantage or barrier to entry[467](index=467&type=chunk)[522](index=522&type=chunk) - Third parties may claim the company infringes their intellectual property, leading to costly litigation and diversion of management resources, even if claims are unfounded[27](index=27&type=chunk)[495](index=495&type=chunk) - The company's efforts to protect intellectual property in international markets may be insufficient to prevent misappropriation or improper use of its technology, thereby affecting international business expansion[28](index=28&type=chunk)[523](index=523&type=chunk) [Resource Management and Cybersecurity Risks](index=20&type=section&id=Resource%20Management%20and%20Cybersecurity%20Risks) Ineffective resource management could severely impact financial performance or stock price, requiring expenditure adjustments based on economic conditions, while cybersecurity threats (cybercriminals, malware, state-sponsored attacks) pose risks of data breaches, reputational damage, legal actions, and financial losses, potentially exceeding insurance coverage - The company's failure to effectively manage resources could have a severe negative impact on financial performance or stock price, requiring expenditure adjustments based on economic conditions[469](index=469&type=chunk)[524](index=524&type=chunk) - The company faces cybersecurity threats, including cybercriminals, malicious code, theft or misuse by employees or contractors, password spraying, phishing, and denial-of-service attacks, as well as sophisticated state-sponsored attacks[498](index=498&type=chunk)[526](index=526&type=chunk) - Any security breach or perceived vulnerability could harm the company's reputation and brand, leading to customer loss, decreased sales, increased costs, litigation, and fines, even if cybersecurity insurance may be insufficient to cover all liabilities[31](index=31&type=chunk)[499](index=499&type=chunk) [ESG and Climate Disclosure Risks](index=24&type=section&id=ESG%20and%20Climate%20Disclosure%20Risks) Growing investor, employee, and customer focus on ESG matters means failure to maintain proper practices and disclosures could harm reputation, erode confidence, and lead to adverse business and financial outcomes, while proposed SEC climate disclosure rules could increase costs and litigation risks - Failure to maintain appropriate Environmental, Social, and Governance (ESG) practices and disclosures could lead to reputational damage, loss of customer and investor confidence, and adverse business and financial results[61](index=61&type=chunk)[528](index=52

BIO-key International, Inc. (NASDAQ:BKYI) Q1 2023 Results Conference Call May 16, 2023 10:00 AM ET Company Participants William Jones - Catalyst IR Michael DePasquale - Chairman and CEO Cecilia Welch - CFO Conference Call Participants Jack Vander Aarde - Maxim Group Operator Good morning, everyone. Thank you for standing by, and welcome to the BIO-key International's First Quarter 2023 Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, Tuesday, May 16, 202 ...

Financial Data and Key Metrics Changes - The company achieved full-year revenue of $7 million in 2022, meeting the low end of its revenue guidance, reflecting a 37% increase from $5.1 million in 2021 [4][67] - Q4 2022 revenue rose 88% to $1.8 million from $9.9 million in Q4 2021, driven by higher software license and service fees [67] - The net loss for Q4 2022 was $5.1 million, or $0.62 per share, compared to a net loss of $2 million, or $0.26 per share, in Q4 2021 [44][71] Business Line Data and Key Metrics Changes - Software license revenue increased by 92% in Q4 2022 and 79% to $4.6 million for the full year 2022, attributed to the acquisition of Swivel Secure and new customer contracts [19][67] - Service revenue increased by 104% in Q4 2022 and 41% to $1.8 million for the full year 2022, with recurring service revenue rising 13% to $1.2 million [40][67] Market Data and Key Metrics Changes - The company serves tens of millions of end users across 600 customers globally, with significant growth in North America, Europe, the Middle East, South America, and Asia, while Africa did not achieve growth due to delays in government-sponsored civil ID programs [24][26] - The cybersecurity market is expected to see record spending in 2023, with nearly a third of organizations adopting passwordless authentication solutions, up from 22% the previous year [10] Company Strategy and Development Direction - The company is focusing on enhancing its global reach through an expanded direct sales team and marketing campaigns, while also pursuing new market opportunities [9][28] - The strategy includes increasing average deal size and targeting larger enterprises, with a goal of $1 