10-Q
BIO KEY INTERNATIONAL INC (BKYI)
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the quarterly period ended September 30, 2021
or
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT |
|---|
For the Transition Period from to
Commission file number 1-13463
BIO-KEY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 41-1741861 |
|---|---|
| (State or Other Jurisdiction of Incorporation of Organization) | (IRS Employer Identification Number) |
3349 HIGHWAY 138, BUILDING A, SUITE E, WALL, NJ 07719
(Address of Principal Executive Offices) (Zip Code)
(732) 359-1100
(Registrant’s telephone number, including area code)
Securities registered pursuance to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which<br> <br>registered |
|---|---|---|
| Common Stock, par value $0.0001 per share | BKYI | Nasdaq Capital Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller Reporting Company ☒ |
|---|---|---|
| Non-accelerated filer ☒ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Number of shares of common stock, $.0001 par value per share, outstanding as of November 12, 2021, was 7,833,789.
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
| PART I. FINANCIAL INFORMATION | ||
|---|---|---|
| Item 1 | Condensed Consolidated Financial Statements (unaudited): | |
| Balance sheets as of September 30, 2021 (unaudited) and December 31, 2020 (audited) | 3 | |
| Statements of operations for the three and nine months ended September 30, 2021 and 2020 | 4 | |
| Statements of Stockholders’ Equity (deficit) for the three and nine months ended September 30, 2021 and 2020 | 5 | |
| Statements of cash flows for the nine months ended September 30, 2021 and 2020 | 7 | |
| Notes to condensed consolidated financial statements | 9 | |
| Item 2 | Management’s Discussion and Analysis of Financial Conditions and Results of Operations | 21 |
| Item 4 | Controls and Procedures | 28 |
| PART II. OTHER INFORMATION | ||
| Item 6 | Exhibits | 29 |
| Signatures | 30 |
PART I -- FINANCIAL INFORMATION
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31,<br> <br>2020 | |||||
|---|---|---|---|---|---|
| **** | **** | **** | |||
| ASSETS | **** | **** | **** | **** | **** |
| Cash and cash equivalents | 9,591,863 | $ | 16,993,096 | ||
| Accounts receivable, net | 1,541,239 | 548,049 | |||
| Due from factor | 53,500 | 60,453 | |||
| Note receivable | - | 295,000 | |||
| Inventory | 4,634,835 | 330,947 | |||
| Prepaid expenses and other | 950,552 | 201,507 | |||
| Investment - debt security | - | 512,821 | |||
| Total current assets | 16,771,989 | 18,941,873 | |||
| Resalable software license rights | 51,294 | 58,882 | |||
| Equipment and leasehold improvements, net | 71,466 | 81,793 | |||
| Capitalized contract costs, net | 218,596 | 165,315 | |||
| Deposits and other assets | 8,712 | 8,712 | |||
| Note receivable, net | 195,000 | - | |||
| Investment - debt security | 482,821 | - | |||
| Operating lease right-of-use assets | 313,607 | 487,325 | |||
| Intangible assets, net | 1,352,095 | 1,514,146 | |||
| Goodwill | 1,262,526 | 1,262,526 | |||
| Total non-current assets | 3,956,117 | 3,578,699 | |||
| TOTAL ASSETS | 20,728,106 | $ | 22,520,572 | ||
| LIABILITIES | **** | **** | **** | **** | **** |
| Accounts payable | 1,437,045 | $ | 244,158 | ||
| Accrued liabilities | 699,422 | 508,487 | |||
| Note payable – PistolStar acquisition, net of debt discount | - | 232,000 | |||
| Deferred revenue, current portion | 671,896 | 657,349 | |||
| Operating lease liabilities, current portion | 206,004 | 234,309 | |||
| Total current liabilities | 3,014,367 | 1,876,303 | |||
| Deferred revenue, net of current portion | 61,488 | 44,987 | |||
| Operating lease liabilities, net of current portion | 118,800 | 264,163 | |||
| Total non-current liabilities | 180,288 | 309,150 | |||
| TOTAL LIABILITIES | 3,194,655 | 2,185,453 | |||
| COMMITMENTS | **** | **** | **** | **** | **** |
| STOCKHOLDERS’ EQUITY | **** | **** | **** | **** | **** |
| Common stock — authorized, 170,000,000 shares; issued and outstanding; 7,825,299 and 7,814,572 of .0001 par value at September 30, 2021 and December 31, 2020, respectively | 783 | 782 | |||
| Additional paid-in capital | 120,079,118 | 119,844,026 | |||
| Accumulated deficit | (102,546,450 | ) | (99,509,689 | ) | |
| TOTAL STOCKHOLDERS’ EQUITY | 17,533,451 | 20,335,119 | |||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 20,728,106 | $ | 22,520,572 |
All values are in US Dollars.
All BIO-key securities issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended<br> <br>September 30, | Nine Months Ended<br> <br>September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||
| Revenues | ||||||||||||
| Services | $ | 318,500 | $ | 491,535 | $ | 985,163 | $ | 928,561 | ||||
| License fees | 870,459 | 346,479 | 2,011,610 | 605,366 | ||||||||
| Hardware | 109,870 | 105,311 | 1,182,784 | 239,025 | ||||||||
| Total Revenues | 1,298,829 | 943,325 | 4,179,557 | 1,772,952 | ||||||||
| Costs and other expenses | ||||||||||||
| Cost of services | 176,976 | 173,823 | 511,360 | 336,940 | ||||||||
| Cost of license fees | 45,986 | 10,775 | 133,328 | 29,486 | ||||||||
| Cost of hardware | 71,712 | 27,011 | 656,190 | 117,900 | ||||||||
| Total costs and other expenses | 294,674 | 211,609 | 1,300,878 | 484,326 | ||||||||
| Gross Profit | 1,004,155 | 731,716 | 2,878,679 | 1,288,626 | ||||||||
| Operating Expenses | ||||||||||||
| Selling, general and administrative | 1,385,534 | 1,490,241 | 4,276,016 | 4,083,568 | ||||||||
| Research, development and engineering | 612,597 | 331,213 | 1,545,200 | 986,675 | ||||||||
| Total operating expenses | 1,998,131 | 1,821,454 | 5,821,216 | 5,070,243 | ||||||||
| Operating loss | (993,976 | ) | (1,089,738 | ) | (2,942,537 | ) | (3,781,617 | ) | ||||
| Other income (expense) | ||||||||||||
| Interest income | 329 | 1,106 | 3,776 | 26,908 | ||||||||
| Government grant – Paycheck Protection Program | - | - | - | 340,819 | ||||||||
| Foreign currency loss | - | - | (50,000 | ) | - | |||||||
| Investment-debt security reserve | (30,000 | ) | - | (30,000 | ) | - | ||||||
| Interest expense | - | (2,204,920 | ) | (18,000 | ) | (4,323,577 | ) | |||||
| Loss on extinguishment of debt | - | - | - | (499,076 | ) | |||||||
| Total other income (expense), net | (29,671 | ) | (2,203,814 | ) | (94,224 | ) | (4,454,926 | ) | ||||
| Net loss | (1,023,647 | ) | (3,293,552 | ) | (3,036,761 | ) | (8,236,543 | ) | ||||
| Deemed dividend from trigger of anti-dilution provision feature | - | - | - | (112,686 | ) | |||||||
| Net loss available to common stockholders | $ | (1,023,647 | ) | $ | (3,293,552 | ) | $ | (3,036,761 | ) | $ | (8,349,229 | ) |
| Basic and Diluted Loss per Common Share | $ | (0.13 | ) | $ | (0.51 | ) | $ | (0.39 | ) | $ | (2.28 | ) |
| Weighted Average Shares Outstanding: | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Basic and Diluted | 7,790,778 | 6,435,845 | 7,788,734 | 3,663,178 |
All BIO-key securities issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | Additional<br> <br>Paid-in | Accumulated | **** | **** | **** | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Capital | Deficit | Total | ||||||||||
| Balance as of January 1, 2021 | **** | 7,814,572 | $ | 782 | $ | 119,844,026 | $ | (99,509,689 | ) | $ | 20,335,119 | |||
| Issuance of common stock for directors’ fees | 2,091 | - | 7,510 | - | 7,510 | |||||||||
| Legal and commitment fees | - | - | (2,709 | ) | - | (2,709 | ) | |||||||
| Issuance of restricted common stock to employees | 1,250 | - | - | - | - | |||||||||
| Share-based compensation | - | - | 133,638 | - | 133,638 | |||||||||
| Net loss | - | - | - | (851,431 | ) | (851,431 | ) | |||||||
| Balance as of March 31, 2021 | **** | 7,817,913 | $ | 782 | $ | 119,982,465 | $ | (100,361,120 | ) | $ | 19,622,127 | |||
| Issuance of common stock for directors’ fees | 1,748 | - | 5,505 | - | 5,505 | |||||||||
| Legal and commitment fees | - | - | (2,519 | ) | - | (2,519 | ) | |||||||
| Issuance of restricted common stock to employees | 1,250 | - | - | - | - | |||||||||
| Restricted stock forfeited | (1,250 | ) | - | - | - | - | ||||||||
| Share-based compensation | - | - | 35,618 | - | 35,618 | |||||||||
| Net loss | - | - | - | (1,161,683 | ) | (1,161,683 | ) | |||||||
| Balance as of June 30, 2021 | **** | 7,819,661 | $ | 782 | $ | 120,021,069 | $ | (101,522,803 | ) | $ | 18,499,048 | |||
| Issuance of common stock for directors’ fees | 1,888 | - | 6,008 | - | 6,008 | |||||||||
| Issuance of restricted common stock to employees | 3,750 | 1 | - | - | 1 | |||||||||
| Share-based compensation | - | - | 52,041 | - | 52,041 | |||||||||
| Net loss | - | - | - | (1,023,647 | ) | (1,023,647 | ) | |||||||
| Balance as of September 30, 2021 | **** | 7,825,299 | $ | 783 | $ | 120,079,118 | $ | (102,546,450 | ) | $ | 17,533,451 |
All BIO-key securities issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| Common Stock | Additional<br> <br>Paid-in | Accumulated | **** | **** | **** | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Capital | Deficit | Total | |||||||||||
