What changed in this filing

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Item 1. Financial Statements

2024-08-14 compared with 2024-06-14 · 183 added, 144 removed, 462 unchanged (41% of the section changed)

9 unchanged sentences

28,164 99,320

433,182 445,740

Prepaid expenses and other

7 unchanged sentences

Operating lease right-of-use assets

23,220 36,905

Intangible assets, net

12 unchanged sentences

Operating lease liabilities, current portion

23,797 37,829

Total current liabilities

14 unchanged sentences

issued and outstanding;

1,814,414 and 1,032,777 of $ .0001 par value at March 31, 2024 and December 31, 2023, respectively

1,815,618 and 1,032,777 of $ .0001 par value at June 30, 2024 and December 31, 2023, respectively

Additional paid-in capital

14 unchanged sentences

Three Months Ended

$ 213,122 $ 532,522

1,950,434 1,578,556

17,647 72,689

Six Months Ended

Total revenues

2,181,203 2,183,767

Costs and other expenses

Cost of services

138,849 154,801

Cost of license fees

148,221 620,881

Cost of hardware

12,573 44,592

Cost of hardware - reserve

Total costs and other expenses

299,643 1,320,274

1,881,560 863,493

Operating Expenses

Selling, general and administrative

1,782,973 1,931,732

Research, development and engineering

607,521 690,159

Total Operating Expenses

2,390,494 2,621,891

Operating loss

( 508,934 ) ( 1,758,398 )

Other income (expense)

1 unchanged sentence

Loss on foreign currency transactions

Loan fee amortization

Change in fair value of convertible note

Interest expense

( 1,356 ) ( 56,919 )

Total other income (expense), net

( 1,351 ) 70,076

Loss before provision for income tax

( 510,285 ) ( 1,688,322 )

Provision for (income tax) tax benefit

$ ( 510,285 ) $ ( 1,688,322 )

Comprehensive loss:

$ ( 510,285 ) $ ( 1,688,322 )

Other comprehensive income (loss) – Foreign currency translation adjustment

( 62,275 ) 72,146

Comprehensive loss

$ ( 572,560 ) $ ( 1,616,176 )

Basic and Diluted Loss per Common Share

$ ( 0.32 ) $ ( 3.51 )

Weighted Average Common Shares Outstanding:

Basic and diluted

1,615,323 480,833

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.

4 unchanged sentences

Comprehensive

Income (Loss)

Balance as of January 1, 2024

1 unchanged sentence

Issuance of common stock for directors’ fees

4,287 - 9,003 - - 9,003

Issuance of common stock to employees

Restricted stock forfeited

( 316 ) - - - - -

Exercise of warrants

777,666 78 1,322 - - 1,400

Foreign currency translation adjustment

- - ( 62,275 ) - ( 62,275 )

Share-based compensation

- - 47,790 - - 47,790

Issuance costs

- - ( 13,470 ) - - ( 13,470 )

- - - - ( 510,285 ) ( 510,285 )

Balance as of March 31, 2024

( 125,517,495

Restricted stock forfeited

Issuance of common stock for Employee stock purchase plan

Share based compensation for employee stock plan

Share-based compensation

Foreign currency translation adjustment

Balance as of June 30, 2024

( 127,184,445

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.

4 unchanged sentences

Comprehensive

Income (Loss)

Balance as of January 1, 2023

7 unchanged sentences

( 118,173,695

Issuance of common stock for directors’ fees

Restricted stock forfeited

Issuance of common stock for Employee stock purchase plan

Share based compensation for employee stock plan

Foreign currency translation adjustment

Share-based compensation

Balance as of June 30, 2023

( 120,796,573

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOW FROM OPERATING ACTIVITIES:

$ ( 510,285 ) $ ( 1,688,322 )

Adjustments to reconcile net loss to net cash used for operating activities:

23,808 13,242

Amortization of intangible assets

78,005 81,237

Change in fair value of convertible note

- ( 141,991 )

Amortization of capitalized contract costs

38,665 37,529

Reserve for inventory

Operating leases right-of-use assets

13,686 66,132

Share and warrant-based compensation for employees and consultants

47,790 59,373

Stock based directors’ fees

Deferred income tax benefit

Change in assets and liabilities:

Accounts receivable

399,749 ( 898,881 )

Due from factor

91,070 ( 33,000 )

Capitalized contract costs

( 158,005 ) ( 8,739 )

Prepaid expenses and other

( 63,513 ) 2,219

Accounts payable

( 116,012 ) 88,040

Accrued liabilities

( 104,257 ) ( 135,417 )