million in channel-sourced bookings for 2023 [15][66] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about a turnaround in the African market, particularly in Nigeria, as operations begin to ramp up again [7][55] - The company expects Q1 2023 revenue to be at a record level, indicating a strong start to the year and projecting substantial growth in both top and bottom lines for 2023 [12][32] Other Important Information - The company aims to reduce inventory by at least half in the first two quarters of 2023, with a current inventory of $4.8 million [26] - Operating expenses increased significantly in 2022 due to the acquisition of Swivel Secure and other factors, but management expects to streamline these costs moving forward [42][70] Q&A Session Summary Question: What is the normalized SG&A expense as you enter 2023? - Management indicated that SG&A and R&D expenses are expected to be under $3 million per quarter moving forward [50] Question: What is the outlook for Q1 2023 revenue growth? - Management stated that the revenue growth is primarily driven by the strength of the core business, excluding contributions from African contracts [51][52] Question: What represents breakeven or profitability for the company? - Management suggested that breakeven is likely around $14 million in annualized revenue, with current expenses in the $3.5 million range [86]

Financial Data and Key Metrics Changes - BIO-key's Q3 2022 revenue rose 6% to $1.4 million compared to $1.3 million in Q3 2021, while year-to-date revenues increased 26% to $5.3 million from $4.2 million in the same period last year [44] - Annual recurring revenue for software licenses increased 5.5% to $918,000 from $870,000 in Q3 2021, reflecting growth from the addition of Swivel Secure and new PortalGuard customers [45] - The gross profit remained flat at $1 million in Q3 2022, with a gross margin decline to 71% from 77% in Q3 2021 due to higher costs for license fees related to Swivel Secure [47] Business Line Data and Key Metrics Changes - Service revenue improved 17% to $372,000 in Q3 2022, with 81% representing recurring maintenance and support, while nonrecurring services decreased 8% to $68,000 [46] - Hardware sales declined to $83,000 in Q3 2022 from $110,000 in Q3 2021 due to other MFA options offered with PortalGuard [46] Market Data and Key Metrics Changes - The company experienced delays in large IT projects in Africa and slippage of projects in the domestic business, primarily with county governments [9] - Despite these challenges, the company expects a strong close to the year as customers seek to utilize their IT budgets before year-end [16] Company Strategy and Development Direction - BIO-key focuses on innovation, particularly in expanding passwordless and mobile Identity and Access Management (IAM) options, with the launch of the updated MobileAuth app and enhancements to PortalGuard [10] - The company is building a growing base of recurring software-as-a-service revenue and expanding its sales team and channel partnerships to enhance market reach [15][20] Management's Comments on Operating Environment and Future Outlook - Management expects to achieve breakeven early in 2023, citing the third quarter as seasonally slow due to summer holidays in Europe [56] - Despite geopolitical and economic challenges, management believes that multifactor authentication solutions will remain in high demand, positioning BIO-key for growth [61] Other Important Information - BIO-key ended Q3 2022 with current assets of $9.9 million, including $2.8 million in cash and cash equivalents, and total stockholders' equity of $11.2 million [51] - The company has a significant inventory of approximately $4 million related to African projects, which is expected to generate cash once deployed [54] Q&A Session Summary Question: What is the current breakeven point and is there enough cash to last through 2023? - Management indicated that breakeven has increased due to higher expenses from acquisitions and marketing initiatives, but they expect to reach breakeven early in 2023 and have sufficient cash to support operations through 2023 [55][58] Question: Can you provide an update on the voter registration system in Africa? - The election in Eswatini is scheduled for August, requiring a lead time of six to nine months for hardware deployment, with deployment expected to begin in early 2023 [64] Question: What is the status of the $500,000 bond in Hong Kong? - The bond is on the balance sheet and is being rolled over, with a reserve set aside due to potential risks associated with the funds being in China [80][83] Question: Will R&D and SG&A expenses remain at current levels? - Management expects R&D expenses to decline as projects are completed, while SG&A may stabilize as the company continues to invest in growth initiatives [88][89] Question: What are the plans for raising capital if needed? - Management stated they would consider debt instruments rather than equity capital at current market rates, emphasizing the importance of their inventory and ongoing projects to generate cash [91][92]