| Balance as of January 1, 2020 | **** | 1,812,483 | $ | 182 | $ | 87,437,661 | $ | (89,723,016 | ) | $ | (2,285,173 | ) | |||
| Issuance of common stock pursuant to securities purchase agreements | 87,500 | 8 | 1,032,492 | - | 1,032,500 | ||||||||||
| Commitment fee adjustment | - | - | (900,000 | ) | - | (900,000 | ) | ||||||||
| Beneficial conversion feature | - | - | 641,215 | - | 641,215 | ||||||||||
| Issuance of common stock pursuant to warrant conversion | 121,500 | 12 | 1,457,988 | - | 1,458,000 | ||||||||||
| Conversion of convertible note payable | 288,461 | 29 | 1,499,971 | - | 1,500,000 | ||||||||||
| Deemed dividends related to down-round features | - | - | 112,686 | (112,686 | ) | - | |||||||||
| Share-based compensation | - | - | 512,719 | - | 512,719 | ||||||||||
| Net loss | - | - | - | (3,370,282 | ) | (3,370,282 | ) | ||||||||
| Balance as of March 31, 2020 | **** | 2,309,944 | $ | 231 | $ | 91,794,732 | $ | (93,205,984 | ) | $ | (1,411,021 | ) | |||
| Issuance of common stock for directors’ fees | 2,143 | 1 | 15,006 | - | 15,007 | ||||||||||
| Issuance of common stock pursuant to securities purchase agreements | 31,440 | 3 | 145,330 | - | 145,333 | ||||||||||
| Conversion of convertible note payable | 440,192 | 44 | 2,288,956 | - | 2,289,000 | ||||||||||
| Warrants issued with convertible notes | - | - | 1,388,339 | - | 1,388,339 | ||||||||||
| Warrant issued for consulting fees | - | - | 94,655 | - | 94,655 | ||||||||||
| Share-based compensation | - | - | 33,177 | - | 33,177 | ||||||||||
| Legal and commitment fees | - | - | (199,328 | ) | - | (199,328 | ) | ||||||||
| Net loss | - | - | - | (1,572,709 | ) | (1,572,709 | ) | ||||||||
| Balance as of June 30, 2020 | **** | 2,783,719 | $ | 279 | $ | 95,560,867 | $ | (94,778,693 | ) | $ | 782,453 | ||||
| Issuance of common stock for directors’ fees | 1,291 | 1 | 7,002 | - | 7,003 | ||||||||||
| Issuance of common stock pursuant to public offering | 4,264,312 | 426 | 22,173,999 | - | 22,174,425 | ||||||||||
| Commitment fee adjustment | (75,000 | ) | (8 | ) | 8 | - | - | ||||||||
| Issuance of common stock pursuant to warrant exercises | 795,538 | 80 | 4,136,715 | - | 4,136,795 | ||||||||||
| Warrant issued for consulting fees | - | - | 12,921 | - | 12,921 | ||||||||||
| Issuance of restricted common stock to employees | 38,250 | 4 | (4 | ) | - | - | |||||||||
| Legal and commitment fees | - | - | (2,171,896 | ) | - | (2,171,896 | ) | ||||||||
| Share-based compensation | - | - | 34,306 | - | 34,306 | ||||||||||
| Net loss | - | - | - | (3,293,552 | ) | (3,293,552 | ) | ||||||||
| Balance as of September 30, 2020 | **** | 7,808,110 | $ | 782 | $ | 119,753,918 | $ | (98,072,245 | ) | $ | 21,682,455 |
All BIO-key securities issued and outstanding for all periods reflect BIO-key’s 1-for-8 reverse stock split, which was effective November 20, 2020.
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
6
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended<br> <br>September 30, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| CASH FLOW FROM OPERATING ACTIVITIES: | **** | **** | **** | **** | **** | **** |
| Net loss | $ | (3,036,761 | ) | $ | (8,236,543 | ) |
| Adjustments to reconcile net loss to cash used for operating activities: | **** | **** | **** | **** | **** | **** |
| Depreciation | 48,210 | 59,129 | ||||
| Amortization of intangible assets | 162,051 | 17,215 | ||||
| Amortization of software license rights | 7,588 | - | ||||
| Amortization of debt discount | 18,000 | 1,416,040 | ||||
| Amortization of capitalized contract costs | 78,477 | 111,467 | ||||
| Amortization of debt issuance costs | - | 2,166,650 | ||||
| Loss on foreign currency | 50,000 | - | ||||
| Reserve for investment security | 30,000 | - | ||||
| Allowance for note receivable | 100,000 | - | ||||
| Operating leases right-of-use assets | 173,718 | 151,325 | ||||
| Loss on extinguishment of debt | - | 499,076 | ||||
| Amortization of beneficial conversion feature | - | 641,215 | ||||
| Share-based and warrant compensation for employees and consultants | 221,298 | 687,778 | ||||
| Share-based directors’ fees | 19,023 | 22,010 | ||||
| Change in operating assets and liabilities: | **** | **** | **** | **** | **** | **** |
| Accounts receivable | (1,043,190 | ) | (181,588 | ) | ||
| Due from factor | 6,953 | 47,679 | ||||
| Capitalized contract costs | (131,758 | ) | (29,808 | ) | ||
| Inventory | (4,303,888 | ) | 29,723 | |||
| Resalable software license rights | - | 5,044 | ||||
| Prepaid expenses and other | (749,045 | ) | (86,137 | ) | ||
| Accounts payable | 1,192,887 | (530,011 | ) | |||
| Accrued liabilities | 190,935 | (193,146 | ) | |||
| Deferred revenue | 31,048 | (135,707 | ) | |||
| Operating lease liabilities | (173,668 | ) | (147,480 | ) | ||
| Net cash used for operating activities | (7,108,122 | ) | (3,686,069 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | **** | **** | **** | **** | **** | **** |
| Issuance of note receivable | - | (295,000 | ) | |||
| Purchase of PistolStar | - | (2,000,000 | ) | |||
| Cash acquired from purchase of PistolStar | - | 100,747 | ||||
| Proceeds from maturity of debt security | - | 512,821 | ||||
| Purchase of debt security | - | (516,121 | ) | |||
| Capital expenditures | (37,883 | ) | (6,094 | ) | ||
| Net cash used for investing activities | (37,883 | ) | (2,203,647 | ) | ||
| CASH FLOW FROM FINANCING ACTIVITIES: | **** | **** | **** | **** | **** | **** |
| Proceeds from issuance of convertible notes | - | 3,958,000 | ||||
| Repayment of convertible notes | - | (4,509,250 | ) | |||
| Proceeds from issuance of common stock | - | 22,174,425 | ||||
| Proceeds from the exercise of warrants | - | 5,594,795 | ||||
| Costs to issue convertible notes | (5,228 | ) | (2,693,022 | ) | ||
| Repayment of note payable - PistolStar | (250,000 | ) | (130,000 | ) | ||
| Net repayments of loans payable to related parties | - | (188,737 | ) | |||
| Net cash provided by (used for) financing activities | (255,228 | ) | 24,206,211 | |||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (7,401,233 | ) | 18,316,495 | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 16,993,096 | 79,013 | ||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 9,591,863 | $ | 18,395,508 |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
7
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
| Nine Months Ended<br> <br>September 30, | ||||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Cash paid for: | **** | **** | **** | **** |
| Interest | $ | 18,000 | $ | 99,426 |
| Noncash Investing and financing activities | **** | **** | **** | **** |
| Accounts receivable acquired from PistolStar | $ | - | $ | 184,792 |
| Prepaid expenses acquired from PistolStar | $ | - | $ | 9,485 |
| Equipment acquired from PistolStar | $ | - | $ | 36,467 |
| Intangible assets acquired from PistolStar | $ | - | $ | 1,480,000 |
| Goodwill related to PistolStar acquisition | $ | - | $ | 1,154,526 |
| Issuance of note payable for PistolStar acquisition, net of working capital adjustment | $ | - | $ | 356,000 |
| Accrued expenses acquired from PistolStar | $ | - | $ | 20,017 |
| Deferred revenue acquired from PistolStar | $ | - | $ | 590,000 |
| Right-of-use asset addition under ASC 842 | $ | - | $ | 141,761 |
| Operating lease liabilities under ASC 842 | $ | - | $ | 141,761 |
| Issuance of common stock pursuant to securities purchase agreements | $ | - | $ | 277,833 |
| Warrants issued with convertible notes | $ | - | $ | 1,388,339 |
| Issuance of common stock for conversion of note payable | $ | - | $ | 3,789,000 |
| Beneficial conversion feature | $ | - | $ | 641,215 |
| Deemed dividends related to down-round features | $ | - | $ | 112,686 |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
8
BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 (Unaudited)
| 1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
|---|
Nature of Business
The Company, founded in 1993, develops and markets proprietary fingerprint identification biometric technology and software solutions enterprise-ready identity access management solutions to commercial, government and education customers throughout the United States and internationally. The Company was a pioneer in developing automated, finger identification technology that supplements or compliments other methods of identification and verification, such as personal inspection identification, passwords, tokens, smart cards, ID cards, PKI, credit cards, passports, driver’s licenses, OTP or other form of possession or knowledge-based credentialing. Additionally, advanced BIO-key® technology has been, and is, used to improve both the accuracy and speed of competing finger-based biometrics.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “BIO-key”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at December 31, 2020 was derived from the audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 29, 2021.
Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. All share figures and results are reflected on a post-split basis
Foreign Currency
The Company accounts for foreign currency transactions pursuant to ASC 830, Foreign Currency Matters ("ASC 830”). The functional currency of the Company is the U.S. dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, monetary balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions and from the remeasurement of the monetary balance sheet items are recorded as gain (loss) on foreign currency transactions.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies (quarter ending March 31, 2023 for the Company). Early adoption is permitted. The Company will evaluate the impact ASU 2016-13 will have on its consolidated financial statements in a future period closer to the date of adoption.
Effective January 1, 2021, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”) to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of ASU 2019-12 did not have a significant impact on the Company’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standard, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
Reclassification
Reclassifications occurred to certain prior year amounts in order to conform to the current year classifications. The reclassifications have no effect on the reported net loss.
| 2. | GOING CONCERN |
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The Company has historically financed its operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. The Company currently requires approximately $710,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation. During the first nine months of 2021, the Company generated $4,179,557 of revenue, which is below its average monthly cash requirements. The Company has also invested a considerable amount of cash in inventory, which it will need to sell to generate revenue for a profitable gross margin. Additionally, the ongoing threat of COVID-19 and its variation, may have an impact on future revenue and operations. During 2020, the Company raised approximately $24,000,000 from financing activities and at September 30, 2021 had $9,591,863 in cash. As of the date of this report, the Company believes it has enough cash for at least twelve months of operations from the date of the filing of this report.
| 3. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
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In accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
| ● | Identify the contract with a customer |
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| ● | Identify the performance obligations in the contract |
| --- | --- |
| ● | Determine the transaction price |
| --- | --- |
| ● | Allocate the transaction price to performance obligations in the contract |
| --- | --- |
| ● | Recognize revenue when or as the Company satisfies a performance obligation |
| --- | --- |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three month periods ended September 30, 2021 and September 30, 2020:
| North<br> <br>America | Africa | EMESA* | Asia | September<br> <br>30,<br> <br>2021 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| License fees | $ | 534,775 | $ | 308,000 | $ | 20,678 | $ | 7,006 | $ | 870,459 |
| Hardware | 84,445 | 13,425 | - | 12,000 | 109,870 | |||||
| Services | 259,965 | 42,000 | 12,759 | 3,776 | 318,500 | |||||
| Total Revenues | $ | 879,185 | $ | 363,425 | $ | 33,437 | $ | 22,782 | $ | 1,298,829 |
| North<br> <br>America | Africa | EMESA* | Asia | September<br> <br>30,<br> <br>2020 | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| License fees | $ | 339,747 | $ | - | $ | 6,732 | $ | - | $ | 346,479 |
| Hardware | 103,511 | - | 1,800 | - | 105,311 | |||||
| Services | 450,994 | - | 36,693 | 3,848 | 491,535 | |||||
| Total Revenues | $ | 894,252 | $ | - | $ | 45,225 | $ | 3,848 | $ | 943,325 |
The following table summarizes revenue from contracts with customers for the nine month periods ended September 30, 2021 and September 30, 2020:
| North<br> <br>America | Africa | EMESA* | Asia | September<br> <br>30,<br> <br>2021 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| License fees | $ | 1,307,265 | $ | 557,484 | $ | 72,205 | $ | 74,656 | $ | 2,011,610 |
| Hardware | 176,414 | 698,264 | 265,996 | 42,110 | 1,182,784 | |||||
| Services | 891,856 | 42,000 | 41,109 | 10,198 | 985,163 | |||||
| Total Revenues | $ | 2,375,535 | $ | 1,297,748 | $ | 379,310 | $ | 126,964 | $ | 4,179,557 |
| North<br> <br>America | Africa | EMESA* | Asia | September<br> <br>30,<br> <br>2020 | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| License fees | $ | 528,524 | $ | - | $ | 6,732 | $ | 70,110 | $ | 605,366 |
| Hardware | 208,192 | - | 1,800 | 29,033 | 239,025 | |||||
| Services | 857,156 | - | 52,144 | 19,261 | 928,561 | |||||
| Total Revenues | $ | 1,593,872 | $ | - | $ | 60,676 | $ | 118,404 | $ | 1,772,952 |
*EMESA – Europe, Middle East, South America
Software licenses
Software license revenue consist of fees for perpetual and subscription licenses for one or more of the Company’s biometric fingerprint solutions or identity access management solutions. Revenue is recognized at a point in time once the software is available to the customer for download. Software license contracts are generally invoiced in full on execution of the arrangement.
Hardware
Hardware revenue consists of fees for associated equipment sold with or without a software license arrangement, such as servers, locks and fingerprint readers. Customers are not obligated to buy third party hardware from the Company and may procure these items from a number of suppliers. Revenue is recognized at a point in time once the hardware is shipped to the customer. Hardware items are generally invoiced in full on execution of the arrangement.
Support and Maintenance
Support and maintenance revenue consists of fees for unspecified upgrades, telephone assistance and bug fixes. The Company satisfies its support and maintenance performance obligation by providing “stand-ready” assistance as required over the contract period. The Company records deferred revenue (contract liability) at time of prepayment until the term of the contract ends. Revenue is recognized over time on a ratable basis over the contract term. Support and maintenance contracts are up to one to five years in length and are generally invoiced in advance at the beginning of the term. Support and maintenance revenue for subscription licenses is carved out of the total license cost at 18% and recognized on a ratable basis over the license term.
Professional Services
Professional services revenues consist primarily of fees for deployment and optimization services, as well as training. The majority of the Company’s consulting contracts are billed on a time and materials basis, and revenue is recognized based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes an input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.
Contracts with Multiple Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices are determined based on overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within the contracts.
The Company considered several factors in determining that control transfers to the customer upon shipment of hardware and availability of download of software. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership upon shipment of hardware and availability of download of software.
Accounts receivable from customers are typically due within 30 days of invoicing. The Company does not record a reserve for product returns or warranties as amounts are deemed immaterial based on historical experience.
Costs to Obtain and Fulfill a Contract
Costs to obtain and fulfill a contract are predominantly sales commissions earned by the sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit determined to be four years. These costs are included as capitalized contract costs on the balance sheet. The period of benefit was determined by taking into consideration customer contracts, technology, and other factors based on historical evidence. Amortization expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Transaction Price Allocated to the Remaining Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at September 30, 2021. The guidance provides certain practical expedients that limit this requirement, which the Company’s contracts meet as follows:
| ● | The performance obligation is part of a contract that has an original expected duration of one year or less, in accordance with ASC 606-10-50-14. |
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Deferred Revenue
Deferred revenue includes customer advances and amounts that have been paid by customer for which the contractual maintenance terms have not yet occurred. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12-60 months. Maintenance revenue which would be recognized based on contract periods subsequent to 12 months from the balance sheet date, is segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At September 30, 2021 and December 31, 2020, amounts in deferred revenue were approximately $733,000 and $702,000, respectively. Revenue recognized during the three and nine-months ended September 30, 2021 from amounts included in deferred revenue at the beginning of the period was approximately $72,000 and $502,000, respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods.
| 4. | PISTOLSTAR, INC. ACQUISITION |
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On June 30, 2020, the Company acquired PistolStar, Inc., a private company based in the United States, which provides enterprise-ready identity access management solutions, including multi-factor authentication, identity-as-a-service, single sign-on and self-service password reset to commercial, government and education customers throughout the United States and internationally.