Income taxes payable

Deferred revenue

455,868 178,755

Operating lease liabilities

( 14,033 ) ( 67,544 )

Net cash provided by (used in) operating activities

297,084 ( 1,928,811 )

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

2 unchanged sentences

CASH FLOW FROM FINANCING ACTIVITIES:

Proceeds from Note Payable

Offering costs

Proceeds for exercise of warrants

Receipt of cash from Employee stock purchase plan

Repayment of government loan

( 41,821 ) ( 34,289 )

Net cash used in financing activities

( 53,891 ) ( 34,289 )

Effect of exchange rate changes

( 62,275 ) 49,913

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

179,049 ( 1,913,187 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

511,400 2,635,522

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 690,449 $ 722,335

All BIO-key shares issued and outstanding for all periods reflect BIO-key’s 1-for-18 reverse stock split, which was effective December 21, 2023.

4 unchanged sentences

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

Three Months Ended March 31,

Six Months Ended June 30,

Cash paid for:

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024 (Unaudited)

June 30, 2024 (Unaudited)

NATURE OF BUSINESS AND BASIS OF PRESENTATION

10 unchanged sentences

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 March 31, 2024 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, 2023 , filed with the SEC on May 31, 2024.

The balance sheet at June 30, 2024 was derived from the audited financial statements, but does not include all of the disclosures required by GAAP.

Foreign Currencies

35 unchanged sentences

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three month periods ended March 31, 2024 and March 31, 2023 :

$ 519,244 $ 1,266,553 $ 164,637 $ - $ 1,950,434

17,408 - 239 - 17,647

191,481 20,254 1,387 - 213,122

The following table summarizes revenue from contracts with customers for the three month periods ended June 30, 2024 and June 30, 2023 :

Total Revenues

$ 728,133 $ 1,286,807 $ 166,263 $ - $ 2,181,203

$ 408,530 $ 552,630 $ 546,746 $ 70,650 $ 1,578,556

24,781 - 47,008 900 72,689

263,858 23,787 239,927 4,950 532,522

Total Revenues

$ 697,169 $ 576,417 $ 833,681 $ 76,500 $ 2,183,767

The following table summarizes revenue from contracts with customers for the six month periods ended June 30, 2024 and June 30, 2023 :

Total Revenues

*EMESA – Europe, Middle East, South America

4 unchanged sentences

Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services.

At March 31, 2024 and December 31, 2023 , amounts in deferred revenue were approximately $ 899,000 and $ 443,000 , respectively.

Revenue recognized during the three months ended March 31, 2024 and March 31, 2023 from amounts included in deferred revenue at the beginning of the period was approximately $ 274,000 and $ 223,000 , respectively.

The Company did not recognize any revenue from performance obligations satisfied in prior periods.

At June 30, 2024 and December 31, 2023 , amounts in deferred revenue were approximately $ 858,000 and $ 443,000 , respectively.

Revenue recognized during the three and six -months ended June 30, 2024 from amounts included in deferred revenue at the beginning of the period was approximately $ 157,000 and $ 431000 , respectively.

Revenue recognized during the three and six -months ended June 30, 2023 from amounts included in deferred revenue at the beginning of the period was approximately $ 102,000 and $ 335,000 , respectively.

ACCOUNTS RECEIVABLE

2 unchanged sentences

Accounts receivable are written off when deemed uncollectible.

Accounts receivable at March 31, 2024 and December 31, 2023 consisted of the following:

Accounts receivable at June 30, 2024 and December 31, 2023 consisted of the following:

Accounts receivable

$ 1,607,561 $ 2,207,311

Allowance for credit losses

( 905,785 ) ( 1,005,785 )

Accounts receivable, net of allowances for credit losses

$ 701,776 $ 1,201,526

Bad debt expenses are recorded in selling, general, and administrative expense.

1 unchanged sentence

The following table presents share-based compensation expenses included in the Company’s unaudited condensed interim consolidated statements of operations:

Three Months Ended March 31,

Three Months Ended June 30,

Selling, general and administrative

$ 47,642 $ 55,453

Research, development and engineering

$ 56,793 $ 71,375

Six Months Ended June 30,

Selling, general and administrative

Research, development and engineering

Inventory is stated at the lower of cost, determined on a first in, first out basis, or realizable value.

3 unchanged sentences

The Company is exploring other markets and opportunities to sell the product.

