BIO KEY INTERNATIONAL INC 10-Q

bkyi20230930_10q.htm     Table of Contents   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 September 30, 2023 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)   101 CRAWFORDS CORNER ROAD, SUITE 4116 , HOLMDEL , NJ 07733   (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 November 17, 2023, is 13,731,669     Table of Contents     BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES   INDEX   PART I. FINANCIAL INFORMATION       Item 1— Financial Statements:   Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022 (Unaudited) 4 Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022  (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements 9     Item 2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations. 17     Item 4—Controls and Procedures. 24     PART II. OTHER INFORMATION       Item 6—Exhibits. 25     Signatures 26     Table of Contents       PART   I -- FINANCIAL INFORMATION   BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS       September 30,     December 31,       2023     2022       (Unaudited)           ASSETS                 Cash and cash equivalents   $ 307,086     $ 2,635,522   Accounts receivable, net     2,799,218       1,522,784   Due from factor     62,572       49,500   Inventory     4,289,213       4,434,369   Prepaid expenses and other     362,250       342,706   Total current assets     7,820,339       8,984,881   Equipment and leasehold improvements, net     69,202       107,413   Capitalized contract costs, net     264,348       283,069   Deposits and other assets     -       8,712   Deferred offering costs     25,434       -   Operating lease right-of-use assets     50,465       197,355   Intangible assets, net     1,519,592       1,762,825   Total non-current assets     1,929,041       2,359,374   TOTAL ASSETS   $ 9,749,380     $ 11,344,255                     LIABILITIES                 Accounts payable   $ 1,656,107     $ 1,108,279   Accrued liabilities     1,080,032       1,009,123   Income taxes payable     162,811       -   Convertible note payable     2,331,497       2,596,203   Government loan – BBVA Bank, current portion     135,308       120,000   Deferred revenue, current     610,451       462,418   Operating lease liabilities, current portion     51,746       159,665   Total current liabilities     6,027,952       5,455,688   Deferred revenue, long term     32,354       52,134   Deferred tax liability     152,998       170,281   Government loan – BBVA Bank – net of current portion     221,625       326,767   Operating lease liabilities, net of current portion     -       37,829   Total non-current liabilities     406,977       587,011   TOTAL LIABILITIES     6,434,929       6,042,699                     Commitments and Contingencies                                       STOCKHOLDERS’ EQUITY                                   Common stock — authorized, 170,000,000 shares; issued and outstanding; 9,501,669 and 9,190,504 of $ .0001 par value at September 30, 2023 and December 31, 2022, respectively     950       919   Additional paid-in capital     122,263,106       122,028,612   Accumulated other comprehensive loss     ( 115,208 )     ( 242,602 ) Accumulated deficit     ( 118,834,397 )     ( 116,485,373 ) TOTAL STOCKHOLDERS’ EQUITY     3,314,451       5,301,556   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 9,749,380     $ 11,344,255     See accompanying notes to the condensed consolidated financial statements.   3 Table of Contents     BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022   Revenues                                 Services   $ 587,893     $ 371,956     $ 1,740,880     $ 1,202,866   License fees     950,015       918,260       4,664,341       3,540,592   Hardware     279,200       83,333       424,583       518,377   Total revenues     1,817,108       1,373,549       6,829,804       5,261,835   Costs and other expenses                                 Cost of services     125,039       162,632       639,996       554,222   Cost of license fees     203,891       173,310       1,022,919       604,677   Cost of hardware     147,674       57,841       240,074       296,278   Total costs and other expenses     476,604       393,783       1,902,989       1,455,177   Gross profit     1,340,504       979,766       4,926,815       3,806,658                                     Operating Expenses                                 Selling, general and administrative     1,547,376       2,510,706       5,422,272       6,315,277   Research, development and engineering     558,686       829,506       1,807,026       2,418,855   Total Operating Expenses     2,106,062       3,340,212       7,229,298       8,734,132   Operating loss     ( 765,558 )     ( 2,360,446 )     ( 2,302,483 )     ( 4,927,474 ) Other income (expense)                                 Interest income     5,917       8       5,944       216   Loss on foreign currency transactions     -       -       ( 15,000 )     -   Investment-debt security reserve     -       ( 40,000 )     -       ( 190,000 ) Change in fair value of convertible note     167,283       -       264,706       -   Interest expense     ( 45,655 )     ( 2,071 )     ( 159,379 )     ( 3,611 ) Total other income (expense), net     127,545       ( 42,063 )     96,271       ( 193,395 )                                   Loss before provision for income tax     ( 638,013 )     ( 2,402,509 )     ( 2,206,212 )     ( 5,120,869 )                                   Provision for (income tax) tax benefit     189       -       ( 142,811 )     -                                     Net loss   $ ( 637,824 )   $ ( 2,402,509 )   $ ( 2,349,023 )   $ ( 5,120,869 )                                   Comprehensive loss:                                 Net loss   $ ( 637,824 )   $ ( 2,402,509 )   $ ( 2,349,023 )   $ ( 5,120,869 ) Other comprehensive income (loss) – Foreign currency translation adjustment     35,364       ( 119,269 )     127,394       ( 229,350 ) Comprehensive loss   $ ( 602,460 )   $ ( 2,521,778 )   $ ( 2,221,629 )   $ ( 5,350,219 )                                   Basic and Diluted Loss per Common Share   $ ( 0.07 )   $ ( 0.29 )   $ ( 0.26 )   $ ( 0.64 )                                   Weighted Average Common Shares Outstanding:                                 Basic and diluted     9,081,873       8,148,848       9,042,319       8,054,207     See accompanying notes to the condensed consolidated financial statements.    4 Table of Contents     BIO-KEY INTERNATIONAL,   INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (Unaudited)                               Accumulated                                       Additional     Other                       Common Stock     Paid-in     Comprehensive     Accumulated                     Amount                 Deficit     Total   Balance as of January 1, 2023     9,190,504     $ 919     $ 122,028,612     $ ( 242,602 )   $ ( 116,485,373 )   $ 5,301,556   Issuance of common stock for directors’ fees     15,388       1       12,001       -       -       12,002   Issuance of common stock to employees     40,000       4       -       -       -       4   Restricted stock forfeited     ( 19,834 )     ( 2 )     ( 3,103 )     -       -       ( 3,105 ) Foreign currency translation adjustment                         72,146       -       72,146   Share-based compensation     -       -       62,474       -       -       62,474   Net loss     -       -       -       -       ( 288,322 )     ( 288,322 ) Balance as of March 31, 2023     9,226,058     $ 922     $ 122,099,984     $ ( 170,456 )   $ ( 116,773,695 )   $ 5,156,755   Issuance of common stock for directors’ fees     23,150       2       16,000       -       -       16,002   Issuance of restricted common stock to employees           -       -       -       -       -   Restricted