From April 10, 2020 until the Company acquired PistolStar, it licensed PortalGuard®, PistolStar’s authentication software, which the Company combines with its biometric authentication solutions offered to existing and prospective customers.
The total purchase price of $2.5 million included cash payments of $2.0 million and the issuance of a $500,000 promissory note.
The promissory note accrued interest at 4% per annum and was payable in four installments over the 12-month period following the closing. The balance of the note at December 31, 2020 was $232,000, net of the unamortized debt discount. On January 21, 2021, the Company paid the $250,000 balance due on the note.
The fair value of the assets acquired and liabilities assumed was less than the purchase price, resulting in the recognition of goodwill. The goodwill reflected the value of the synergies the Company expected to realize and the assembled workforce.
| 5. | ACCOUNTS RECEIVABLE |
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Accounts receivable are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible.
Accounts receivable at September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Accounts receivable - current | $ | 1,605,024 | $ | 561,834 | ||
| Loss on foreign currency | (50,000 | ) | - | |||
| Allowance for doubtful accounts | (13,785 | ) | (13,785 | ) | ||
| Accounts receivable, net of allowances for doubtful accounts | $ | 1,541,239 | $ | 548,049 | ||
| 6. | SHARE-BASED COMPENSATION | |||||
| --- | --- |
The following table presents share-based compensation expenses for continuing operations included in the Company’s unaudited interim condensed consolidated statements of operations:
| Three Months<br> <br>Ended<br> <br>September 30, | Three Months<br> <br>Ended<br> <br>September 30, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Selling, general and administrative | $ | 47,694 | $ | 51,157 |
| Research, development and engineering | 10,356 | 3,073 | ||
| $ | 58,050 | $ | 54,230 | |
| Nine Months<br> <br>Ended<br> <br>September 30, | Nine Months<br> <br>Ended<br> <br>September 30, | |||
| --- | --- | --- | --- | --- |
| 2021 | 2020 | |||
| Selling, general and administrative | $ | 207,342 | $ | 632,793 |
| Research, development and engineering | 32,979 | 76,995 | ||
| $ | 240,321 | $ | 709,788 | |
| 7. | FACTORING | |||
| --- | --- |
Due from factor consisted of the following as of:
| September 30, | December 31, | |||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Original invoice value | $ | 115,000 | $ | 241,715 | ||
| Factored amount | (61,500 | ) | (181,262 | ) | ||
| Balance due from factor | $ | 53,500 | $ | 60,453 |
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which expires on October 31, 2022. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor a minimum of $150,000 of certain accounts receivable balances on a non-recourse basis per quarter for credit approved accounts. The Factor remits 35% of the foreign and 75% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees, forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. In addition, the Company, from time to time, receives over advances from the Factor. Factoring fees range from 2.75% to 15% of the face value of the invoice factored and are determined by the number of days required for collection of the invoice. The cost of factoring is included in selling, general and administrative expenses. The cost of factoring was as follows:
| Three Months ended<br> <br>September 30, | ||||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Factoring fees | $ | 1,055 | $ | 15,934 |
| Nine Months ended<br> <br>September 30, | ||||
| --- | --- | --- | --- | --- |
| 2021 | 2020 | |||
| Factoring fees | $ | 33,302 | $ | 81,164 |
| 8. | NOTE RECEIVABLE | |||
| --- | --- |
During the third quarter of 2020, the Company loaned $295,000 as an advance to Exponential Launch Partners (“ELP”) to aid in fulfilling the African contracts. The note does not bear any interest if paid within the nine (9) monthly installments beginning *December 31, 2020.*The note bears a default rate of 5%. ELP has been attempting to raise capital to repay the note. The note is currently in default and as such, has been classified as noncurrent effective June 30, 2021. No payments were received from ELP during the nine months ended September 30, 2021. The Company is currently renegotiating the payment terms of the note, as the deployment of projects in Africa has been delayed due to COVID and the establishment of bank regulations for payments to vendors and contractors. Due to the ongoing delays in payment, the Company has reserved $100,000 of the note as an allowance.
| September 30, | December 31, | ||||
|---|---|---|---|---|---|
| 2021 | 2020 | ||||
| Note receivable – current | $ | - | $ | 295,000 | |
| Note receivable – non-current | 295,000 | - | |||
| Allowance for doubtful account | (100,000 | ) | - | ||
| Note receivable, net of allowance | $ | 195,000 | $ | 295,000 | |
| 9. | PREPAID EXPENSES AND OTHER | ||||
| --- | --- |
Included in prepaid expense and other at September 30, 2021 was approximately $755,000 relating to deposits for a range of hardware devices. These devices were ordered in conjunction with the Company securing the recent license contracts in Africa and are expected to be delivered in future quarters as the hardware is deployed. Also included are deposits on our new EcoID II fingerprint readers. Additional deposits are sometimes required before shipment of the inventory, and prepaid may increase before the inventory is received, while other orders have extended payment terms.
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Deposit for inventory | $ | 755,205 | $ | 66,995 |
| Other prepaid expenses | 141,793 | 64,178 | ||
| Insurance | 17,754 | 45,468 | ||
| Software licenses | 35,800 | 24,866 | ||
| Total prepayments | $ | 950,552 | $ | 201,507 |
| 10. | INVENTORY | |||
| --- | --- |
Inventory is stated at the lower of cost, determined on a first in, first out basis, or net realizable value and consists primarily of fabricated assemblies and finished goods. Inventory is comprised of the following as of:
| September 30, | December 31, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Finished goods | $ | 4,459,012 | $ | 221,130 |
| Fabricated assemblies | 175,823 | 109,817 | ||
| Total inventory | $ | 4,634,835 | $ | 330,947 |
| 11. | RESALABLE SOFTWARE LICENSE RIGHTS | |||
| --- | --- |
On December 31, 2015, the Company purchased third-party software licenses in the amount of $180,000 in anticipation of a large pending deployment that has yet to materialize. The Company is amortizing the total cost over the greater of actual unit cost of licenses sold or the straight line method over 10 years. A total of $2,579 and $16 was charged to cost of sales during the three month periods ended September 30, 2021 and 2020, respectively. A total of $7,588 and $5,044 was charged to cost of sales during the nine month periods ended September 30, 2021 and 2020, respectively. Since the license purchase, the cumulative amount of $128,706 has been charged to cost of sales, with a carrying balance of $51,294 and $58,882 as of September 30, 2021 and December 31, 2020, respectively.
| 12. | INVESTMENT - DEBT SECURITY |
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The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020 maturing in June 2021. The Bond Certificate translated to $512,821 U.S. Dollars, based on the exchange rate at the purchase date. The Company can invest up to 20,000,000 Hong Kong dollars under the terms of the certificate, bearing interest at 5% per annum. The investment was recorded at amortized cost which approximates fair value and was held to maturity. The Company has yet to receive the proceeds and accrued interest from the investment. The Company is preparing a legal letter of demand to confirm the status of the bond, and as such, the debt security has been classified as noncurrent as of September 30, 2021. In addition, due to the delay in the receipt of the proceeds, the Company recorded a $30,000 reserve.
| 13. | COMMITMENT |
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Sales Incentive Agreement with Technology Transfer Institute (“TTI”)
On March 25, 2020, the Company entered into a sales incentive agreement with TTI. Terms of the agreement include the following:
| 1. | The original term of the agreement was one year and has been automatically extended for an additional one-year term. |
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| 2. | For each $5,000,000 in revenue (up to a maximum of $20,000,000) the Company generates from contracts sourced by TTI which are executed during the original term and generate net income of at least 20% (as defined) within eighteen months after the date such contract is executed, the Company will pay TTI a sales incentive fee of $500,000 payable by the issuance of 62,500 shares of common stock. |
| --- | --- |
| 3. | In the event that the Company generates revenue in excess of $20,000,000 from contracts sourced by TTI which are executed during the original term and generate net income of at least 20% (as defined) within eighteen months after the date such contract is executed, the Company will issue TTI a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $12.00 per share for each $1,000,000 of revenue in excess of $20,000,000 (up to a maximum of $25,000,000). |
| --- | --- |
In no event will the Company be obligated to issue more than 250,000 shares of common stock or warrants to purchase more than 62,500 shares of common stock pursuant to this agreement.
There has been no revenue generated or sales incentive fees paid during the nine months ended September 30, 2021 and 2020.
| 14. | CONVERTIBLE NOTES PAYABLE |
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There was no balance outstanding for convertible notes payable as of September 30, 2021 and December 31, 2020. Details for Notes that were either converted or redeemed during the 2020 fiscal year were as follows:
Securities Purchase Agreement dated July 10, 2019
On July 10, 2019, the Company issued a $3,060,000 principal amount senior secured convertible note (the “Original Note”). At closing, a total of $2,550,000 was funded. The original issue discount was $510,000. The principal amount due of the Original Note was due and payable as follows: $918,000 was due 180 days after funding, $1,071,000 was due 270 days after funding, and the remaining balance due 12 months after the date of funding.
