BIO KEY INTERNATIONAL INC 10-Q

bkyi20220331_10q.htm       U.S. 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 March   31, 2022     ☐ 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)   ( 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 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  ☐           Non-accelerated filer   ☒   Smaller Reporting Company   ☒               Emerging growth company   ☐     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act)  Yes  ☐   No  ☒   Number of shares of Common Stock, $.0001 par value per share, outstanding as of May 20, 2022 was 8,416,818 .           BIO-KEY INTERNATIONAL, INC.   INDEX     PART   I. FINANCIAL INFORMATION     Item 1 — Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021 (unaudited) 4 Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited) 7 Notes to Condensed Consolidated Financial Statements 9     Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.  20     Item 4 — Controls and Procedures.  25     PART   II. OTHER INFORMATION     Item 6 — Exhibits.   25     Signatures 26             PART   I — FINANCIAL INFORMATION   BIO- key International, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS       March 31, 2022     December 31, 2021       (Unaudited)           ASSETS                 Cash and cash equivalents   $ 5,801,121     $ 7,754,046   Accounts receivable, net     2,553,331       970,626   Due from factor     51,850       49,500   Note receivable, net of allowance     82,000       82,000   Inventory     4,956,472       4,940,660   Prepaid expenses and other     361,365       216,041   Total current assets     13,806,139       14,012,873   Resalable software license rights     46,247       48,752   Investment – debt security, net     452,821       452,821   Equipment and leasehold improvements, net     129,159       69,168   Capitalized contract costs, net     279,789       249,012   Deposits and other assets     8,712       8,712   Note receivable, net of allowance     110,000       113,000   Operating lease right-of-use assets     202,513       254,100   Intangible assets, net     2,646,804       1,298,077   Goodwill     1,720,803       1,262,526   Total non-current assets     5,596,848       3,756,168   TOTAL ASSETS   $ 19,402,987     $ 17,769,041                     LIABILITIES                 Accounts payable   $ 1,014,270     $ 427,772   Accrued liabilities     895,453       828,997   Earnout payable – Swivel acquisition     500,000       -   Government loan – BBVA Bank – current portion     123,000       -   Deferred revenue – current     798,830       565,355   Operating lease liabilities, current portion     156,730       177,188   Total current liabilities     3,488,283       1,999,312   Deferred revenue – long term     54,699       67,300   Operating lease liabilities, net of current portion     54,710       86,974   Government loan – BBVA Bank – net of current portion     423,740           Total non-current liabilities     533,149       154,274   TOTAL LIABILITIES     4,021,432       2,153,586                     Commitments and Contingencies                                       STOCKHOLDERS ’ EQUITY                 Common stock — authorized, 170,000,000 shares; issued and outstanding; 8,406,451 and 7,853,759 of $ .0001 par value at March 31, 2022 and December 31, 2021, respectively     841       786   Additional paid-in capital     120,899,785       120,190,139   Accumulated other comprehensive income     55,802       -   Accumulated deficit     ( 105,574,873 )     ( 104,575,470 ) TOTAL STOCKHOLDERS ’ EQUITY     15,381,555       15,615,455   TOTAL LIABILITIES AND STOCKHOLDERS ’ EQUITY   $ 19,402,987     $ 17,769,041     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 AND COMPREHENSIVE LOSS (Unaudited)       Three months ended March 31,       2022     2021                     Revenues                 Services   $ 395,804     $ 380,022   License fees     1,460,183       478,958   Hardware     85,184       1,029,658   Total revenues     1,941,171       1,888,638                     Costs and other expenses                 Cost of services     210,913       175,944   Cost of license fees     73,230       38,969   Cost of hardware     53,298       551,722   Total costs and other expenses     337,441       766,635   Gross Profit     1,603,730       1,122,003                     Operating expenses                 Selling, general and administrative     1,797,998       1,516,398   Research, development and engineering     805,266       441,651   Total operating expenses     2,603,264       1,958,049   Operating loss     ( 999,534 )     ( 836,046 ) Other income (expense)                 Interest income     131       2,615   Interest expense     -       ( 18,000 ) Total other income (expense)     131       ( 15,385 ) Net loss   $ ( 999,403 )   $ ( 851,431 )                   Comprehensive loss:                 Net loss   $ ( 999,403 )   $ ( 851,431 ) Other comprehensive income – Foreign currency translation adjustment     55,802       -   Comprehensive loss   $ ( 943,601 )   $ ( 851,431 ) Basic and Diluted Loss per Common Share   $ ( 0.13 )   $ ( 0.11 )                   Weighted Average Shares Outstanding:                 Basic and Diluted     7,885,008       7,773,688     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 Paid-in     Accumulated Other Comprehensive     Accumulated               Shares     Amount     Capital     Income     Deficit     Total   Balance as of January 1, 2022     7,853,759     $ 786     $ 120,190,139     $ -     $ ( 104,575,470 )   $ 15,615,455   Issuance of common stock for directors’ fees     9,382       1       22,019       -       -       22,020   