stock forfeited     ( 14,375 )     ( 1 )     1       -       -       -   Issuance of common stock for Employee stock purchase plan     28,020       3       13,931       -       -       13,934   Share based compensation for employee stock plan     -       -       3,563       -       -       3,563   Foreign currency translation adjustment     -       -       -       19,884       -       19,884   Share-based compensation     -       -       57,831       -       -       57,831   Net loss     -       -       -       -       ( 1,422,878 )     ( 1,422,878 ) Balance as of June 30, 2023     9,262,853     $ 926     $ 122,191,310     $ ( 150,572 )   $ ( 118,196,573 )   $ 3,845,091   Issuance of common stock for directors’ fees     16,874       2       11,000       -       -       11,002   Restricted stock forfeited     ( 33,333 )     ( 3 )     -       -       -       ( 3 ) Issuance of restricted common stock to employees and directors     255,275       25       ( 25 )     -       -       -   Share based compensation for employee stock plan     -       -       10,398       -       -       10,398   Foreign currency translation adjustment     -       -       -       35,364       -       35,364   Share-based compensation     -       -       50,423       -       -       50,423   Net loss     -       -       -       -       ( 637,824 )     ( 637,824 ) Balance as of September 30, 2023     9,501,669     $ 950     $ 122,263,106     $ ( 115,208 )   $ ( 118,834,397 )   $ 3,314,451     See accompanying notes to the condensed consolidated financial statements.    5 Table of Contents   BIO-KEY INTERNATIONAL,   INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (Unaudited)                               Accumulated                                       Additional     Other                       Common Stock     Paid-in     Comprehensive     Accumulated                     Amount                 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   Issuance of common stock for directors’ fees     9,117       1       18,005       -       -       18,006   Issuance of restricted common stock to employees     1,250       -       -       -       -       -   Restricted stock forfeited     ( 1,250 )     -       -       -       -       -   Issuance of common stock for Employee stock purchase plan     26,006       2       39,123       -       -       39,125   Share based compensation for employee stock plan     -       -       8,314       -       -       8,314   Foreign currency translation adjustment     -       -       -       ( 165,883 )     -       ( 165,883 ) Share-based compensation     -       -       57,379       -       -       57,379   Net loss     -       -       -       -       ( 1,718,957 )     ( 1,718,957 ) Balance as of June 30, 2022     8,441,574     $ 844     $ 121,022,606     $ ( 110,081 )   $ ( 107,293,830 )   $ 13,619,539   Issuance of common stock for directors’ fees     8,547       1       18,008       -       -       18,009   Issuance of restricted common stock to employees     2,500       -       -       -       -       -   Foreign currency translation adjustment     -       -       -       ( 119,269 )     -       ( 119,269 ) Share-based compensation     -       -       82,738       -       -       82,738   Net loss     -       -       -       -       ( 2,402,509 )     ( 2,402,509 ) Balance as of September 30, 2022     8,452,621     $ 845     $ 121,123,352     $ ( 229,350 )   $ ( 109,696,339 )   $ 11,198,508     See accompanying notes to the condensed consolidated financial statements.   6 Table of Contents     BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)       Nine Months Ended September 30,       2023     2022                     CASH FLOW FROM OPERATING ACTIVITIES:                 Net loss   $ ( 2,349,023 )   $ ( 5,120,869 ) Adjustments to reconcile net loss to net cash used for operating activities:                 Depreciation     38,213       33,813   Amortization of intangible assets     217,978       216,806   Amortization of capitalized contract costs     126,057       80,019   Operating leases right-of-use assets     146,890       87,903   Reserve for Investment – debt security     -       190,000   Allowance for note receivable           40,000   Share and warrant-based compensation for employees and consultants     163,584       236,108   Stock based directors’ fees     39,006       58,035   Change in fair value of convertible note     ( 264,706 )     -   Deferred income tax benefit     ( 20,000 )     -   Bad debts     150,000       130,111   Change in assets and liabilities:                 Accounts receivable     ( 1,334,989 )     ( 264,635 ) Due from factor     ( 13,072 )     -   Capitalized contract costs     ( 107,336 )     ( 120,968 ) Inventory     145,156       47,993   Resalable software license rights     -       7,466   Prepaid expenses and other     ( 51,831 )     ( 120,977 ) Accounts payable     488,416       239,227   Accrued liabilities     327,131       ( 6,882 ) Income taxes payable     62,811       -   Deferred revenue     128,253       43,351   Operating lease liabilities     ( 154,460 )     ( 104,904 ) Net cash used for operating activities     ( 2,261,922 )     ( 4,328,403 ) CASH FLOWS FROM INVESTING ACTIVITIES:                 Purchase of Swivel Secure, net of cash acquired of $ 729,905     -       ( 543,578 ) Receipt of cash from note receivable     -       9,000   Capital expenditures     -       ( 31,066 ) Net cash used for investing activities     -       ( 565,644 ) CASH FLOW FROM FINANCING ACTIVITIES:                 Deferred offering costs     ( 25,434 )     -   Receipt of cash from Employee stock purchase plan     13,934       39,125   Repayment of government loan     ( 113,885 )     -   Net cash provided by (used in) financing activities     ( 125,385 )     39,125                     Effect of exchange rate changes     58,871       ( 124,507 )                   NET DECREASE IN CASH AND CASH EQUIVALENTS     ( 2,328,436 )     ( 4,979,429 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     2,635,522       7,754,046   CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 307,086     $ 2,774,617     See accompanying notes to the condensed consolidated financial statements.    7 Table of Contents   BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION       Nine Months Ended September 30,       2023     2022                     Cash paid for:                 Interest   $ 159,379     $ 3,661                     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   Intangible assets acquired from Swivel Secure   $ -     $ 762,860   Goodwill resulting from the acquisition from Swivel Secure   $ -     $ 1,067,372   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   Operating lease right-of-use asset and liability for new lease   $ -     $ 105,893     See accompanying notes to the condensed consolidated financial statements.    8 Table of Contents   BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (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 (“GAAP”), 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. 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, 2022 was derived from the audited financial statements, but does not include all of the disclosures required by GAAP. 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, 2022 , filed with the SEC on June 1, 2023.   Foreign Currencies   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, 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 (loss).   Recently Issued Accounting Pronouncements   Effective January 1, 2023, the Company adopted 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. The adoption of ASU 2016 - 13 did not have a material effect on the consolidated financial statements of the Company.    