The Original Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor in shares of common stock at a fixed conversion price of $12.00 per share.
In connection with the closing of the Original Note, the Company issued a five-year warrant to the Investor to purchase 250,000 shares of common stock at a fixed exercise price of $12.00 per share, paid a $50,000 commitment fee, and issued 33,334 shares of common stock in payment of a $400,000 due diligence fee. The Company also paid banker fees of $193,500 and legal fees of $71,330. The valuation of the warrant of $595,662 was recorded to debt discount and was amortized over the life of the Original Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.
On March 12, 2020, the Company issued a $3,789,000 principal amount senior secured convertible note (the “Amended Note”), which replaced the Original Note and included an additional $729,000 in interest due to the debt restructuring. The principal amount was due and payable in full on April 13, 2020. The Amended Note was secured by a lien on substantially all of the Company’s assets and properties and was convertible at the option of the Investor into shares of common stock at a fixed conversion price of $5.20 per share. The Company accounted for the transaction as a debt extinguishment and, therefore, the balance of the fees and unamortized discount associated with the Original Note were written off and included as loss on extinguishment of debt. On the day of the amendment, the closing stock price for the day was $6.08, which resulted in a beneficial conversion of $0.88 per share outstanding or $641,215 to be amortized to interest expense over the term of the Amended Note, as adjusted for any debt conversion.
On April 12, 2020 and May 6, 2020, the Company entered into amendments (the “Amendments”) to the Amended Note. The Amendments extended the maturity date to June 12, 2020 and extended the Investor’s right to convert the Amended Note into shares of the Company’s common stock at a price of $5.20 per share through June 12, 2020. All other provisions of the Amended Note remained the same.
On June 10, 2020, the investor converted the last of the remaining principal into shares of common stock for payment in full, and the remaining principal balance was $0. The Amended Note amount of $3,789,000 was converted into 728,654 shares of common stock in 2020.
January 2020 Note
On January 13, 2020, the Company issued a $157,000 principal amount secured 10% convertible redeemable note (the “January 2020 Note”) to an institutional investor with a maturity date of June 13, 2020 which was convertible into common stock at a conversion price of $12.00 per share. At the closing, the Company agreed to issue 81,250 shares of common stock in lieu of payment of a $75,000 commitment fee which was reduced to 6,250 shares as the January 2020 Note was repaid prior to the maturity date.
On June 12, 2020, the January 2020 Note was paid in full by payment of $211,984.
February 2020 Note
On February 13, 2020, the Company issued a $126,000 principal amount secured 10% convertible redeemable note (the “February 2020 Note”) to an institutional investor with a maturity date of July 13, 2020 which was convertible into common stock at a conversion price of $9.20 per share. On March 12, 2020, the Original Note was amended to reduce the conversion price to $5.20 per share, which reduced the conversion price of the February Note to $5.20 and resulted in a deemed dividend of $70,998. The February 2020 Note was redeemable at any time by payment of a premium to the principal balance starting at 10% and increasing to 30%. The Company issued 6,250 shares of common stock to the investor in lieu of payment of a $57,500 commitment fee. The Company paid $6,000 of legal fees in connection with the issuance of February 2020 Note. The February 2020 Note was paid in full on July 10, 2020 by payment of $170,442.
May 2020 Note
On May 6, 2020, the Company issued a $2,415,000 principal amount senior secured convertible note (the “May 2020 Note”). At closing, $2,100,000 was funded. The principal amount was due and payable in five equal monthly installments of $268,333 beginning seven months after the funding date with the remaining balance due on the twelfth month after the date of funding. The May 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the May 2020 Note, the Company paid a $133,333 due diligence fee by issuing 14,368 shares of common stock to the Investor priced at $9.28 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent. In connection with the closing of the May 2020 Note, the Company issued a five-year warrant to the investor to purchase 237,500 shares of common stock at a fixed exercise price of $9.28 and was immediately exercisable. The valuation of the warrant of $876,937 was recorded to debt discount and was amortized over the life of the May 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in-capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount were included in the interest expense on the statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $2,415,000 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $1,218,163 in July 2020.
June 2020 Note
On June 29, 2020, the Company issued a $1,811,250 principal amount senior secured convertible note (the “June 2020 Note”). At closing, $1,575,000 was funded. The principal amount was due and payable in nine equal monthly installments of $201,250 beginning four months after the funding date with the remaining balance due on the twelfth month after the date of funding. The June 2020 Note was convertible at a fixed convertible price of $9.28 per share. In connection with the issuance of the June 2020 Note, the Company paid a $100,000 due diligence fee by issuing 17,071 shares to the Investor priced at $5.86 per share. The Company also paid a placement fee of 7% of the gross proceeds to a placement agent.
In connection with the closing of the June 2020 Note, the Company issued a five-year warrant to the Investor to purchase 178,125 shares of common stock at a fixed exercise price of $9.28 per share and was immediately exercisable. The valuation of the warrant of $511,402 was recorded to debt discount and is was amortized over the life of the June 2020 Note. The fees associated with the agreement were allocated to debt issuance costs and additional paid-in capital based on the respective ratio of the valuation of the note and warrant. Amortization of the debt issuance costs and debt discount are included in interest expense on the statement of operations.
Following the completion of the underwritten offering in July 2020, the principal balance of $1,811,250 was paid in full during the third quarter of 2020. As a result of the repayment, the Company expensed the remaining debt discounts and issuance costs of $957,919 in July 2020.
| 15. | LEASES |
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The Company’s leases office space in New Jersey, Hong Kong, Minnesota, and New Hampshire with lease termination dates of 2023, 2022, 2022, and 2022, respectively. The leases include non-lease components with variable payments. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases, for the three and nine months ended as of:
| 3 Months ended<br> <br>September 30, | 9 Months ended<br> <br>September 30, | ||||
|---|---|---|---|---|---|
| 2021 | 2021 | ||||
| Lease cost | **** | **** | **** | **** | **** |
| Operating lease cost | $ | 63,973 | $ | 191,919 | |
| Total lease cost | $ | 63,973 | $ | 191,919 | |
| Balance sheet information | **** | **** | **** | **** | **** |
| Operating ROU assets | $ | 313,607 | |||
| Operating lease liabilities, current portion | $ | 206,004 | |||
| Operating lease liabilities, non-current portion | 118,800 | ||||
| Total operating lease liabilities | $ | 324,804 | |||
| Weighted average remaining lease term (in years) – operating leases | 1.63 | ||||
| Weighted average discount rate – operating leases | 5.50 | % |
Supplemental cash flow information related to leases were as follows, for the nine months ended September **** 30, 2021:
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 191,869 |
|---|
Maturities of operating lease liabilities were as follows:
| 2021 (remaining three months) | $ | 65,108 | |
|---|---|---|---|
| 2022 | 187,594 | ||
| 2023 | 89,226 | ||
| Total future lease payments | 341,928 | ||
| Less: imputed interest | (17,124 | ) | |
| Total | $ | 324,804 | |
| 16. | EARNINGS (LOSS) PER SHARE - COMMON STOCK (“EPS”) | ||
| --- | --- |
The Company’s basic EPS is calculated using net loss available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.
The reconciliation of the numerator of the basic and diluted EPS calculations was as follows for both of the following three and nine month periods ended September 30, 2021 and 2020:
| Three Months ended<br> <br>September 30, | Nine Months ended<br> <br>September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||
| Basic and Diluted Numerator: | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Net loss | $ | (1,023,647 | ) | $ | (3,293,552 | ) | $ | (3,036,761 | ) | $ | (8,236,543 | ) |
| Deemed dividends related to down-round features | - | - | - | (112,686 | ) | |||||||
| Net loss available to common stockholders (basic and diluted) | $ | (1,023,647 | ) | $ | (3,293,552 | ) | $ | (3,036,761 | ) | $ | (8,349,229 | ) |
Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:
| Three Months ended<br> <br>September 30, | Nine Months ended<br> <br>September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||
| Stock options | 212,545 | 200,382 | 212,545 | 200,382 | ||||
| Warrants | 4,689,387 | 706,487 | 4,689,387 | 706,487 | ||||
| Total | 4,901,932 | 906,869 | 4,901,932 | 906,869 |
The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the net losses for the periods:
| Three Months ended<br> <br>September 30, | Nine Months ended<br> <br>September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||
| Stock options | - | 303 | - | 2,353 | ||||
| Warrants | - | 39,825 | - | 368,240 | ||||
| Restricted stock | - | 1,035 | 3,598 | 4,134 | ||||
| Total | - | 41,163 | 3,598 | 374,727 | ||||
| 17. | STOCKHOLDERS’ EQUITY | |||||||
| --- | --- |
1. Preferred Stock
Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications.