Issuance of common stock pursuant to Swivel purchase agreement     269,060       27       599,977       -       -       600,004   Issuance of restricted common stock to employees and directors     274,250       27       ( 27 )     -       -       -   Foreign currency translation adjustment                         55,802       -       55,802   Share-based compensation     -       -       87,677       -       -       87,677   Net loss     -       -       -       -       ( 999,403 )     ( 999,403 ) Balance as of March 31, 2022     8,406,451     $ 841     $ 120,899,785     $ 55,802     $ ( 105,574,873 )   $ 15,381,555     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 (Continued) (Unaudited)       Common Stock     Additional 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     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)       Three Months Ended March 31,       2022     2021                     CASH FLOW FROM OPERATING ACTIVITIES:                 Net loss   $ ( 999,403 )   $ ( 851,431 ) Adjustments to reconcile net loss to cash used in operating activities:                 Depreciation     11,220       25,115   Amortization of intangible assets     54,231       54,016   Amortization of debt discount     -       18,000   Amortization of capitalized contract costs     35,658       22,989   Operating leases right-of-use assets     51,587       57,119   Stock based directors’ fees     22,020       7,510   Share based compensation for employees and consultants     87,677       133,638   Bad debts     25,111       -   Change in assets and liabilities:                 Accounts receivable     ( 904,930 )     ( 884,199 ) Due from factor     ( 2,350 )     10,645   Capitalized contract costs     ( 66,435 )     ( 27,893 ) Inventory     ( 15,812 )     ( 269,500 ) Resalable software license rights     2,505       2,521   Prepaid expenses and other     ( 124,616 )     ( 1,404,654 ) Accounts payable     175,341       65,165   Accrued liabilities     45,669       27,465   Deferred revenue     220,874       ( 128,107 ) Operating lease liabilities     ( 52,722 )     ( 56,958 ) Net cash used in operating activities     ( 1,434,375 )     ( 3,198,559 ) CASH FLOW FROM INVESTING ACTIVITIES:                 Purchase of Swivel Secure, net of cash acquired of $ 729,905     ( 543,578 )     -   Receipt of cash from note receivable     3,000       -   Capital expenditures     ( 4,459 )     ( 13,307 ) Net cash used in investing activities     ( 545,037 )     ( 13,307 ) CASH FLOW FROM FINANCING ACTIVITIES                 Costs to issue notes and common stock     -       ( 2,709 ) Repayments of note payable - PistolStar     -       ( 250,000 ) Net cash used in financing activities     -       ( 252,709 )                   Effect of exchange rate changes     26,487       -                     NET DECREASE IN CASH AND CASH EQUIVALENTS     ( 1,952,925 )     ( 3,464,575 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     7,754,046       16,993,096   CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 5,801,121     $ 13,528,521     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 (Unaudited)   SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION       Three Months Ended March 31,       2022     2021                     Cash paid for:                 Interest   $ -     $ 18,000                     Noncash Investing and financing activities                 Accounts receivable acquired from Swivel Secure   $ 702,886     $ —   Equipment acquired from Swivel Secure   $ 65,640     $ —   Other assets acquired from Swivel Secure   $ 20,708     $ —   Estimated intangible assets acquired from Swivel Secure   $ 1,379,589     $ —   Estimated goodwill resulting from the acquisition from Swivel Secure   $ 450,643     $ —   Accounts payable and accrued expenses acquired from Swivel Secure   $ 431,884     $ —   Government loan acquired from Swivel Secure   $ 544.000     $ —   Common stock issued for acquisition of Swivel Secure   $ 600,004     $ —     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   March   31, 2022 (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”) for interim financial reporting. 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, 2021 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, 2021, filed with the SEC on March 31, 2022.     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.   The functional currency of Swivel Secure Europe, SA is the Euro. Under ASC 830, all assets and liabilities are translated into U. S. dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in Euros are reflected in the statement of operations as appropriate. Translation adjustments are included in accumulated other comprehensive income.   Goodwill and acquired intangible assets   Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. For purposes of assessing potential impairment, the Company estimates the fair value of the reporting unit, based on the Company’s market capitalization, and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. The annual goodwill impairment test will be performed as of  December 31st  of each year. To date, the Company has not identified any impairment to goodwill.   Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired definite-lived intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.   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. Early adoption is permitted. The Company is currently assessing the impact ASU 2016 - 13 will have on its consolidated financial statements.   9     Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.     