9 Table of Contents   In August 2020, the Financial Accounting Standards Board issued ASU 2020 - 06, Debt - Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging - Contracts in Entity ’ s Own Equity (Subtopic 815 - 40 ) (“ASU 2020 - 06” ) to simplify accounting for certain financial instruments. ASU 2020 - 06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020 - 06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020 - 06 is effective for the Company on January 1, 2024 and should be applied on a full or modified retrospective basis. The Company is currently assessing the impact ASU 2020 - 06 will have on its 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.     2. GOING CONCERN   The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has suffered substantial net losses and negative cash flows from operations in recent years and is dependent on debt and equity financing to fund its operations all of which raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon the Company’s ability to increase its revenue and meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.   As of the date of this report, the Company does not have enough cash for twelve months of operations. The history of significant losses, the negative cash flow from operations, the limited cash resources on hand and the dependence by the Company on its ability to obtain additional financing to fund its operations after the current cash resources are exhausted raises substantial doubt about the Company's ability to continue as a going concern. In recent periods, the Company has reduced its marketing, research and development, and rent expenses. In addition, the Company has purchased inventory for projects in Nigeria, which have been delayed in deployment, and is currently exploring other markets and opportunities to sell or return the product to generate additional cash.     3. REVENUE FROM CONTRACTS WITH CUSTOMERS   Disaggregation of Revenue   The following table summarizes revenue from contracts with customers for the three month periods ended September 30, 2023 and September 30, 2022 :       North                             September 30,       America     Africa     EMESA*     Asia     2023                                             Services   $ 294,581     $ 26,009     $ 267,303     $ -     $ 587,893   License fees     426,059       -       523,956       -       950,015   Hardware     48,057       -       231,143       -       279,200   Total Revenues   $ 768,697     $ 26,009     $ 1,022,402     $ -     $ 1,817,108         North                             September 30,       America     Africa     EMESA*     Asia     2022                                             Services   $ 280,192     $ 22,677     $ 69,087     $ -     $ 371,956   License fees     468,090       -       450,170       -       918,260   Hardware     48,226       13,800       11,412       9,895       83,333   Total Revenues   $ 796,508     $ 36,477     $ 530,669     $ 9,895     $ 1,373,549     10 Table of Contents   The following table summarizes revenue from contracts with customers for the  nine month periods ended September 30, 2023 and September 30, 2022 :       North                             September 30,       America     Africa     EMESA*     Asia     2023                                             Services   $ 840,045     $ 75,806     $ 812,654     $ 12,375     $ 1,740,880   License fees     1,614,971       552,630       2,426,090       70,650       4,664,341   Hardware     134,390       -       278,293       11,900       424,583   Total Revenues   $ 2,589,406     $ 628,436     $ 3,517,037     $ 94,925     $ 6,829,804         North                             September 30,       America     Africa     EMESA*     Asia     2022                                             Services   $ 936,910     $ 60,629     $ 205,274     $ 53     $ 1,202,866   License fees     1,436,704       517,161       1,507,051       79,676       3,540,592   Hardware     323,338       25,833       18,342       150,864       518,377   Total Revenues   $ 2,696,952     $ 603,623     $ 1,730,667     $ 230,593     $ 5,261,835     *EMESA – Europe, Middle East, South America   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 September 30, 2023 and December 31, 2022 , amounts in deferred revenue were approximately $ 642,000 and $ 515,000 , respectively. Revenue recognized during the three and nine -months ended September 30, 2023  from amounts included in deferred revenue at the beginning of the period was approximately $ 67,000 and $ 402,000 , respectively. Revenue recognized during the three and nine -months ended September 30, 2022 from amounts included in deferred revenue at the beginning of the period was approximately $ 62,000 and $ 448,000 , respectively. The Company did not recognize any revenue from performance obligations satisfied in prior periods.     4. ACCOUNTS RECEIVABLE   Accounts receivable are carried at original amount less an estimate made for credit losses based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions and other relevant factors, including specific reserves for certain accounts. Accounts receivable are written off when deemed uncollectible.   Accounts receivable at September 30, 2023 and December 31, 2022 consisted of the following:        September 30,     December 31,       2023     2022                     Accounts receivable   $ 3,423,003     $ 2,096,569   Allowance for credit losses     ( 623,785 )     ( 573,785 ) Accounts receivable, net of allowances for credit losses   $ 2,799,218     $ 1,522,784     Bad debt expenses are recorded in selling, general, and administrative expense.   11 Table of Contents     5. SHARE BASED COMPENSATION   The following table presents share-based compensation expenses included in the Company’s unaudited condensed interim consolidated statements of operations:       Three Months Ended September 30,       2023     2022                     Selling, general and administrative   $ 56,414     $ 66,152   Research, development and engineering     15,406       17,547       $ 71,820     $ 83,699           Nine Months Ended September 30,       2023     2022                     Selling, general and administrative   $ 171,833     $ 158,578   Research, development and engineering     48,758       34,818       $ 220,591     $ 193,396       6. INVENTORY   Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow moving goods, and for other impairment of value based upon assumptions of future demand and market conditions. The $ 400,000 reserve on inventory is due to slow moving inventory purchased for projects in Nigeria. The Company is exploring other markets and opportunities to sell or return the product. Inventory is comprised of the following as of:       September 30,     December 31,       2023     2022                     Finished goods   $ 4,619,487     $ 4,764,643   Fabricated assemblies     69,726       69,726   Reserve on finished goods     ( 400,000 )     ( 400,000 ) Total inventory   $ 4,289,213     $ 4,434,369       7. COMMITMENTS AND CONTINGENCIES   Distribution Agreement   Swivel Secure has a distribution agreement with Swivel Secure Limited (“SSL”). Terms of the agreement include the following:   1. The initial term of the agreement ends on January 31, 2027 and will be automatically extended for additional one -year terms thereafter unless either party provides written notice to the other party not later than 30 days before the end of the term that it does not wish to extend the term.   2. SSL appoints Swivel Secure as the exclusive distributor of SSL’s products, to market, sell and distribute in the EMEA (Europe, Middle East and Africa), excluding the United Kingdom and Republic of Ireland, for a defined discount on the sale price.   