Inventory is comprised of the following as at March 31, 2024 and December 31, 2023:

Inventory is comprised of the following as at June 30, 2024 and December 31, 2023 :

Finished goods

$ 4,367,510 $ 4,373,056

Fabricated assemblies

59,184 59,184

Reserve on finished goods

( 3,986,500 ) ( 3,986,500 )

Total inventory

$ 440,194 $ 445,740

COMMITMENTS AND CONTINGENCIES

8 unchanged sentences

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 March 31, 2024 , the Company was not a party to any pending lawsuits.

As of June 30, 2024 , the Company was not a party to any pending lawsuits.

The Company’s leases office space in New Jersey, Minnesota, New Hampshire, Madrid and Hong-Kong with lease termination dates in 2024.

5 unchanged sentences

Total lease cost

$ 14,553 $ 63,973

6 Months ended

Total lease cost

Balance sheet information

Operating right-of-use assets

$ 23,220 $ 36,905

Operating lease liabilities, current portion

$ 23,797 $ 37,829

Operating lease liabilities, non-current portion

Total operating lease liabilities

$ 23,797 $ 37,829

Weighted average remaining lease term (in years) – operating leases

Weighted average discount rate – operating leases

5.50 % 5.50 %

Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2024 and 2023:

$ 22,613 $ 69,821

Maturities of operating lease liabilities were as follows as of March 31, 2024 :

Cash paid for amounts included in the measurement of operating lease liabilities for the six months ended June 30, 2024 and 2023:

Maturities of operating lease liabilities were as follows as of June 30, 2024 :

2024 (2 months remaining)

1 unchanged sentence

imputed interest

N OTE PAYABLE

Note Purchase Agreement dated June 24, 2024

On June 24, 2024, the Company entered into and closed a note purchase agreement (the “Purchase Agreement”) which provided for the issuance of a $ 2,360,000 principal amount senior secured promissory note (the “2024 Note”).

The 2024 Note carries an original issue discount of $ 350,000 and the Company agreed to pay $ 10,000 to the Lender to cover its transaction costs, which were deducted from the proceeds of the 2024 Note resulting in a total of $ 2,000,000 being funded to the Company at closing.

The proceeds will be used for general working capital.

The principal amount of the 2024 Note is due eighteen months ( 18 ) following the date of issuance.

Interest under the 2024 Note accrues at a rate of nine percent ( 9 %) per annum.

All repayments of principal due under the 2024 Note will be subject to an exit fee of seven percent ( 7 %) of the principal amount being repaid (the “Exit Fee”).

Commencing six months after the date of issuance of the Note (the “Redemption Start Date”), Lender shall have the right to redeem up to $ 270,000 of principal amount under the 2024 Note each month which amount plus the Exit Fee will be due and payable three ( 3 ) business days after Lender’s delivery of a redemption notice to the Company.

At the end of each month following the Redemption Start Date, if the Company has not reduced the outstanding balance under the 2024 Note by at least $ 270,000 , then by the fifth ( 5th ) day of the following month, the Company must either pay to Lender the difference between $ 270,000 and the amount, if any, redeemed in such month plus the Exit Fee, or the outstanding balance due under the Note will automatically increase by one percent ( 1 %).

The 2024 Note is secured by a lien on substantially all of the Company’s assets and properties and the Company’s obligations under the Note are guaranteed by Pistol Star, Inc., a wholly owned subsidiary of the Company.

The 2024 Note can be prepaid in whole or in part without penalty at any time.

In the event that the Company receives any proceeds in connection with any fundraising or financing transaction (including any warrant exercises), it will be required to make a mandatory prepayment equal to the lesser of (i) forty percent ( 40 %) of the amount raised in such transaction and (ii) the full amount due under the 2024 Note.

The 2024 Note provides for customary events of default, including, among other things, the event of non-payment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, the bankruptcy or insolvency of the Company or of all or a substantial part of its property, and monetary judgment defaults of a specified amount.

Upon the occurrence of an Event of Default, Lender may ( i) cause interest on the outstanding balance to accrue at an interest rate equal to the lesser of twenty two ( 22 %) or the maximum rate permitted under applicable law, and (ii) accelerate all amounts due under the 2024 Note plus an amount equal to (a) fifteen percent ( 15 %) of the amount due under the 2024 Note for each default that is considered a major trigger event (as defined), and (b) five percent ( 5 %) of the amount due under the 2024 Note for each occurrence of any default that is considered a minor trigger event (as defined), in any case not to exceed twenty five percent ( 25 %).

CONVERTIBLE NOTE PAYABLE

4 unchanged sentences

Interest under the Note accrues at a rate of 10 % per annum, payable monthly through month six and 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 the Company’s assets and properties can be prepaid in whole or in part without penalty at any time.