2. Common Stock
Effective November 20, 2020, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-8. The number of authorized shares and the par value of the Company's common stock and preferred stock were not affected by the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares were rounded up to the nearest whole share. The reverse stock split became effective at the opening of trading on November 20, 2020.
Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.
Issuances of Common Stock
On March 30, 2020, the Company issued 121,500 shares of common stock upon exercise of warrants at $12.00 per share, resulting in proceeds of $1,458,000 to the Company.
See Note 14 Convertible Notes Payable for common stock issuances related to conversion of convertible notes payable and shares of common stock issued for fees in connection with the agreements during fiscal 2020.
On July 23, 2020, the Company completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $22.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. 4,264,312 shares of common stock were issued in this offering and 795,538 additional shares of common stock were issued upon the exercise of 512,500 prefunded warrants and 283,038 warrants issued in the offering.
Issuances of Restricted Stock
Restricted stock consists of shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. The fair value of nonvested shares is determined based on the market price of the Company's common stock on the grant date. Restricted stock is expensed ratably over the term of the restriction period.
The Company issued 6,250 shares of restricted common stock to certain employees of the Company and 1,250 of shares of restricted common stock were forfeited during the nine-month period ended September 30, 2021. These shares vest in equal annual installments over a three-year period from the date of grant and had a fair value on the date of issuance of $18,456.
Restricted stock compensation for the three and nine-month periods ended September 30, 2021, was $18,360 and $52,081, respectively.
There were 38,250 shares of restricted stock issued in the three and nine-month periods ended September 30, 2020.
Issuances to Directors, Executive Officers & Consultants
During the three and nine-month period ended September 30, 2021, the Company issued 1,888 and 5,727 shares of common stock to its directors in lieu of payment of board and committee fees valued at $6,008 and $19,023, respectively. There were 1,291 and 3,434 shares of common stock issued to directors in the three and nine-month period ended September 30, 2020, respectively, valued at $7,003 and $22,010, respectively.
Employees’ exercise options
During the three and nine-month periods ended September 30, 2021 and 2020, no employee stock options were exercised.
3. Warrants
During the nine months ended September 30, 2020, the Company issued a warrant valued at $94,655 to an investor to purchase 15,625 shares for a business referral.
During the nine months ended September 2020, the Company issued a warrant to purchase 3,125 shares of common stock to a former employee for a business referral valued at $12,921.
There were no warrants issued during the three and nine-month periods ended September 30, 2021.
See Note 14 Convertible Notes Payable for warrants issued with convertible notes in connection with the agreements during fiscal 2020.
4. Securities Purchase Agreement dated September 23, 2015
On September 23, 2015, the Company issued warrants (the “2015 Warrants”) to purchase 8,681 shares of common stock in connection with the issuance of a promissory note. The warrants were immediately exercisable at an initial exercise price of $28.80 per share and had a term of five years. The 2015 Warrants expired in September 2020.
The 2015 Warrants had a “full ratchet” anti-dilution adjustment provision. The anti-dilution adjustment provision was triggered in the first quarter of 2020 from the February 2020 Note and amendments to the Original Note. As a result of the forgoing transactions, the number of shares of common stock issuable upon the full exercise of the 2015 Warrants increased to 48,078, the exercise price was reduced to $5.20 per share, and the Company recorded a non-cash deemed dividend in amount of $41,688.
| 18. | FAIR VALUES OF FINANCIAL INSTRUMENTS |
|---|
Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and due from factor, are carried at, or approximate, fair value because of their short-term nature. The carrying values of the Company’s notes payable and operating lease liabilities approximated their fair values as of September 30, 2021, and December 31, 2020, as the interest rates approximated market.
| 19. | MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE |
|---|
For the three months ended September 30, 2021 and 2020, one customer accounted for 28% and 13% of revenue, respectively. For the nine months ended September 30, 2021 and 2020, one customer accounted for 16% and 21% of revenue, respectively.
At September 30, 2021, our Nigerian customer accounted for 41% and a second customer accounted for 26% of current accounts receivable. The Nigerian payment terms of net 90 have been orally modified. Originally, the payments were to be made by the World Bank to the registered companies on the project. Due to the number of registered companies, the World Bank designated local Nigerian banks to process the paperwork for payment. The local banks process the paperwork that ensures certain tasks are completed for payment to the registered companies. The World Bank will release the funds to be distributed as the tasks are completed. At December 31, 2020, one customer accounted for 31% of current accounts receivable.
| 20. | SUBSEQUENT EVENTS |
|---|
On November 11, 2021, the Company issued 1,615 shares of common stock to its directors in payment of meeting fees. Additionally, the Company issued an aggregate of 6,875 shares of restricted stock with three-year vesting period to three new employees.
The Company has reviewed all other subsequent events through the date of filing.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts contained in this Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure that they will be achieved. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our history of losses and limited revenue; our ability to raise additional capital; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition between us and other companies in the biometric technology and identity access management industries; market acceptance of biometric products generally and our products under development; our ability to execute and deliver on contracts in Africa, our ability to expand into Asia, Africa and other foreign markets; our ability to integrate the operations and personnel of PistolStar into our business, the duration and severity of the current coronavirus COVID-19 pandemic and its effect on our business operations, sales cycles, personnel, and the geographic markets in which we operate; delays in the development of products and statements of assumption underlying any of the foregoing as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS |
|---|
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and related information contained herein and our audited financial statements as of December 31, 2020.
OVERVIEW
We are a leading identity access management (IAM) platform provider for the enterprise and large-scale customer and civil ID solutions. Built to leverage BIO-key’s world-class biometric core platform among 14 other strong authentication factors, BIO-key PortalGuard® and hosted PortalGuard IDaaS (identity as a service) are platforms that enable our customers to securely and easily assure that only the right people can access the right systems. PortalGuard goes beyond traditional multifactor authentication (MFA) solutions by addressing sizeable gaps, such as allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.
Millions use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based hypervisor servers from all of their devices. Employees, contractors, students and faculty sign in through PortalGuard to seamlessly and securely access the applications they need to do their work, without relying on personal phone use or per-user tokens. Organizations use our platform to securely collaborate with their supply chain and partners, and to provide their customers with flexible, resilient user experiences online or in-person.
Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage enrollment, de-duplication and authentication for millions of users. One large bank has enrolled and identifies over 10 million of their customers in branches on a daily basis.
We sell our branded biometric and FIDO authentication hardware as accessories to our IAM platforms, so that customers can have a single vendor providing all components of their IAM solution. We do not mandate BIO-key hardware and our NIST-certified biometric platform is unique in that it supports interoperable mixing and matching combinations of fingerprint scanners regardless of manufacturer, so that the right scanner can be deployed for the right use case, without mandating the user of a particular scanner.
Security-conscious developers leverage our platform APIs and federation interfaces to securely and efficiently embed biometric and MFA identity capabilities into their software. Our approach to IDaaS allows our customers to efficiently scale their security and identity infrastructures to protect both internal cloud workforce- and external customer-facing applications.
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We operate a SaaS business model with customers subscribing to a term use of our software for annual recurring revenue. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.
PortalGuard is used by our customers to manage and secure IT access by their employees, contractors and partners, which we call workforce identity. PortalGuard is also used to manage and secure the identities of an organization’s customers through integration of APIs we have developed and industry-standard federation standards, which we call customer identity. We invoice customers in advance in annual and multi-year prepaid installments for subscriptions to our platforms.
Strategic Outlook and Recent Developments
Historically, our largest market has been access control within highly regulated industries such as government, financial services, and healthcare. In 2019, we became the go-to biometric authentication provider for board of election offices as eight offices deployed our hardware and software to secure internal access to the voter registration database. We will seek to extend this footprint in 2022 and beyond.
In 2020, we announced that we had secured two of the largest contracts in our history, with our partner Technology Transfer Institute. The contracts, valued at a combined $75,000,000, are for large-scale identification projects in Africa and Nigeria. Under the first contract, we will provide biometric authentication to support the infrastructure of a new e-commerce project developed with the expectation to generate more than one million jobs in Nigeria. The second contract provides for BIO-key hardware and software to be used by a leading African telecommunications company to secure internal access to customer data. Currently Africa and the surrounding regions are receiving government funding to expand the use of biometric authentication solutions to help establish trustworthy government programs and reduce fraud. We received our first purchase order under these contracts in the fourth quarter of 2020. We received new orders in the first quarter of 2021 from a new customer in connection with the large-scale identification project, which we shipped in March 2021. The COVID-19 pandemic has and may continue to delay the rollout of these programs.
We plan to have a more significant role in the IAM market which continues to expand. We plan to offer customers a suite of authentication options that complement our biometric solutions. The more well-rounded offerings of authentication options will allow customers to customize their approach to authentication all under one umbrella.