3. Swivel Secure is expected to generate a certain minimum level of orders of SSL products each year during the term of the agreement. If Swivel Secure fails to meet such minimum level of orders in any year, the exclusive distribution rights will terminate and Swivel Secure will serve as a non-exclusive distributer of SSL Products.   The Company expects the revenue targets to continue to be met based on historical performance and increasing distribution by Swivel Secure.   Litigation   From time to time, the Company may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, 2023 , the Company was not a party to any pending lawsuits.   12 Table of Contents     8. LEASES   The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong-Kong with lease termination dates in 2023 and 2024. On August 11, 2023, the Company signed a new one -year lease starting September 1, 2023 for office space in New Jersey. The property leased in China is paid monthly as used, without a formal agreement. The following tables present the components of lease expense and supplemental balance sheet information related to the operating leases were:         3 Months ended     3 Months ended       September 30,     September 30,       2023     2022                     Lease cost                 Total lease cost     $ 34,145       $ 63,973         9 Months ended     9 Months ended       September 30,     September 30,       2023     2022                     Lease cost                 Total lease cost   $ 145,828     $ 163,401         September 30,     December 31,   Balance sheet information   2023     2022   Operating right-of-use assets   $ 50,465     $ 197,355                     Operating lease liabilities, current portion   $ 51,746     $ 159,665   Operating lease liabilities, non-current portion     -       37,829   Total operating lease liabilities   $ 51,746     $ 197,494                     Weighted average remaining lease term (in years) – operating leases     0.93       0.96   Weighted average discount rate – operating leases     5.50 %     5.50 %                                     Cash paid for amounts included in the measurement of operating lease liabilities for the nine months ended September 30, 2023 and 2022:   $ 197,946     $ 144,985     Maturities of operating lease liabilities were as follows as of September 30, 2023 :   2023 (3 months remaining)   $ 14,553   2024     38,808   Total future lease payments   $ 53,361   Less: imputed interest     ( 1,615 ) Total   $ 51,746       9. CONVERTIBLE NOTE PAYABLE   Securities Purchase Agreement dated December 22, 2022   On December 22, 2022, the Company entered into and closed a securities purchase agreement (the “Purchase Agreement”) and issued a $ 2,200,000 principal amount senior secured promissory note (the “Note”). At closing, a total of $ 2,002,000 was funded, with the proceeds to be used for general working capital.   The principal amount of the Note was due six months following the date of issuance, subject to one six -month extension by the Company. The Company elected to extend the due date to December 22, 2023. Interest under the Note accrued at a rate of 10 % per annum through month six and accrues at a rate of 12 % per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of the Company’s assets and properties can be prepaid in whole or in part without penalty at any time.   In connection with the issuance of the Note, the Company issued to the investor 700,000 shares of Common Stock (the “Commitment Shares”) valued at $ 1.00 per share and a warrant (the “Warrant”) to purchase 200,000 shares of common stock (the “Warrant Shares”) at an exercise price of $ 3.00 per share, exercisable commencing on the date of issuance with a term of five years.    13 Table of Contents   Upon issuance, the Note was not convertible into common stock or any other securities of the Company. Only after a date that is six ( 6 ) months following the issuance date of the Note and upon the occurrence of any events of default (as defined) and expiration of any applicable cure periods, all amounts due under the Note will immediately and automatically become due and payable in full, interest will accrue at the higher of 18 % per annum or the maximum amount permitted by applicable law, the outstanding principal amount due under the Note will be increased by 30 %, and the Investor will have the right to convert all amounts due under the Note into shares of common stock (the “Conversion Shares”) at a conversion price equal to the 10 day volume weighted average sales price of the Company’s common stock on the date of conversion, subject to the Share Cap described in the paragraph below.   The aggregate number of shares of common stock issuable in the forgoing transaction consisting of the Commitment Shares, the Warrant Shares, and the Conversion Shares are capped at 1,684,576 which is 19.9 % of the Company’s issued and outstanding shares of common stock on December 22, 2022, the date the definitive transaction documents were executed (the “Share Cap”).   The Company elected the fair value measurement option for the Note as the Note had embedded derivatives that required bifurcation and recorded the entire hybrid financing instrument at fair value under the guidance of ASC 825, Financial Instruments. As a result, the Note was recorded at fair value upon issuance and is subsequently remeasured at each reporting date until settled or converted. The Company reports interest expense, including accrued interest, related to the Note under the fair value option, separately from within the change in fair value of the Note in the accompanying consolidated statement of operations. See Note 13.   As of September 30, 2023 and December 31, 2022 , the Note with principal balance of $ 2,200,000 , at fair value, was recorded at $ 2,331,497  and $ 2,596,203 , respectively. See note 16.     10. EARNINGS (LOSS) PER SHARE - COMMON STOCK (“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     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022                                     Stock options     166,234       203,257       166,234       203,257   Warrants     4,864,150       4,672,025       4,872,025       4,672,025   Total     5,030,384       4,875,282       5,038,259       4,875,282       11. STOCKHOLDERS’ EQUITY   Issuances of Common Stock   During the nine -month periods ended September 30, 2023 , there have not been any shares of common stock issued to anyone outside the Company.   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 September 30, 2023 , 28,020 shares were issued to employees which resulted in a $ 3,563 non-cash compensation expense for the Company. On September 30, 2022 , 26,006 shares were issued to employees which resulted in a $ 8,314 non-cash compensation expense for the Company.   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   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. Nonvested stock is expensed ratably over the term of the restriction period.   During the nine -month periods ended September 30, 2023 and 2022 , the Company issued 295,275 and 275,000 shares of restricted common stock, respectively, to certain employees and directors. 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 $ 170,974 and $ 592,075 , respectively.   14 Table of Contents   During the nine -month periods ended September 30, 2023 and 2022 , 67,542 and 1,250 shares of restricted common stock were forfeited, respectively.   Restricted stock compensation for the three -month periods ended September 30, 2023 and 2022 , was $ 50,422  and $ 65,836 , respectively.   Restricted stock compensation for the nine -month periods ended September 30, 2023 and 2022 , was $ 164,259 and $ 156,880 , respectively.   Issuances to Directors   During the three and nine -month periods ended September 30, 2023 , the Company issued 16,874 and 55,4128 shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 11,002  and $ 39,006 , respectively.    