2. GOING CONCERN   The Company has 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. The Company currently requires approximately $ 814,000 per month to conduct operations, a monthly amount that it has been unable to consistently achieve through revenue generation. During 2021, the Company generated approximately $ 5,114,000 of revenue, which is below its average monthly requirements. With the addition of the Swivel Secure Europe, SA, the Company expects $ 1,000,000 of additional cash flow to support operations. In addition, the Company is beginning to sell hardware purchased directly for the Nigerian projects to alternative customers. Given the uncertainty of the duration and severity of the current COVID- 19 pandemic and the conflict between Ukraine and Russia and their effects on our business operations, sales cycles, personnel, and the geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature, the related financial impact cannot be reasonably estimated at this time. As of the date of this report, the Company has enough cash and receivables for twelve months of operations.     3. REVENUE FROM CONTRACTS WITH CUSTOMERS   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   ● 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 period:       North America     Africa     EMESA*     Asia     March 31, 2022                                             License fees   $ 473,070     $ 517,161     $ 390,277     $ 79,675     $ 1,460,183   Hardware     71,900       12,033       1,251       -       85,184   Services     355,632       15,275       24,844       53       395,804   Total Revenues   $ 900,602     $ 544,469     $ 416,372     $ 79,728     $ 1,941,171         North America     Africa     EMESA*     Asia     March 31, 2021                                             License fees   $ 368,800     $ -     $ 42,508     $ 67,650     $ 478,958   Hardware     48,795       684,839       265,995       30,029       1,029,658   Services     359,614       -       17,888       2,520       380,022   Total Revenues   $ 777,209     $ 684,839     $ 326,391     $ 100,199     $ 1,888,638     *EMESA – Europe, Middle East, South America   10     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.   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 as of March 31, 2022. 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.   Deferred revenue represents the Company’s remaining performance obligations related to prepaid support and maintenance, all of which is expected to be recognized from one to five years.   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. Contracts greater than 12 months are segregated as long term deferred revenue. Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services. At March 31, 2022 and December 31, 2021, amounts in deferred revenue were approximately $ 854,000 and $ 633,000 , respectively. Revenue recognized during the three months ended March 31, 2022 and 2021 from amounts included in deferred revenue at the beginning of the period was approximately $ 234,000 and $ 305,000 , respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods.     11       4. SWIVEL SECURE EUROPE, SA ACQUISITION   On March 8, 2022, the Company completed the acquisition of 100 % of the issued and outstanding capital stock of Swivel Secure Europe, SA, (‘Swivel Secure’) based in Madrid, Spain, pursuant to the terms of a stock purchase agreement. The aggregate purchase price consisted of a base purchase price of $ 1.75 million, subject to closing adjustments based on the closing date working capital, indebtedness and unpaid transaction expenses, and an earn-out of up to $ 500,000 . The earn-out is payable based on Swivel Secure generating $ 3,000,000 of revenue and $ 1,000,000 of operating profit during an earn-out period commencing on the closing date and ending on January 31, 2023. The earn-out payment, if any, will be paid at the Company’s option, in cash or shares of Company common stock priced at the 20 day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market. At the closing, the Company made a cash payment of $ 1.27 million and issued 269,060 shares of common stock of which 89,687 shares were held back by the Company to secure certain indemnification obligations under the stock purchase agreement. The shares of Company common stock were priced at $ 2.23 , the contractual 20 day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market.   The acquisition has been accounted for as a business combination and, in accordance with ASC 805. The Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the preliminary purchase price allocation, assuming the earnout will be paid:   Purchase consideration:         Total cash paid, including working capital adjustment   $ 1,273,483   Earnout payable     500,000   Common stock issued     600,004   Total purchase price consideration   $ 2,373,487             Fair value of assets acquired and liabilities assumed:         Cash and cash equivalents   $ 729,905   Accounts receivable     702,886   Equipment acquired     65,640   Other assets     20,708   Estimated intangible assets     1,379,589   Estimated goodwill     450,643   Total estimated assets acquired     3,349,371             Accounts payable and accrued expenses     431,884   Government loan     544,000   Total liabilities assumed     975,884   Total estimated fair value of assets acquired and liabilities assumed   $ 2,373,487     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.   The estimated intangible assets identified in the purchase price allocation include the customer relationships.   The government loan was issued through BBVA Bank during the COVID- 19 pandemic.  The loan bears interest at the rate of 1.75 % per annum  and is payable in monthly installments of approximately $ 11,900 inclusive of interest from May 2022 through April 2026.     