BIO-key(BKYI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents unaudited condensed consolidated financial statements and notes for periods ended June 30, 2023, and December 31, 2022 Item 1—Financial Statements Provides unaudited condensed consolidated financial statements and comprehensive notes for periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets 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 | $5,301,556 | Condensed Consolidated Statements of Operations and Comprehensive Loss Outlines revenues, expenses, and net loss for the three and six months ended June 30, 2023, and 2022 Table: Condensed Consolidated Statements of Operations and Comprehensive Loss ($) | 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) | $(0.34) | | Weighted Average Common Shares Outstanding (Basic and diluted) | 9,021,426 | 8,098,020 | 9,008,631 | 7,992,102 | Condensed Consolidated Statements of Stockholders' Equity Summarizes changes in stockholders' equity, including common stock and accumulated deficit, from January 1 to June 30, 2023 Table: Condensed Consolidated Statements of Stockholders' Equity ($) | 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] - Net loss for Q1 2023 was $(288,322) and for Q2 2023 was $(1,422,878)[107] Condensed Consolidated Statements of Cash Flows Reports cash flows from operating, investing, and financing activities for the six months ended June 30, 2023, and 2022 Table: Condensed Consolidated Statements of Cash Flows ($) | 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 | $4,893,042 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies, financial instruments, and other disclosures supporting financial statements Nature of Business and Basis of Presentation BIO-key develops biometric and IAM solutions, with unaudited GAAP financial statements using U.S. dollar as functional currency - BIO-key develops and markets proprietary fingerprint identification biometric technology and software solutions for identity access management (IAM) to commercial, government, and education customers[87] - The accompanying unaudited interim consolidated financial statements are prepared in conformity with GAAP and include all necessary recurring adjustments[88][112] - The Company's functional currency is the U.S. dollar; assets and liabilities are translated at current exchange rates, and revenues/expenses at average rates, with translation adjustments included in accumulated other comprehensive income (loss)[113] Going Concern Substantial net losses and negative cash flows raise going concern doubts, dependent on increased revenue and continuous financing - The Company has suffered substantial net losses and negative cash flows from operations in recent years, dependent on debt and equity financing, raising substantial doubt about its ability to continue as a going concern[17] - As of the report date, the Company does not have enough cash for twelve months of operations[116] - The Company is looking into other markets and opportunities to sell or return inventory purchased for delayed projects in Nigeria to generate additional cash[116] Revenue from Contracts with Customers Revenue disaggregated by type and geography; total revenues increased 29% YoY for H1 2023, driven by 42% license fee growth Table: Revenue from Contracts with Customers ($) | 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] - 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][216] Accounts Receivable 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] - The adoption of ASU 2016-13 (expected credit loss model) did not have a material effect on the consolidated financial statements[15] Share Based Compensation 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 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] - A $400,000 reserve on inventory is due to slow-moving inventory purchased for projects in Nigeria, with the Company exploring other markets or return options[22] Table: Inventory Components ($) | 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 | $4,434,369 | Commitments and Contingencies Exclusive distribution agreement with Swivel Secure Limited until 2027, with no pending lawsuits as of June 30, 2023 - Swivel Secure has an exclusive distribution agreement with Swivel Secure Limited (SSL) for EMEA (excluding UK/Ireland) products, with an initial term ending January 31, 2027[96][48] - The exclusive distribution rights are contingent on Swivel Secure meeting minimum annual order levels; failure to do so results in non-exclusive distributorship[146] - As of June 30, 2023, the Company was not a party to any pending lawsuits[122] Leases Leases office space with 2023/2024 termination dates; new one-year New Jersey lease signed for September 1, 2023 start - The Company leases office space in New Jersey, Minnesota, New Hampshire, Madrid, and Hong Kong, with termination dates in 2023 and 2024[25] - A new one-year lease for New Jersey office space was signed on August 11, 2023, starting September 1, 2023[25] Table: Lease Costs and Metrics ($) | 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 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] - 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][225] - The note is secured by a lien on substantially all of the Company's assets and properties and can be prepaid without penalty[51][225] - 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] Stockholders' Equity 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] - 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] - 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] - Restricted stock compensation for the six months ended June 30, 2023, was $113,837[32] - No warrants were issued during the three and six-month periods ended June 30, 2023 and 2022[155] Fair Values of Financial Instruments 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] - The carrying value of the government loan payable approximates fair value as its interest rate approximates market rates[133] - 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][156] Fair Value Measurement of Convertible Note Payable Convertible note measured at fair value using a Level 3 model, decreasing to $2,498,780 at June 30, 2023 - The Company elected the fair value measurement option for the convertible note due to embedded derivatives, recording it at fair value upon issuance and remeasuring at each reporting date[28] Table: Convertible Note at Fair Value ($) | 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 $2,200,000, nominal interest rate of 12% (at June 30, 2023), default interest rate of 18%, and a 50% likelihood of default at the extended maturity date[35][135][158] Table: Change in Fair Value of Convertible Note ($) | 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 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] - 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] Income Taxes 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][195] - The deferred tax liability relates to intangible assets from the acquisition of Swivel Secure[37] - 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] Subsequent Events 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] - 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] Item 2—Management's Discussion and Analysis of Financial Conditions and Results of Operations Analyzes BIO-key's business, strategy, financial performance, liquidity, and capital resources for periods ended June 30, 2023 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] - 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] - 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][65] Strategic Outlook 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] - Growth strategies include pursuing strategic acquisitions in the IAM space to enter new market verticals or create synergies with existing operations[166] - 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] - 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] Critical Accounting Policies and Estimates 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] - 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] Results of Operations 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 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] - The decrease in hardware sales was largely due to the absence of large deployments in 2023, compared to significant orders in 2022[182] - R&D costs decreased primarily due to reductions in personnel costs and outside services related to the completed MobileAuth application development[172] - 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][186] Six Months Ended June 30, 2023 as Compared to June 30, 2022 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] - License fees increased due to increased revenue and third-party software for Swivel Secure licenses[191] - 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][220] Liquidity and Capital Resources 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][223] - The Company's capital needs have been principally met through proceeds from the sale of equity and debt securities[199] - 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] - The Company uses an accounts receivable factoring arrangement, extended to October 31, 2023, to assist with general working capital requirements[234] - The Company requires approximately $763,000 per month to conduct operations, which it has been unable to consistently achieve through revenue generation[235] - 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] Item 4—Controls and Procedures Addresses effectiveness of disclosure controls and internal control over financial reporting, including identified material weaknesses Evaluation of Disclosure Controls and Procedures 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] - A material weakness was identified relating to the effectiveness of management's review and controls over the income tax provision in financial footnotes[208] - A lack of control over foreign subsidiaries with respect to the timely filing of required tax returns was also identified[208] Changes in Internal Control Over Financial Reporting 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] - 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] PART II. OTHER INFORMATION 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 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] 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][233]