During the three and nine -month periods ended September 30, 2022 , the Company issued 8,547 and 27,046 shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 18,009 and $ 58,035 , respectively.    Employees ’ exercise options   During the three and nine -month periods ended September 30, 2023 and 2022 , no employee stock options were exercised.   3. Warrants   There were no warrants issued during the three and nine -month periods ended September 30, 2023 and 2022 .  Subsequently, warrants were issued October 31, 2023 as part of the units' issue in the public offering.     12. 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 government loan payable approximates fair value as the interest rate related to the financial instruments approximated market.     13. FAIR VALUE MEASUREMENT OF CONVERTIBLE NOTE PAYABLE   Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three -tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:   Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active or inputs which are observable either directly or indirectly for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).   The following tables summarize the Note measured at fair value at September 30, 2023 and December 31, 2022 :   September 30, 2023   Total     Level 1     Level 2     Level 3                                     Convertible note at fair value   $ 2,331,497     $ -     $ -     $ 2,331,497     December 31, 2022   Total     Level 1     Level 2     Level 3                                     Convertible note at fair value   $ 2,596,203     $ -     $ -     $ 2,596,203     15 Table of Contents   The Company estimated the fair value of the convertible note using a probability-weighted discounted cash flow model with the following assumptions and significant terms of the Note at both September 30, 2023 and December 31, 2022 :   1. Face amount - $ 2,200,000     2. Nominal interest rate – 14.03 % at September 30, 2023  and 10 % at  December 31, 2022     3. Default interest rate –  18 %     4. Increase in principal upon a default –  30 %     5. Present value discount rate –  14.03 % at September 30, 2023 , and 15.18 % at December 31, 2022     6. Likelihood of default – estimated to be between 50 % at the extended maturity date   The following table shows the changes in fair value measurements for the convertible note using significant unobservable inputs (Level 3 ) during the three months ended September 30, 2023 :   Beginning balance   $ 2,596,203   Purchases and issuances     -   Change in fair value for the three months ended March 31, 2023     ( 141,991 ) Balance at March 31, 2023   $ 2,454,212   Change in fair value for the three months ended June 30, 2023     44,568   Balance at June 30, 2023   $ 2,498,780   Change in fair value for the three months ended September 30, 2023     ( 167,283 ) Ending balance at September 30, 2023   $ 2,331,497       14. MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE   During each of the three month periods ended September 30, 2023 , and 2022 , two customers accounted for 33 % and one customer accounted for 16 % of the revenue, respectively. For the nine month periods ended September 30, 2023 , and 2022 , two customers accounted for 23 % and one customer accounted for 11 % of revenue, respectively.   Three customers accounted for 77 % of current accounts receivable at September 30, 2023 . At December 31, 2022 , one customer accounted for 35 % of current accounts receivable.     15. INCOME TAXES   United States, Hong Kong and Nigeria The Company recorded no income tax expense for the  three and nine months ended September 30, 2023 and 2022 because the estimated annual effective tax rate was zero. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.   As of September 30, 2023  and December 31, 2022 , the Company provided a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.   Spain The provision for income taxes amounted to $ 142,811 .  Current income taxes totaled $ 162,811 and deferred tax benefit totaled $ 20,000 .  The deferred tax liability presented on the condensed consolidated balance sheet relates to intangible assets from the acquisition of Swivel Secure.     16 SUBSEQUENT EVENTS   On October 30, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors in connection with a public offering of the Company’s securities (the “Offering”). At the closing of Offering on October 31, 2023, the Company issued and sold 21,430,000 units (the “Units”), consisting of 4,230,000 share of common stock, par value $ 0.0001 per share (the “Common Stock”), 17,200,000 pre-funded warrants to purchase shares of Common Stock (the “Pre-Funded Warrants”), and 21,430,000 warrants to purchase share of Common Stock (the “Common Warrants” and, together with the Pre-Funded Warrants, the “Warrants”). Each Unit was sold at a public offering price of $ 0.175 . The Common Warrants are immediately exercisable at an exercise price of $ 0.175 per share and expire on the five -year anniversary of the date of issuance. The Pre-Funded Warrants are immediately exercisable at an exercise price of $ 0.001 per share. The Offering was made pursuant to the Company’s Registration Statement on Form S- 1. The net proceeds from the offering were approximately $ 3.3 million, after deducting the placement agent fees and offering expenses. The Company used $ 1,400,000 of the net proceeds to partially repay outstanding indebtedness due under the Note and the balance is being used for general corporate and working capital purposes.   The Company is not currently in compliance with the continued listing requirement of the Nasdaq Stock Market to maintain a minimum bid price of $1.00 per share.  If the Company does not regain compliance by January 8, 2024, it will be subject to immediate delisting from Nasdaq. On November 14, 2023, the Company filed a Preliminary Proxy Statement with the SEC to solicit stockholder approval of a reverse stock split in an effort to regain compliance with the minimum bid requirement.  The Preliminary Proxy Statement also seeks stockholder approval of the BIO-key International, Inc. 2023 Stock Incentive Plan.   The Company has reviewed subsequent events through the date of this filing.    16 Table of Contents     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 to satisfy debt repayment obligations and working capital needs; our ability to continue as a going concern; 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 convert sales opportunities to customer contracts; our ability to expand into Asia, Africa and other foreign markets; our ability to integrate the operations and personnel of Swivel Secure into our business; fluctuations in foreign currency and exchange rates; 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, 2022 and other filings with the Securities and Exchange Commission (“SEC”). These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant, presently or in the future. Except as required by law, we undertake no obligation to update 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, 2022.   Overview   BIO-key International, Inc. (the “Company,” “BIO-key,” “we,” or “us”) is a leading identity and access management, or 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, employee, customer, student and citizen 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, AuthControl Sentry, AuthControl Enterprise, AuthControl MSP, WEB-key® biometric civil and large-scale ID infrastructure, and accessory hardware to provide a complete solution for our customers.   