5. ACCOUNTS RECEIVABLE   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.   12     Accounts receivable at March 31, 2022 and December 31, 2021 consisted of the following:        March 31,     December 31,       2022     2021   Accounts receivable   $ 2,817,116     $ 1,234,411   Loss on foreign currency     ( 50,000 )     ( 50,000 ) Allowance for doubtful accounts     ( 213,785 )     ( 213,785 ) Accounts receivable, net of allowances for doubtful accounts   $ 2,553,331     $ 970,626     Bad debt expenses (if any) are recorded in selling, general, and administrative expense.      6. SHARE BASED COMPENSATION   The following table presents share-based compensation expenses for continuing operations included in the Company’s unaudited condensed consolidated statements of operations:       Three Months Ended March 31,       2022     2021                                       Selling, general and administrative   $ 92,426     $ 128,944   Research, development and engineering     17,271       12,204       $ 109,697     $ 141,148       7. FACTORING   Due from factor consisted of the following as of:        March 31,     December 31,       2022     2021                     Original invoice value   $ 108,400     $ 99,000   Factored amount     ( 56,550 )     ( 49,500 ) Balance due from factor   $ 51,850     $ 49,500     The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to  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  per quarter of certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor remits  35 % of the foreign and  75 % of the domestic accounts receivable balance to 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 March 31,       2022     2021                     Factoring fees   $ 18,727     $ 13,347     13       8. NOTE RECEIVABLE   During the third quarter 2020, the Company loaned $ 295,000 as an advance to Technology Transfer Institute (“TTI”) 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 %. Due to the ongoing delays in payment, the Company reserved $ 100,000 of the note as an allowance. On February 17, 2022, the Company amended the note to modify the payment terms to provide for lower monthly payments, with an updated maturity date on or before December 6, 2023. On May 5, 2022, the Company amended the note to modify the payment terms to eight biweekly installments of $ 1,000 beginning February 25, 2022, nineteen consecutive monthly installments of $ 15,000 beginning on July 6, 2022, and $ 2,000 on or before February 6, 2024. A member of our board of directors served as Chief Executive Officer of TTI until August 12, 2020.       March 31,     December 31,       2022     2021                     Note receivable   $ 295,000     $ 295,000   Repayment of note     ( 3,000 )     -   Allowance for doubtful account     ( 100,000 )     ( 100,000 ) Note receivable, net of allowance     192,000       195,000   Current portion, net of allowance   $ 82,000     $ 82,000   Noncurrent portion, net of allowance   $ 110,000     $ 113,000       9. 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:       March 31,     December 31,       2022     2021                                       Finished goods   $ 4,854,866     $ 4,798,203   Fabricated assemblies     101,606       142,457   Total inventory   $ 4,956,472     $ 4,940,660       10. 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 at the greater of the actual unit cost per license sold or straight line amortization over 10 years A total of $ 2,505 and $ 2,521 was charged to cost of sales during the three -month periods ended March 31, 2022 and March 31, 2021, respectively. Since the license purchase, the actual per unit cost (actual usage) of such license rights in the cumulative amount of $ 133,753 has been charged to cost of sales, with a carrying balance of $ 46,247 and $ 48,752 as of March 31, 2022 and December 31, 2021, respectively.   The Company has classified the balance as non-current until a larger deployment occurs.   Estimated minimum amortization expense based on straight-line amortization of the software license rights over the remaining useful life approximates the following:   Years ending December 31         2022 (nine months remaining)   $ 15,574   2023     18,000   2024     12,673   Total   $ 46,247     14       11. INVESTMENT IN DEBT SECURITY   The Company purchased a 4,000,000 Hong Kong dollar denominated Bond Certificate with a financial institution in Hong Kong in June 2020. 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 is recorded at amortized cost which approximates fair value was held to maturity. The Company has yet to receive the proceeds and accrued interest from the investment and as such, the debt security was classified as noncurrent. In addition, due to the delay in the receipt of the proceeds, the Company recorded a $ 60,000 reserve.     12. COMMITMENTS AND CONTINGENCIES   Sales Incentive Agreement with TTI   On March 25, 2020, the Company entered into a sales incentive agreement with TTI. Terms of the agreement include the following:     1. The term of the agreement is one year unless notice to terminate (as defined) is given.  The agreement will be automatically extended for additional one -year terms unless terminated.     2. For each $ 5,000,000 in revenue (up to a maximum of $ 20,000,000 ) the Company generates from contracts sourced by TTI during the first year that generates net income of at least 20 % (as defined), 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 from contracts sourced by TTI revenue in excess of $20,000,000, 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 from this agreement.   