We expect to grow our business within government services and highly regulated industries in which we have historically had a strong presence including financial services, higher education, and healthcare. We believe that continued heightened security and privacy requirements in these industries, and as colleges and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer network log-on solutions and fingerprint readers. Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education platform providers, we expect to continue to grow our installed base.
Our primary sales strategies are focused on (i) increased marketing efforts into the IAM market, (ii) dedicated pursuit of large-scale identification projects across the globe, and (iii) growing our channel alliance program which currently includes more than one hundred participants and is starting to generate incremental revenues.
A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations.
The outbreak of a novel strain of the coronavirus, COVID-19, has been recognized as a pandemic by the World Health Organization. This outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities, and other geographic regions have taken preventative or protective actions, including imposing restrictions on travel and business operations, and requiring individuals to limit time outside of their homes. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time.
The complications caused by COVID-19 have forced organizations to quickly adapt to a work from home remote business model. This increases the risk of unauthorized users, phishing attacks, and hackers who are eager to take advantage of the challenges of securing remote workers. We believe that biometrics should play a key role in remote user authentication.
22
Critical Accounting Policies
For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements
For detailed information regarding recent account pronouncements, see Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2021, AS COMPARED TO SEPTEMBER 30, 2020
Consolidated Results of Operations - Percent Trend
| % of Total Revenues for the<br> <br>Three Months Ended<br> <br>September 30, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Revenues | **** | **** | **** | **** | **** | **** |
| Services | 25 | % | 52 | % | ||
| License fees | 67 | % | 37 | % | ||
| Hardware | 8 | % | 11 | % | ||
| Total revenues | 100 | % | 100 | % | ||
| Costs and other expenses | **** | **** | **** | **** | **** | **** |
| Cost of services | 14 | % | 18 | % | ||
| Cost of license fees | 4 | % | 1 | % | ||
| Cost of hardware | 5 | % | 3 | % | ||
| Total costs and other expenses | 23 | % | 22 | % | ||
| Gross Profit | 77 | % | 78 | % | ||
| Operating expenses | **** | **** | **** | **** | **** | **** |
| Selling, general and administrative | 107 | % | 158 | % | ||
| Research, development and engineering | 47 | % | 35 | % | ||
| Total operating expenses | 154 | % | 193 | % | ||
| Operating loss | -77 | % | -115 | % | ||
| Other income (expense) | **** | **** | **** | **** | **** | **** |
| Total other income (expense) | -2 | % | -234 | % | ||
| Net loss | -79 | % | -349 | % |
23
Revenues and cost of goods sold
| Three months ended<br> <br>September 30, | **** | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | ||||||
| Revenues | |||||||||
| Service | $ | 318,500 | $ | 491,535 | ) | -35 | % | ||
| License | 870,459 | 346,479 | 151 | % | |||||
| Hardware | 109,870 | 105,311 | 4 | % | |||||
| Total Revenue | $ | 1,298,829 | $ | 943,325 | 38 | % | |||
| Cost of goods sold | |||||||||
| Service | $ | 176,976 | $ | 173,823 | 2 | % | |||
| License | 45,986 | 10,775 | 327 | % | |||||
| Hardware | 71,712 | 27,011 | 165 | % | |||||
| Total COGS | $ | 294,674 | $ | 211,609 | 39 | % |
All values are in US Dollars.
Revenues
For the three months ended September 30, 2021 and 2020, service revenues included approximately $245,000 and $480,000, respectively, of recurring maintenance and support revenue, and approximately $74,000 and $11,000 respectively, of non-recurring custom services revenue. Recurring service revenue decreased $235,000 or 49% in 2021 which was due largely to the recognition of annual SaaS revenue versus maintenance renewal contracts. Non-recurring custom services increased 573% due to additional new customer installations and upgrades from on-premise to cloud deployments. As our customer base continues to grow, we expect the service revenue to increase in future periods.
For the three months ended September 30, 2021, license revenue increased substantially from the corresponding period in 2020. We increased both the variation and number of customers, including additional revenue from the PistolStar software and cloud migrations, primarily in the higher education market. Growth was also due to the fact during the three months ended September 30, 2020, our sales pipeline was adversely impacted by the COVID-19 pandemic.
For the three months ended September 30, 2021, hardware sales increased by approximately $5,000 (4%), as a result of smaller new customer deployments.
Costs of goods sold
For the three months ended September 30, 2021, cost of service increased 2% over the corresponding period in 2020, due to the dedicated personnel costs associated with required support for services revenue.
License costs for the three months ended September 30, 2021 increased approximately $35,000 or 327%, and were directly associated with increased license revenue and related third party software expenses.
Hardware costs for the three months ended September 30, 2021 increased approximately 165%, and was directly associated with the hardware mix.
Selling, general and administrative
| Three months ended<br> <br>September 30, | **** | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | ||||||
| Selling, general and administrative | $ | 1,385,534 | $ | 1,490,241 | ) | -7 | % |
All values are in US Dollars.
Selling, general and administrative expenses for the three months ended September 30, 2021 decreased $104,707 or 7% to $1,385,534 from $1,490,241 for the corresponding period in 2020. The decrease included the absence of one-time integration costs incurred in connection with the acquisition of PistolStar, initial costs associated with establishing our African subsidiary in 2020, and legal and professional fees related to financing transactions in 2020. These amounts were offset by increased payroll, marketing expenses, and bad debt allowance for the note receivable of $100,000.
24
Research, development and engineering
| Three months ended<br> <br>September 30, | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | |||||
| Research, development and engineering | $ | 612,597 | $ | 331,213 | 85 | % |
All values are in US Dollars.
For the three months ended September 30, 2021, research, development and engineering costs increased approximately $281,000 (85%) to $612,597 as compared to $331,213 in the corresponding period in 2020. This increase was due to professional services, new personnel costs, and related recruiting expenses.
Other income (expense)
| Three months ended<br> <br>September 30, | **** | **** | **** | **** | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | ||||||||
| Interest income | $ | 329 | $ | 1,106 | ) | -70 | % | ||||
| Investment-debt security reserve | (30,000 | ) | - | ) | -100 | % | |||||
| Interest expense | - | (2,204,920 | ) | 100 | % | ||||||
| Total other income (expense) | $ | (29,671 | ) | $ | (2,203,814 | ) | 99 | % |
All values are in US Dollars.
During the three months ended September 30, 2021, interest income of $329 was offset by the investment-debt security reserve as adjustment for collections of such security. During the three months ended September 30, 2020, interest income of $1,106 was offset by interest expense related to the amortization of debt discount and debt issuance costs in connection with convertible debt financings, including the write-off of unamortized discount and debt issuance costs related to the May 2020 and June 2020 notes.
NINE MONTHS ENDED SEPTEMBER 30, 2020, AS COMPARED TO SEPTEMBER 30, 2019
Consolidated Results of Operations - Percent Trend
| % of Total Revenues for the<br> <br>Nine Months Ended<br> <br>September 30, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Revenues | **** | **** | **** | **** | **** | **** |
| Services | 24 | % | 52 | % | ||
| License fees | 48 | % | 34 | % | ||
| Hardware | 28 | % | 14 | % | ||
| Total revenues | 100 | % | 100 | % | ||
| Costs and other expenses | **** | **** | **** | **** | **** | **** |
| Cost of services | 12 | % | 19 | % | ||
| Cost of license fees | 3 | % | 2 | % | ||
| Cost of hardware | 16 | % | 7 | % | ||
| Total costs and other expenses | 31 | % | 28 | % | ||
| Gross profit | 69 | % | 72 | % | ||
| Operating expenses | **** | **** | **** | **** | **** | **** |
| Selling, general and administrative | 102 | % | 230 | % | ||
| Research, development and engineering | 37 | % | 56 | % | ||
| Total operating expenses | 139 | % | 286 | % | ||
| Operating loss | -70 | % | -214 | % | ||
| Other income (expense) | **** | **** | **** | **** | **** | **** |
| Total other income (expense) | -2 | % | -251 | % | ||
| Net loss | -72 | % | -465 | % |
25
Revenues and costs of goods sold
| Nine months ended<br> <br>September 30, | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | |||||
| Revenues | ||||||||
| Service | $ | 985,163 | $ | 928,561 | 6 | % | ||
| License | 2,011,610 | 605,366 | 232 | % | ||||
| Hardware | 1,182,784 | 239,025 | 395 | % | ||||
| Total Revenue | $ | 4,179,557 | $ | 1,772,952 | 136 | % | ||
| Cost of goods sold | ||||||||
| Service | $ | 511,360 | $ | 336,940 | 52 | % | ||
| License | 133,328 | 29,486 | 352 | % | ||||
| Hardware | 656,190 | 117,900 | 457 | % | ||||
| Total COGS | $ | 1,300,878 | $ | 484,326 | 169 | % |
All values are in US Dollars.