Millions of people use BIO-key multi-factor-authentication, or MFA, solutions every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from all of their devices. We go beyond passwordless to offer phone-less and token-less authentication methods. This critical differentiator is particularly effective for retail, call center, manufacturing, shop-floor, and healthcare environments which utilize roving workers and shared workstations. Unlike most digital identity solutions, BIO-key also plays a role in securing in-person identity. For example, a banking customer has enrolled over 22 million of its customers’ biometrics with BIO-key as part of their know your customer, or KYC process, and then uses BIO-key fingerprint technology each time their customers access bank services to ensure positive identification before transacting with them.   BIO-key PortalGuard and hosted PortalGuard IDaaS authentication platforms enable our customers to assure that only the right people can access the right systems by utilizing our world-class biometric capabilities, among 17 other available authentication methods. PortalGuard goes beyond traditional MFA solutions by allowing roving users to biometrically authenticate at any workstation without using their phones or tokens which addresses sizeable security gaps, including eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.    Our customers use PortalGuard to manage and secure digital systems 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. By using PortalGuard, our customers can securely collaborate with their supply chain and partners, and provide their customers with flexible, resilient user experiences online or in-person.   In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure Europe, a Madrid, Spain based provider of IAM solutions. Swivel Secure Europe is the exclusive distributer of the AuthControl Sentry, AuthControl Enterprise, and AuthControl MSP product line in Europe, Africa and the Middle East, or EMEA, excluding the United Kingdom and Ireland. These solutions include PINsafe, a patented one-time-code extraction technology, helping enterprises manage the increasing data security risks posed by cloud services and “bring your own device” policies.   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.    We sell our branded USB fingerprint 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. Our fingerprint biometric platform is certified by NIST and unique among fingerprint platforms in that it supports mixing and matching of different manufactures’ fingerprint scanners in a deployment. This provides our customers with the flexibility to select the right scanner for their specific use case, without mandating the use of a particular scanner.     17 Table of Contents     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.   Strategic Outlook   Historically, our largest market has been authentication within highly regulated industries such as government, financial services, and healthcare. With the adoption of MFA as a cybersecurity requirement, nearly all enterprises are beginning to adopt MFA for their user bases. Our ability to add value to or replace the first-generation MFA solutions deployed by these enterprises with our phone-less and token-less biometrics sets us apart from a crowded field of phone- and token-based MFA solutions. We believe that as enterprises experience the lifecycle costs associated with managing tokens and passwords, they will have an economic incentivize to consider adding BIO-key PortalGuard to their IAM solution. PortalGuard will allow them to continue to use their existing FIDO devices, while selectively augmenting their authentication options with tokenless and phoneless biometric choices.   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.Through Swivel Secure Europe, we also expect to grow our business in EMEA.   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.   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, 2022.  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.   18 Table of Contents   RESULTS OF OPERATIONS   THREE MONTHS ENDED September 30, 2023 AS COMPARED TO September 30, 2022   Consolidated Results of Operations   - Percent Trend       Three Months Ended September 30,       2023     2022   Revenues                 Services     32 %     27 % License fees     52 %     67 % Hardware     16 %     6 % Total Revenues     100 %     100 % Costs and other expenses                 Cost of services     7 %     12 % Cost of license fees     11 %     13 % Cost of hardware     8 %     4 % Total Cost of Goods Sold     26 %     29 % Gross profit     74 %     71 %                   Operating expenses                 Selling, general and administrative     85 %     183 % Research, development and engineering     31 %     60 % Total Operating Expenses     116 %     243 % Operating loss     -42 %     -172 %                   Other expense     7 %     -3 % Loss before provision for income tax     -35 %     -175 % Provision for income tax     0 %     0 % Net loss     -35 %     -175 %   19 Table of Contents   Revenues and cost of goods sold       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Revenues                                 Service   $ 587,893     $ 371,956     $ 215,937       58 % License     950,015       918,260       31,755       3 % Hardware     279,200       83,333       195,867       235 % Total Revenue   $ 1,817,108     $ 1,373,549     $ 443,559       32 %       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change   Cost of Goods Sold                                 Service   $ 125,039     $ 162,632     $ (37,593 )     -23 % License     203,891       173,310       30,581       18 % Hardware     147,674       57,841       89,833       155 % Total COGS   $ 476,604     $ 393,783     $ 82,821       21 %   Revenues   For the three months ended September 30, 2023, and 2022, service revenues included approximately $297,000 and $304,000, respectively, of recurring maintenance and support revenue, and approximately $291,000 and $68,000 respectively, of non-recurring custom services revenue.  Recurring service revenue decreased $7,000 or 2% in 2023 which was due to the timing of certain quarter end renewals. Non-recurring custom services increased 326% due to additional new customer customizations and upgrades. As our customer base continues to grow, we expect the service revenue to increase in future periods.   For the three months ended September 30, 2023, license revenue increased $31,755 or 3% to $950,015 from $918,260 in the corresponding period in 2022. We increased both the variation and number of customers, including additional revenue from Swivel Secure customers and customers in the higher education market.    For the three months ended  September 30, 2023, hardware sales increased 235% to $279,200 from $83,333 in the corresponding period in  2022. The increase was due largely to add-on orders from an existing customer in  2023, compared to reduced new hardware deployments in  2022 . Costs of goods sold   For the three months ended September 30, 2023, cost of service decreased approximately $38,000 or 23% to $125,039 from $162,632 in the three months ended September 30, 2022, due to reduced costs to support the PortalGuard and new Swivel Secure deployments. For the three months ended September 30, 2023, license fees increased to $203,891 from $173,310 in the three months ended September 30, 2022, due largely to an increase in license fees for third-party software included in our Swivel Secure offerings. For the three months ended September 30, 2023, hardware costs increased to $147,674 from $57,841 in the three months ended September 30, 2022, related to costs associated with increased hardware revenue.   Selling, general and administrative       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Selling, general and administrative   $ 1,547,376     $ 2,510,706     $ (963,330 )     -38 %   Selling, general and administrative expenses for the three months ended September 30, 2023, decreased 38% from the corresponding period in 2022. The decreases included reductions in administration, sales and marketing personnel costs and marketing shows and expenses.   