Financial Performance - Total revenues for the three months ended September 30, 2022, were $1,373,549, an increase of 5.8% compared to $1,298,829 for the same period in 2021[14] - Total revenues for the nine months ended September 30, 2022, reached $5,261,835, up 26.0% from $4,179,557 in the prior year[14] - Gross profit for the three months ended September 30, 2022, was $979,766, a decrease of 2.4% from $1,004,155 in the same quarter of 2021[14] - Operating loss for the three months ended September 30, 2022, was $(2,360,446), compared to $(993,976) for the same period in 2021[14] - The company reported a net loss of $(2,402,509) for the three months ended September 30, 2022, compared to $(1,023,647) in the same quarter of 2021[14] - The net loss for the nine months ended September 30, 2022, was $(5,120,869), compared to a net loss of $(3,036,761) for the same period in 2021, representing an increase of approximately 68.6%[24] Cash and Assets - Cash and cash equivalents decreased to $2,774,617 as of September 30, 2022, from $7,754,046 at December 31, 2021[10] - Total current assets decreased to $9,882,546 as of September 30, 2022, from $14,012,873 at December 31, 2021[10] - As of September 30, 2022, the company had a total cash balance of approximately $2.8 million and $1,808,036 in trade accounts receivable expected to be collected by early December[40] - The company anticipates converting approximately 50% of its $4.9 million inventory to cash over the next six months[40] - Total inventory as of September 30, 2022, is $4,892,667, a decrease from $4,940,660 as of December 31, 2021, representing a reduction of approximately 1%[72] Liabilities and Equity - Total liabilities increased to $3,827,503 as of September 30, 2022, compared to $2,153,586 at December 31, 2021[10] - Stockholders' equity decreased to $11,198,508 as of September 30, 2022, from $15,615,455 at December 31, 2021[10] - As of September 30, 2022, the total stockholders' equity was $11,198,508, with an accumulated deficit of $(109,696,339)[18] Revenue Breakdown - For the nine months ended September 30, 2022, license fees revenue amounted to $3,540,592, a significant portion of total revenue[43] - The company reported hardware revenue of $518,377 for the nine months ended September 30, 2022, compared to $1,182,784 for the same period in 2021, indicating a decline[43] - The company’s services revenue for the nine months ended September 30, 2022, was $1,202,866, showing growth compared to the previous year[43] Share-Based Compensation - The company incurred share-based compensation expenses of $236,108 for employees and consultants during the nine months ended September 30, 2022[24] - Share-based compensation expenses for the three months ended September 30, 2022, totaled $100,746, up from $58,050 in the same period of 2021[64] - Restricted stock compensation for the nine-month period ended September 30, 2022, was $156,880, compared to $52,081 for the same period in 2021[97] Acquisitions and Investments - The company made a purchase of Swivel Secure for $(543,578), net of cash acquired, during the nine months ended September 30, 2022[24] - The acquisition of Swivel Secure was completed 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[58] - The company acquired accounts receivable, equipment, intangible assets, and goodwill from Swivel Secure totaling approximately $2,401,000, which includes $1,067,372 in goodwill[27] Future Outlook and Risks - The company expects additional cash flows in excess of $1 million annually from the acquisition of Swivel Secure, based on current recurring revenue and expense projections[40] - The earn-out from the Swivel Secure acquisition is contingent upon generating $3,000,000 in revenue and $1,000,000 in operating profit by January 31, 2023[57] - The Company has identified various risks and uncertainties that may affect future performance, including a history of losses and limited revenue[111] - The ongoing COVID-19 pandemic and geopolitical tensions, such as the situation in Ukraine, may affect the Company's business operations and sales cycles[111] - The Company has not provided specific future financial guidance or performance guarantees, emphasizing the uncertainty of forward-looking statements[111] Tax and Valuation - The Company recorded no income tax expense for the three and nine months ended September 30, 2022 and 2021, with an estimated annual effective tax rate of zero[105] - As of September 30, 2022, the Company provided a full valuation allowance against its net deferred tax assets, indicating a belief that these assets are unlikely to be realized[106]