Revenues
For the nine months ended September 30, 2021 and 2020, service revenues included approximately $818,000 and $891,000, respectively, of recurring maintenance and support revenue, and approximately $167,000 and $38,000 respectively, of non-recurring custom services revenue. Recurring service revenue decreased $73,000 or 8% in 2021 due largely to the recognition of annual SaaS revenue versus maintenance renewal contracts. Non-recurring custom services increased 339% due to additional new customer installations and upgrades from on-premise to cloud deployments. As our cloud customer base continues to grow, we expect the service revenue to increase in future periods.
For the nine months ended September 30, 2021, license revenue increased approximately $1,400,000 from the corresponding period in 2020. We increased both the variation and number of customers, including additional revenue from the PistolStar software and cloud migrations, primarily in the higher education market. Growth was also due to the fact during the nine months ended September 30, 2020, our sales pipeline was adversely impacted by the COVID-19 pandemic.
Hardware sales increased approximately $944,000 during the nine months ended September 30, 2021 to $1,182,784 from $239,025 during the nine months ended September 30, 2020. The increase was attributable largely to sales in Nigeria for an international government agency during the first quarter of 2021.
Costs of goods sold
For the nine months ended September 30, 2021, cost of service increased $174,420, or approximately 52%, to $511,360 due to increased support required for existing custom support and PistolStar support, compared to only PistolStar support in the nine months ended September 30, 2020.
License costs for the nine months ended September 30, 2021 increased $103,842, or approximately 352%, to $133,328 related to increased license revenue and the resale of associated third party software.
Hardware costs for the nine months ended September 30, 2021 increased $538,290, or approximately 457%, to $656,190. The increase was associated with the increased hardware sales and hardware mix.
Selling, general and administrative
| Nine months ended<br> <br>September 30, | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | |||||
| Selling, general and administrative | $ | 4,276,016 | $ | 4,083,568 | 5 | % |
All values are in US Dollars.
26
Selling, general and administrative expenses for the nine months ended September 30, 2021 increased $192,448, or approximately 5%, to $4,276,061 from the corresponding period in 2020. The increase included higher administrative personnel expenses, marketing expenses, Delaware franchise taxes, and bad debt expense related to the reserve on the note receivable of $100,000. These amounts were offset by decreased factoring fees, non-cash compensation, and the absence of one-time expenses incurred in 2020 for integration costs incurred in connection the acquisition of Pistol Star, accounting and legal fees incurred in connection with financing transactions, initial costs associated with establishing our African subsidiary, and personnel restructuring charges related to our Hong Kong operations.
Research, development and engineering
| Nine months ended<br> <br>September 30, | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | |||||
| Research, development and engineering | $ | 1,545,200 | $ | 986,675 | 57 | % |
All values are in US Dollars.
For the nine months ended September 30, 2021, research, development and engineering costs increased $558,525, or approximately 57%, to approximately $1,545,000 from the corresponding period in 2020. Included in the increase were personnel costs associated with PistolStar, new hires and recruiting fees, and increased amortization of intangible assets acquired from PistolStar.
Other income (expense)
| Nine months ended<br> <br>September 30, | **** | **** | **** | **** | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | % Change | ||||||||
| Interest income | 3,776 | 26,908 | ) | -86 | % | ||||||
| Foreign currency loss | (50,000 | ) | - | ) | -100 | % | |||||
| Investment-debt security reserve | (30,000 | ) | - | ) | -100 | % | |||||
| Government grant | - | 340,819 | ) | -100 | % | ||||||
| Interest expense | (18,000 | ) | (4,323,577 | ) | 100 | % | |||||
| Loss on extinguishment of debt | - | (499,076 | ) | 100 | % | ||||||
| Total other income (expense) | $ | (94,224 | ) | $ | (4,454,926 | ) | 99 | % |
All values are in US Dollars.
Other expense for the nine months ended September 30, 2021 consisted of interest expense from the amortization of debt discounts, a reserve on the investment-debt security as adjustment for collections of such security, and a foreign currency adjustment to an accounts receivable invoice, offset by interest income. Other income and expenses for the nine months ended September 30, 2020 consisted of interest expense, which included the amortization of a beneficial conversion feature, amortization of debt discounts, and debt issuance costs relating to the convertible notes of approximately $4,324,000, and a loss on the extinguishment of convertible debt financing in an approximate amount of $500,000. The forgoing were partially offset by amounts received under the Payment Protection Program of approximately $341,000 and interest income of approximately $27,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating activities overview
Net cash used by operations during the nine months ended September 30, 2021 was approximately $7,108,000. Items of note included:
| ● | Net positive cash flows related to adjustments for non-cash expenses of approximately $908,000. |
|---|---|
| ● | Net positive cash flows related to increases in account payable, accrued liabilities and deferred revenue of approximately $1,415,000. |
| --- | --- |
| ● | Net negative cash flows related to increases in accounts receivable, prepayments, and inventory of approximately $6,096,000 and our net loss for the nine months. |
| --- | --- |
Investing activities overview
Approximately $38,000 was used for capital expenditures during the nine months ended September 30, 2021.
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Financing activities overview
Approximately $255,000 was used for financing activities during the nine months ended September 30, 2021, due to the repayment of notes payable.
Liquidity and Capital Resources
Since our inception, our capital needs have been principally met through proceeds from the sale of equity and debt securities. We expect capital expenditures to be less than $100,000 during the next twelve months.
Between January and June 2020, we issued four convertible notes with principal amount totaling approximately $4,500,000. All amounts were repaid in June and July 2020, primarily from the proceeds of the underwritten public offering, discussed below.
On April 20, 2020, we entered into a Paycheck Protection Program Term Note (the “SVB Note”) with Silicon Valley Bank (“SVB”). We received total proceeds of approximately $341,000 which was used in accordance with the requirements of the CARES Act. The full amount of the SVB Note has been forgiven.
On July 23, 2020, we completed an underwritten public offering of shares of common stock and warrants resulting in net proceeds of approximately $22.7 million, inclusive of the over-allotment and after deducting underwriting discounts, commissions and estimated offering expenses. We used approximately $4.2 million of the net proceeds to repay all outstanding amounts due under outstanding convertible promissory notes at that time.
During the nine months ended September 30, 2021, we have invested approximately $4.8 million in deposits for and receipt of inventory to support our African contracts and new EcoID II fingerprint readers. The Company expects to sell most of the current African inventory by the end of the second quarter in 2022 to vendors who are facilitating the mandates for the identity requirements for Nigeria, sponsored by the World Bank.
Liquidity outlook
At September 30, 2021, our total cash and cash equivalents were approximately $9,600,000, as compared to approximately $17,000,000 at December 31, 2020.
As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $710,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During for the first nine months of 2021, we generated $4,179,557 of revenue, which is below our average monthly requirements. If we are unable to generate sufficient revenue to fund current operations and execute our business plan, we may need to obtain additional third-party financing. As of the date of this report, we do not expect that we will need to obtain additional financing during the next twelve months.
Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or in the extreme case, not continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are in the opinion of management, reasonably likely to have a current or future effect on our financial condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
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Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 6. EXHIBITS
| Exhibit<br> <br>No. | Description |
|---|---|
| 31.1 | Certificate of CEO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended |
| 31.2 | Certificate of CFO of Registrant required under Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended |
| 32.1 | Certificate of CEO of Registrant required under 18 U.S.C. Section 1350 |
| 32.2 | Certificate of CFO of Registrant required under 18 U.S.C. Section 1350 |
| 101.INS | Inline XBRL Instance |
| 101.SCH | Inline XBRL Taxonomy Extension Schema |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation |
| 101.DEF | Inline XBRL Taxonomy Extension Definition |
| 101.LAB | Inline XBRL Taxonomy Extension Labels |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BIO-key International, Inc. | |
|---|---|
| Dated: November 15, 2021 | /s/ Michael W. DePasquale |
| Michael W. DePasquale | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Dated: November 15, 2021 | /s/ Cecilia Welch |
| Cecilia Welch<br> <br>Chief Financial Officer | |
| (Principal Financial Officer) |
30
Exhibit 31.1
CERTIFICATION
I, Michael W. DePasquale, certify that:
I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
- The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
| Dated: November 15, 2021 | |
|---|---|
| /s/ Michael W. DePasquale | |
| Michael W. DePasquale | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Cecilia C. Welch, certify that:
I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
- The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
| Dated: November 15, 2021 | |
|---|---|
| /s/ CECILIA C. WELCH | |
| Cecilia C. Welch | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael W. DePasquale, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|---|---|
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| --- | --- |
| BIO-KEY INTERNATIONAL, INC. | |
| --- | --- |
| By: | /s/ Michael W. DePasquale |
| Michael W. DePasquale | |
| Chief Executive Officer | |
| Dated: November 15, 2021 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cecilia Welch, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|---|---|
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
| --- | --- |
| BIO-KEY INTERNATIONAL, INC. | |
| --- | --- |
| By: | /s/ CECILIA C. WELCH |
| Cecilia C. Welch | |
| Chief Financial Officer | |
| Dated: November 15, 2021 |