Distribution Agreement   On October 23, 2020, Swivel Secure entered into a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:     1. The term of the agreement is one year unless notice to terminate (as defined) is given.  The agreement will be automatically extended for additional one -year terms unless terminated.     2. SSL appoints Swivel Secure as a non-exclusive distributor of SSL’s products, to market, sell and distribute world-wide, for a defined discount.     3. Swivel Secure is required to meet certain revenue targets with respect to the sale of products during certain quarterly periods, for the 12 month period commencing October 23, 2020.   If for any reason, they fail to agree on revenue targets within 30 days of each commencement period, SSL shall be entitled to terminate the agreement by giving Swivel Secure not less than 14 days written notice.   The Company expects the revenue targets to continue to be agreed to, based on historical negotiations and increasing distribution by Swivel Secure.   Litigation   From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of March 31, 2022, the Company was not a party to any pending lawsuits.   15       13. LEASES   The Company’s leases office space in New Jersey, Hong Kong, Minnesota, Spain, and New Hampshire with lease termination dates in 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, were:       3 Months ended March 31, 2022     3 Months ended March 31, 2021                     Lease cost                 Operating lease cost   $ 55,219     $ 63,973   Total lease cost   $ 55,219     $ 63,973     Balance sheet information   March 31, 2022     December 31, 2021   Operating right-of-use assets   $ 202,513     $ 254,100                     Operating lease liabilities, current portion   $ 156,730     $ 177,188   Operating lease liabilities, non-current portion     54,710       86,974   Total operating lease liabilities   $ 211,440     $ 264,162                     Weighted average remaining lease term (in years) – operating leases     1.27       1.45   Weighted average discount rate – operating leases     5.50 %     5.50 %   Supplemental cash flow information related to leases were as follows:   Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2022 and 2021:   $ 65,108     $ 63,812     Maturities of operating lease liabilities were as follows as of March 31, 2022:   2022 (9 months remaining)   $ 131,240   2023     89,226   Total future lease payments   $ 221,466   Less: imputed interest     ( 9,026 ) Total   $ 211,440     16       14. EARNINGS PER SHARE (“EPS”)   The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of preferred stock.   The following table sets forth options and warrants which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:       Three Months Ended March 31,       2022     2021                     Stock options     212,461       212,711   Warrants     4,689,387       4,689,387   Total     4,901,848       4,902,098     17       15. 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   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 8, 2022, the Company issued 269,060 shares of common stock of which 89,687 shares were held back by the Company to secure certain indemnification obligations under the Swivel Secure stock purchase agreement. The shares of Company common stock were issued at a total cost of $ 600,004 , priced at $ 2.23 , based on the contractual 20 day volume-weighted average price of the Company’s common stock immediately prior to the payment date as reported on the Nasdaq Capital Market   On June 18, 2021, the stockholders approved the Employee Stock Purchase Plan. Under the terms of this plan, 789,000 shares of common stock are reserved for issuance to employees and officers of the Company at a purchase price equal to 85 % of the lower of the closing price of the common stock on the first day or the last day of the offering period as reported on the Nasdaq Capital Market. Eligible employees are granted an option to purchase shares under the plan funded by payroll deductions. The Board may suspend or terminate the plan at any time, otherwise the plan expires June 17, 2031. On December 31, 2021, 19,484 shares were issued to employees which resulted in a $ 10,680 non-cash compensation expense for the Company.   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.   During the three -month periods ended March 31, 2022 and 2021, the Company issued 274,250 and 1,250 shares of restricted common stock to certain employees and the board, respectively. 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 $ 589,638 and $ 4,550 , respectively.   Restricted stock compensation for the three -month period ended March 31, 2022 and 2021 was $ 39,840 and $ 17,375 , respectively.   Issuances to Directors, Executive Officers & Consultants   During the three -month periods ended March 31, 2022 and 2021 the Company issued 9,382 and 2,091 shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 20,020 and $ 7,510 , respectively.    Employees ’ exercise options   During the three -month periods ended March 31, 2022 and 2021, no employee stock options were exercised.   3. Warrants   There were no warrants issued during the three -month periods ended March 31, 2022 and 2021.   18       16. FAIR VALUES OF FINANCIAL INSTRUMENTS         Cash and cash equivalents, accounts receivable, due from factor, accounts payable and accrued liabilities are carried at, or approximate, fair value because of their short-term nature. The carrying value of the Company’s notes and loan payables approximated fair value as the interest rates related to the financial instruments approximated market.     17. MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE   For the three month periods ended March 31, 2022 and 2021, one customer accounted for 27 % of revenues and two customers accounted for 52 % of revenues, respectively. Two customers accounted for 44 % of current accounts receivable as of March 31, 2022. At December 31, 2021, three customers accounted for 87 % of current accounts receivable.     18. SUBSEQUENT EVENTS   On May 12, 2022, the Company issued 7,695 shares of common stock to its directors in payment of meeting fees. Additionally, the Company issued 1,250 shares of restricted stock with three -year vesting period to a new employee. All the shares were issued at $ 1.95 the closing price on May 12, 2022, as reported on the Nasdaq Capital Market.    On May 16, 2022, the Company issued 1,422 shares of common stock to its directors in payment of committee meeting fees.   The Company has reviewed subsequent events through the date of this filing.   19       CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS   All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “should,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. These statements are not guarantees of future performance or events and are subject to risks and uncertainties that may cause actual results to differ materially from those included within or implied by such forward-looking statements. These risks and uncertainties include, without limitation, our history of losses and limited revenue; our ability to raise additional capital; our ability to protect our intellectual property; changes in business conditions; changes in our sales strategy and product development plans; changes in the marketplace; continued services of our executive management team; security breaches; competition in the biometric technology and identity access management industries; market acceptance of biometric products generally and our products under development; our ability to 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 and Swivel Secure 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; the duration and extent of continued hostilities in Ukraine and its impact on our European customers; delays in the development of products, statements of assumption underlying any of the foregoing, and numerous other matters of national, regional and global scale, including those set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to disclose any revisions to these forward-looking statements, 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, 2021.   Overview   BIO-key International, Inc. (the “Company,” “BIO-key,” “we,” or “us”) is a leading identity and access management (IAM) platform provider enabling secure work-from-anywhere for enterprise, education, and government customers.  Our vision is to enable any organization to secure streamlined and passwordless workforce, customer, citizen and student access to any online service, workstation, or mobile application, without a requirement to use tokens or phones.  Our products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, WEB-key® biometric civil and large-scale ID infrastructure, and high-quality, low-cost accessory hardware to provide a full and complete solution for identity-innovating customers.   Built to leverage BIO-key’s world-class biometric core platform among 16 other strong authentication factors, BIO-key PortalGuard and hosted PortalGuard IDaaS 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 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 of people use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based 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 19 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 the use of BIO-key hardware with our software and services. Our NIST-certified fingerprint biometric platform is unique in that it supports interoperable mixing and matching combinations of different manufactures’ fingerprint scanners in a deployment, so that the right scanner can be selected for the right use case, without mandating the user of a particular scanner.   Security-conscious software 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.    20     We operate a SaaS business model with customers subscribing to term use of our software for annual recurring revenue. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners including resellers, system integrators, master agents and other distribution partners. Our subscription fees include a term license of hosted or on-premise product and technical support and maintenance of our platform. We base subscription fees primarily on the products used and the number of users enrolled in our platform. We generate subscription fees pursuant to noncancelable contracts with a weighted average duration of approximately one year.    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   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 which continue to deploy our hardware and software to secure internal access to the voter registration database. Upon acquiring PortalGuard in 2020, we now serve the higher education vertical. We have and expect to continue to extend this footprint in 2022 and beyond.   In 2020, we announced that we had secured two contracts with our partner Technology Transfer Institute. The contracts 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 related to these contracts in the fourth quarter of 2020 which we shipped in the first quarter of 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 will 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 we have grown to more than one hundred and fifty participants and continues to generate incremental revenues.   