20 Table of Contents   Research, development and engineering       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Research, development, and engineering   $ 558,686     $ 829,506     $ (270,820 )     -33 %   For the three months ended September 30, 2023, research, development, and engineering costs decreased 33% to $558,686 as compared to $829,506 in the corresponding period in 2022. The decrease consisted primarily of reductions in personnel costs and reductions in outside services related to the development of our MobileAuth application which we completed in 2022.   Other income (expense)       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Interest income   $ 5,917     $ 8     $ 5,909       73863 % Investment-debt security reserve     -       (40,000 )     40,000       100 % Change in fair value of convertible note     167,283       -       167,283       100 % Interest expense     (45,655 )     (2,071 )     (43,584 )     -2104 % Other income (expense)   $ 127,545     $ (42,063 )   $ 169,608       403 %     Other income (expense) for the three months ended  September 30, 2023 consisted of interest income of $5,917, interest expense of $45,655 on the secured note payable and the government loan through the BBVA bank net of interest and change in fair value of $167,283 on the convertible note payable. Other income(expense) for the three months ended  September 30, 2022 consisted of interest income of $8, a reserve on the investment-debt security as adjustment for collections in the amount of $40,000, and interest expense of $2,071 on the government loan through the BBVA bank.       Three Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Provision for income tax   $ 189     $ -     $ 189       -100 %   The provision for income taxes for the three months ended September 30, 2023 consisted of current income taxes of $6,811 for our Swivel Secure subsidiary, and deferred tax benefit of $7,000 relating to intangible assets from the acquisition of Swivel Secure.   nine months ended September 30, 2023 AS COMPARED TO September 30, 2022   Consolidated Results of Operations  - Percent Trend       Nine Months Ended September 30,       2023     2022   Revenues                 Services     25 %     23 % License fees     68 %     67 % Hardware     7 %     10 % Total Revenues     100 %     100 % Costs and other expenses                 Cost of services     9 %     11 % Cost of license fees     15 %     11 % Cost of hardware     4 %     6 % Total Cost of Goods Sold     28 %     28 % Gross profit     72 %     72 %                   Operating expenses                 Selling, general and administrative     79 %     120 % Research, development and engineering     26 %     46 % Total Operating Expenses     105 %     166 % Operating loss     -33 %     -94 %                   Other expense     1 %     -4 % Loss before provision for income tax     -32 %     -97 % Provision for income tax     -2 %     0 %                   Net loss     -34 %     -97 %   21 Table of Contents   Revenues and cost of goods sold       Nine Months Ended                       September 30,                       2023     2022     $ Change     % Change   Revenues                                 Service   $ 1,740,880     $ 1,202,866     $ 538,014       45 % License     4,664,341       3,540,592       1,123,749       32 % Hardware     424,583       518,377       (93,794 )     -18 % Total Revenue   $ 6,829,804     $ 5,261,835     $ 1,567,969       30 %                                   Cost of Goods Sold                                 Service     639,996       554,222       85,774       15 % License     1,022,919       604,677       418,242       69 % Hardware     240,074       296,278       (56,204 )     -19 % Total COGS   $ 1,902,989     $ 1,455,177     $ 447,812       31 %   Revenues   For the nine months ended September 30, 2023, and 2022, service revenues included approximately $899,000 and $944,000, respectively, of recurring maintenance and support revenue, and approximately $842,000 and $259,000, respectively, of non-recurring custom services revenue.  Recurring service revenue decreased 5% in the first nine months of 2023 due to the timing of certain quarter end renewals. Non-recurring custom services revenue increased 225% in the first nine months of 2023 due largely to the additional service revenue from Swivel Secure customers during the entire period in 2023. As our customer base continues to grow, we expect the service revenue to increase in future periods.   For the nine months ended September 30, 2023, license revenue increased 32% to $4,664,341 from $3,540,592 in the corresponding period in 2022. We increased both the variation and number of customers, including additional revenue from the Swivel Secure customers, and customers in the higher education market.   Hardware sales decreased $93,794 during the nine months ended September 30, 2023, to $424,583 from $518,377 in the nine months ended September 30, 2022. The decrease was attributable largely to the absence of any new large deployments in 2023, as compared a large order for our Pocket 10 product from a new customer in 2022.   Costs of goods sold   For the nine months ended September 30, 2023, cost of service increased $85,774 or 46% from $554,222 in the nine months ended September 30, 2022, due to the increased costs to support the new Swivel Secure deployments. For the nine months ended September 30, 2023, license fees increased to $1,022,919 from $604,677 in the nine months ended September 30, 2022, due largely to an increase in revenue and third-party software for the Swivel Secure licenses. For the nine months ended September 30, 2023, hardware costs decreased to $240,074 from $296,278 during the nine months ended September 30, 2022, corresponding to decreased hardware revenue.   Selling, general and administrative       Nine Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Selling, general and administrative   $ 5,422,272     $ 6,315,277     $ (893,005 )     -14 %   Selling, general and administrative expenses for the nine months ended September 30, 2023, decreased 14% from the corresponding period in 2022. The decreases included reductions in administration, sales and marketing personnel costs and marketing shows and expenses.   Research, development and engineering       Nine Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Research, development and engineering   $ 1,807,026     $ 2,418,855     $ (611,829 )     -25 %   For the nine months ended September 30, 2023, research, development and engineering costs decreased 25% from $2,418,855 to $1,807,026. The decrease consisted primarily of reductions in personnel costs and in outside services related to the development of our MobileAuth application which was completed in 2022.   22 Table of Contents   Other income (expense)       Nine Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Interest income   $ 5,944     $ 216     $ 5,728       2652 % Loss on foreign currency transactions     (15,000 )     -       (15,000 )     -100 % Investment-debt security reserve     -       (190,000 )     190,000       100 % Change in fair value of convertible note     264,706       -       264,706       -100 % Interest expense     (159,379 )     (3,611 )     (155,768 )     -4314 % Other income (expense)   $ 96,271     $ (193,395 )   $ 289,666       150 %   Other income (expense) for the nine  month period ended September 30, 2023 consisted of interest income of $5,944, a loss on foreign currency of $15,000, a change in fair value of $264,706 on the convertible note payable, and interest expense of $159,379 on the secured note payable and the government loan through the BBVA bank. Other income (expense) for the nine months ended September 30, 2022 consisted of interest income of $216, a reserve on the investment-debt security as adjustment for collections of such security of $190,000, and interest expense of $3,611 on the government loan through the BBVA bank.   