Financial Performance - Total revenues for the three months ended June 30, 2022, were $1,947,115, representing a significant increase from $992,090 for the same period in 2021, reflecting a growth of approximately 96.5%[9] - The company reported a net loss of $1,718,957 for the three months ended June 30, 2022, compared to a net loss of $1,161,683 for the same period in 2021, indicating a deterioration in financial performance[9] - The net loss for the six months ended June 30, 2022, was $2,718,360, compared to a net loss of $2,013,114 for the same period in 2021, indicating a worsening financial performance year-over-year[15] - The company reported a comprehensive loss of $1,884,840 for the three months ended June 30, 2022, compared to a comprehensive loss of $1,161,683 for the same period in 2021, indicating a significant increase in losses[9] Assets and Liabilities - Cash and cash equivalents decreased to $4,893,042 as of June 30, 2022, down from $7,754,046 as of December 31, 2021, representing a decline of approximately 37.5%[7] - Total current assets decreased to $12,348,986 as of June 30, 2022, compared to $14,012,873 as of December 31, 2021, a reduction of about 11.9%[7] - Total liabilities increased to $4,005,366 as of June 30, 2022, up from $2,153,586 as of December 31, 2021, reflecting an increase of approximately 85.8%[7] - As of June 30, 2022, the total stockholders' equity was $13,619,539, a decrease from $15,381,555 as of March 31, 2022, reflecting a net loss of $1,718,957 during the quarter[10] Revenue Recognition and Deferred Revenue - The Company applies ASC 606 for revenue recognition, which includes identifying contracts, performance obligations, and recognizing revenue as obligations are satisfied[32][41] - Deferred revenue represents the Company's remaining performance obligations related to prepaid support and maintenance, expected to be recognized over one to five years[46] - Deferred revenue as of June 30, 2022, was approximately $660,000, an increase from $633,000 on December 31, 2021[47] - Revenue recognized from deferred revenue for the three and six months ended June 30, 2022, was approximately $153,000 and $387,000, respectively[47] Operating Expenses - Operating expenses for the three months ended June 30, 2022, totaled $2,790,656, compared to $1,865,036 for the same period in 2021, indicating an increase of approximately 49.4%[9] - The company incurred $1,067,372 in goodwill from the acquisition of Swivel Secure, along with $762,860 in intangible assets, highlighting significant investment in growth through acquisition[18] - Share-based compensation for employees and consultants amounted to $153,370 during the same period, reflecting ongoing investment in human capital[15] - Share-based compensation expenses for the three months ended June 30, 2022, totaled $83,699, compared to $41,123 for the same period in 2021[56] Acquisition and Goodwill - The acquisition of Swivel Secure was completed 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 fair value of assets acquired in the Swivel Secure acquisition totaled $3,349,371, resulting in goodwill of $1,067,372[50] - The Company has not identified any impairment to goodwill as of the latest assessment[26] - The annual goodwill impairment test will be performed as of December 31st of each year[26] Cash Flow and Financial Management - The Company generated approximately $3,888,286 in revenue during the first half of 2022, which is below its average monthly requirement of approximately $814,000[31] - Cash and cash equivalents at the end of the period were $4,893,042, down from $7,754,046 at the beginning of the period, representing a net decrease of $2,861,004[15] - Accounts receivable decreased by $390,660, indicating potential challenges in cash flow management[15] - Accounts receivable as of June 30, 2022, was $2,302,847, significantly up from $1,234,411 on December 31, 2021[55] Tax and Regulatory Matters - The Company recorded no income tax expense for the three and six months ended June 30, 2022, due to an estimated annual effective tax rate of zero[96] - The Company has a full valuation allowance against its net deferred tax assets as of June 30, 2022, indicating uncertainty in realizing these assets[97] Customer Concentration - One customer accounted for 12% of revenue for the three months ended June 30, 2022, and one customer accounted for 14% for the six months ended June 30, 2022[94]