A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space.  In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings.  We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations.   Recent Developments.   On March 8, 2022, we expanded our sales and support operation into Europe, Africa and the Middle East (“EMEA”) by acquiring Swivel Secure Europe, SA. ("Swivel Secure") for up to $2.25 million. Swivel Secure is a Madrid, Spain based provider of IAM solutions serving over 300 customers through a network of channel partners throughout EMEA. Swivel Secure is the exclusive distributer of AuthControl Sentry, AuthControl Enterprise and AuthControl MSP product line in EMEA, excluding the United Kingdom. Swivel Secure maintains a direct sales force with offices in Madrid, Spain and Lisbon, Portugal. There can be no assurance that we will be able to manage Swivel Secure’s business or successfully integrate the business with our historic operations without substantial costs, delays or other operational or financial challenges.   Given the uncertainty of the duration and severity of the current COVID-19 pandemic and the conflict between Ukraine and Russia and their effects on our business operations, sales cycles, personnel, and the geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature, the related financial impact cannot be reasonably estimated at this time.   The complications caused by COVID-19 has 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 continue to play a key role in remote user authentication.   Critical Accounting Policies and Estimates   For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021.  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.   21     RESULTS OF OPERATIONS   THREE MONTHS ENDED MARCH   31, 2022 AS COMPARED TO MARCH   31, 2021   Consolidated Results of Operations   - Percent Trend       Three Months Ended March 31,       2022     2021   Revenues                 Services     20 %     20 % License fees     75 %     25 % Hardware     5 %     55 % Total Revenues     100 %     100 % Costs and other expenses                 Cost of services     11 %     9 % Cost of license fees     4 %     2 % Cost of hardware     3 %     30 % Total Cost of Goods Sold     17 %     41 % Gross profit     83 %     59 %                   Operating expenses                 Selling, general and administrative     93 %     80 % Research, development and engineering     41 %     23 % Total Operating Expenses     134 %     103 % Operating loss     -51 %     -44 %                   Other income (expenses)     - %     -1 %                   Net loss     -51 %     -45 %   Revenues and cost of goods sold       Three months ended                       March 31,                       2022     2021     $ Change     % Change                                     Revenues                                 Service   $ 395,804     $ 380,022     $ 15,782       4 % License     1,460,183       478,958       981,225       205 % Hardware     85,184       1,029,658       (944,474 )     -92 % Total Revenue   $ 1,941,171     $ 1,888,638     $ 52,533       3 %                                   Cost of goods sold                                 Service   $ 210,913     $ 175,944     $ 34,969       20 % License     73,230       38,969       34,261       88 % Hardware     53,298       551,722       (498,424 )     -90 % Total Cost of goods sold   $ 337,441     $ 766,635     $ (429,194 )     -56 %   22     Revenues   For the three months ended March 31, 2022 and 2021, service revenues included approximately $317,000 and $348,000 respectively, of recurring maintenance and support revenue, and approximately $79,000 and $32,000, respectively, of non-recurring custom services revenue.  Recurring service revenue decreased 9% in the first quarter of 2022 as compared to the first quarter of 2021 which was due largely to the recognition of annual SaaS revenue versus maintenance renewal contracts. Non-recurring custom services increased 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 March 31, 2022, license revenue increased to $1,460,183 or 205% from $478,958 during the three months ended March 31, 2021. We increased both the variation and number of customers, including additional revenue from Swivel Secure which we acquired in March of 2022, one large SaaS renewal, and cloud migrations.    Hardware sales decreased $944,474 during the three months ended March 31, 2022 to $85,184 from $1,029,658 during the three months ended March 31, 2021. The decrease was attributable largely to sales in Nigeria and continued expansion of an international government agency in 2021 not recurring in 2022 as expected due to governmental related delays.   Costs of goods sold   For the three months ended March 31, 2022, cost of service increased approximately $35,000 or 20% to $210,913 due to the additional personnel costs associated with the direct support for the PortalGuard installations, compared to $175,944 for the three months ended March 31, 2021. For the three months ended March 31, 2022, license fees increased to $73,230 from $38,969 during the three months ended March 31, 2021, due largely to the increase in revenue. For the three months ended March 31, 2022, hardware costs decreased to $53,298 from $551,722 during the three months ended March 31, 2021, corresponding to the decrease in hardware revenue.   