Provision for income tax       Nine Months Ended                       September 30,                       2023     2022     $ Change     % Change                                     Provision for income tax   $ (142,811 )   $ -     $ (142,811 )     -100 %   The provision for income taxes for the six months ended September 30, 2023 consisted of current income taxes of $162,811 for our Swivel Secure subsidiary, and deferred tax benefit of $20,000 relating to intangible assets from the acquisition of Swivel Secure.   LIQUIDITY AND CAPITAL RESOURCES   Cash Flows   Operating activities overview   Net cash used by operations during the nine months ended September 30, 2023 was $2,326,417. Items of note included:   ● Net positive cash flows related to adjustments for non-cash expenses of approximately $622,000.    ● Net positive cash flows related to inventory, accounts payable, accrued liabilities, income tax payable and deferred revenue of approximately $1,080,000.    ● Negative cash flows related to changes in accounts receivable, due from factor and prepaid expenses of approximately $1,730,000, due to working capital management.   Financing activities overview   Net cash used for financing during the nine months ended September 30, 2023 was $125,386 for repayment of the government loan through the BBVA bank and $25,434 for deferred offering costs. Net cash received from financing during the nine months ended September 30, 2023  was $13,934 of proceeds from sales of common stock under the employee stock purchase plan.   Investing activities overview   There were no investing activities during the nine months ended September 30, 2023.   Liquidity and Capital Resources   Since our inception, our capital needs have been met through proceeds from the sale of equity and debt securities, and revenue. We expect capital expenditures to be less than $100,000 during the next twelve months.     The following sets forth our investment sources of capital during the previous two years:   On October 30, 2023, we completed a public offering of units consisting of shares of common stock, pre-funded warrants to purchase shares of common stock, and warrants to purchase share of common stock.  Each Unit was sold at a public offering price of $0.175. resulting in net proceeds of $3.3 million, after deducting the placement agent fees and offering expenses.   In December 2022, we entered into and closed a securities purchase agreement (the “Purchase Agreement”) with AJB Capital Investments, LLC under which we issued a $2,200,000 principal amount senior secured promissory note (the “Note”). The principal amount of the Note was due six months following the date of issuance, subject to one six-month extension. We elected to extend the maturity date of the note to December 22, 2023. Interest under the Note accrued at a rate of 10% per annum, payable monthly through month six and currently accrues at the rate of 12% per annum in months seven through twelve, payable monthly. The Note is secured by a lien on substantially all of our assets and properties and can be prepaid in whole or in part without penalty at any time. We recently prepaid $1,400,000 of the principal amount due under the Note from the proceeds of the public offering. 23 Table of Contents   In March 2022, in connection with the acquisition of Swivel Secure, we assumed a €500,000 government loan that 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 maturity in April 2026. Upon closing of the acquisition, Swivel Secure had cash equal to the outstanding balance.   We entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to October 31, 2023 and may be discontinued at that time. Pursuant to the terms of the arrangement, from time to time, we sell to the Factor a minimum of $150,000 per quarter of certain of our 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 us (the “Advance Amount”), with the remaining balance, less fees, forwarded to us once the Factor collects the full accounts receivable balance from the customer. In addition, from time to time, we receive 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. We expect to continue to use this factoring arrangement periodically to assist with our general working capital requirements due to contractual requirements.     Liquidity outlook   At September 30, 2023, our total cash and cash equivalents were $307,086, as compared to $2,635,522 at December 31, 2022.  At September 30, 2023, we had working capital of approximately $1,792,000.    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 $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 2023, we generated $6,829,804 of revenue, which did not generate enough cash to fully fund our average monthly requirements. We expect that Swivel Secure will generate positive cash flow in 2023. We also have approximately $3.8 million of inventory purchased for projects in Nigeria. We are exploring other markets and opportunities to sell or return the product to generate additional cash.   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. The approximate $800,000 outstanding balance of the Note is due on December 22, 2023.  Unless we generate sufficient positive cash flow from operations or liquidation of existing inventory, we expect that we will need to obtain additional financing during the next twelve months to repay our outstanding secured note and support operations.   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.   ITEM 4.    CONTROLS AND PROCEDURES   Evaluation of 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, 2023. 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, 2023, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As reported in our 10-K for the year ended December 31, 2022, in connection with the audit of our financial statements as of and for the year ended December 31, 2022, our management identified a material weakness relating to the effectiveness of management’s review and controls over the income tax provision in our financial footnotes, such that management’s review procedures were not operating at a level of precision to prevent or detect a potential material misstatement in our consolidated financial statements. We have also identified a lack of control over our foreign subsidiaries with respect to the filing of required tax returns on a timely basis. We are continuing to assess the actions that need to be taken to remedy each of these material weaknesses. Each of the material weaknesses noted will only be deemed to have been remediated after the new controls and procedures have been in place for a sufficient period and management has concluded through appropriate testing that the controls are operating effectively. We are in the process of implementing new controls designed to remediate the aforementioned material weaknesses. These efforts have included engaging a consultant to review income tax transactions for appropriate accounting treatment and assist with the preparation of financial statements.   Changes in Internal Control Over Financial Reporting   Other than the forgoing described above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.       24 Table of Contents   ITEM 6. EXHIBITS   Exhibit 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).   25 Table of Contents   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 20, 2023   /s/ Michael W. DePasquale     Michael W. DePasquale     Chief Executive Officer     (Principal Executive Officer)       Dated: November 20, 2023   /s/ Cecilia C. Welch     Cecilia C. Welch     Chief Financial Officer     (Principal Financial Officer)     26