Selling, general and administrative       Three months ended                       March 31,                       2022     2021     $ Change     % Change                                     Selling, general and administrative   $ 1,797,998     $ 1,516,398     $ 281,600       19 %   Selling, general and administrative expenses for the three months ended March 31, 2022 increased 19% to $1,797,998 as compared to $1,516,398 for the corresponding period in 2021. This increase was attributable largely to legal and professional fees and expenses incurred in connection with the acquisition of Swivel Secure and increased sales and marketing personnel costs. These increases were offset, in part, by decreases in our operational expenses in Hong Kong, accounting fees, and non-cash compensation.   Research, development and engineering       Three months ended                       March 31,                       2022     2021     $ Change     % Change                                     Research, development and engineering   $ 805,266     $ 441,651     $ 363,615       82 %   For the three months ended March 31, 2022, research, development and engineering expenses increased 82% to $805,266 as compared to $441,651 for the corresponding period in 2021. Included in the increase were personnel costs associated with retaining outside services related to the development of our MobileAuth application, and increased non-cash compensation for engineering and development personnel.   Other income (expense)       Three months ended                       March 31,                       2022     2021     $ Change     % Change                                     Other income (expenses)                                 Interest income   $ 131     $ 2,615     $ (2,484 )     -95 % Interest expense     -       (18,000 )     18,000       -100 % Other income (expense)   $ 131     $ (15,385 )   $ 15,516       -101 %   Other income (expense) for the three month period ended March 31, 2022 consisted of interest income, and for the three month period ending March 31, 2021 related to interest expense from the amortization of debt discounts, net of interest income,   23     LIQUIDITY AND CAPITAL RESOURCES   Cash Flows   Operating activities overview   Net cash used for operations during the three months ended March 31, 2022 was $1.4 million. Items of note included:     ● Net positive cash flows related to accounts payable, accrued liabilities and deferred revenue of approximately $442,000.      ● Net positive cash flows related to adjustments for non-cash expenses of approximately $287,000.     ● Negative cash flows related to changes in accounts receivable and prepayments of approximately $1 million, due to working capital management.   Investing activities overview   Net cash used in investing activites during the three months ended March 31, 2022 was $545,000. This consisted of approximately $4,500 of capital expenditures and $3,000 of receipts from notes receivable and $544,000 (net of cash acquired and currency adjustment) to fund the cash portion of the purchase price for Swivel Secure.   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.   Liquidity outlook   At March 31, 2022, our total cash and cash equivalents were approximately $5,801,000, as compared to approximately $7,754,000 at December 31, 2021.  At March 31, 2022 we had working capital of approximately $10,318,000.   As discussed above, we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities, convertible preferred stock, common stock, and through factoring receivables. We currently require approximately $814,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation.  During for the first three months of 2022, we generated approximately $1,941,000 of revenue, which is below our average monthly requirements. We expect that Swivel Secure will generate positive cash flow in 2022 to further support operations. 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.   24     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 March 31, 2022. 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 March 31, 2022, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.    Changes in Internal Control Over Financial Reporting   There have been no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.   PART   II — OTHER INFORMATION   ITEM 6. Exhibits     The following exhibits are being filed or furnished with this quarterly report on Form 10-Q.   Exhibit No.   Description         2.1   Stock Purchase Agreement dated February 2, 2022, by and among BIO-key International, Inc., Alex Rocha, and Swivel Secure Europe, SA. (Previously filed as Exhibit 2.1 to the Current Report on Form 8-K of the Company dated February 2, 2022)       2.2   Amendment No. 1 to Stock Purchase Agreement by and among BIO-key International, Inc., Alex Rocha and Swivel Secure Europe, SA (Previously filed as Exhibit 2.1 to the Current Report on Form 8-K of the Company dated March 4, 2022)       10.1*   Management Services Agreement dated March 8, 2022 by and among Swivel Aman- FZCO , Swivel Secure Europe, SA, and Alex Rocha.       10.2*   Option Agreement dated March 8, 2022 by and between BIO-key International, Inc., Alex Rocha.       10.3*+   Distribution Agreement dated October 23, 2020 by and between Swivel Secure Europe, SA and Swivel Secure Limited.       10.4*+   Deed of Variation dated January 29, 2022 by and between Swivel Secure Europe, SA and Swivel Secure Limited.       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)   *  Filed herewith. +  Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Registrant has determined that such portions are (a) not material and (b) would likely cause competitive harm to the Registrant if publicly disclosed.   25     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: May 23, 2022 /s/ MICHAEL W. DEPASQUALE   Michael W. DePasquale   Chief Executive Officer         Dated: May 23, 2022 /s/ CECILIA C. WELCH   Cecilia C. Welch   Chief Financial Officer   26