The Note was 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 38,889 shares of Common Stock (the “Commitment Shares”) valued at $ 18.00 per share and a warrant (the “Warrant”) to purchase 11,112 shares of common stock (the “Warrant Shares”) at an exercise price of $ 54.00 per share, exercisable commencing on the date of issuance with a term of five years.

5 unchanged sentences

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 summarizes the weighted average securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive.

Years ended December 31,

Stock options

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

Six Months Ended

Stock options

1,722,695 270,672

1,731,931 281,985

STOCKHOLDERS’ EQUITY

Issuances of Common Stock

During the three -month periods ended March 31, 2024 , and 2023, there have not been any shares of common stock issued, except as noted below under Issuances to Directors, Executive Officers & Consultants

During the six -month periods ended June 30, 2024 , and 2023 , there have not been any shares of common stock issued to anyone outside the Company, except as noted below under Issuances to Directors, Executive Officers & Consultants

On June 18, 2021, the stockholders approved the Employee Stock Purchase Plan.

Under the terms of this plan, 43,334 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 June 28, 2024, 1,390 shares were issued to employees which resulted in a $ 456 non-cash compensation expense for the Company.

On June 30, 2023, 1,557 shares were issued to employees which resulted in a $ 3,563 non-cash compensation expense for the Company.

Issuances of Restricted Stock

2 unchanged sentences

Nonvested stock is expensed ratably over the term of the restriction period.

During the three -month periods ended March 31, 2024 and 2023 , the Company issued 0 and 2,222 shares of restricted common stock, respectively, to certain employees.

During the six -month periods ended June 30, 2024 and 2023 , the Company issued 0 and 2,222 shares of restricted common stock, respectively, to certain employees.

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 $ 0 and $ 31,200 , respectively.

During the three -month periods ended March 31, 2024 and 2023 , 316 and 1,102 shares of restricted common stock were forfeited, respectively.

Share based compensation for the three -month periods ended March 31, 2024 and 2023 , was $ 47,791 and $ 62,474 , respectively.

During the six -month periods ended June 30, 2024 and 2023 , 502 and 1,901 shares of restricted common stock were forfeited, respectively.

Share based compensation for the six -month periods ended June 30, 2024 and 2023 , was $ 96,561 and $ 120,767 , respectively.

Issuances to Directors

During the three -month periods ended March 31, 2024 , and 2023 the Company issued 4,287 and 855 shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 9,003 and $ 12,002 , respectively.

During the six -month periods ended June 30, 2024 , and 2023 the Company issued 4,287 and 2,141 shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 9,003 and $ 28,004 , respectively.

Employees ’ exercise options

During the three -month periods ended March 31, 2024 and 2023 , no employee stock options were exercised.

There were no warrants issued during the three -month periods ended March 31, 2024 and 2023 .

During the six -month periods ended June 30, 2024 and 2023 , no employee stock options were exercised.

There were no warrants issued during the six -month periods ended June 30, 2024 and 2023 .

There were 777,666 prefunded warrants exercised during the three -month period ended March 31, 2024.

3 unchanged sentences

MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

During each of the three month periods ended March 31, 2024 , and 2023 , one customer accounted for 59 % and one customer accounted for 19 % of the revenue, respectively.

For the three month periods ended March 31, 2024 , and 2023 , two customers accounted for 70 % and two customers accounted for 56 % of revenue, respectively.

Three customers accounted for 77 % of current accounts receivable at March 31, 2024 .

During each of the three month periods ended June 30, 2024 , and 2023 , no customer accounted for more than 10% and one customer accounted for 12 % of the revenue, respectively.

For the six month periods ended June 30, 2024 , and 2023 , one customers accounted for 40 % and two customers accounted for 30 % of revenue, respectively.

Two customers accounted for 94 % of current accounts receivable at June 30, 2024 .

At December 31, 2023 , one customer accounted for 35 % of current accounts receivable.

United States, Hong Kong and Nigeria

The Company recorded no income tax expense for the three months ended March 31, 2024 and 2023 because the estimated annual effective tax rate was zero .

The Company recorded no income tax expense for the three and six months ended June 30, 2024 and 2023 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 March 31, 2024 and December 31, 2023 , 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.

Due to the current loss for the three months ended March 31, 2024, the Company did not record income taxes.

As of June 30, 2024 and December 31, 2023 , 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.

Due to the current loss for the six months ended June 30, 2024 , the Company did not record income taxes.

The deferred tax liability presented on the condensed consolidated balance sheet relates to intangible assets from the acquisition of Swivel Secure.

SUBSEQUENT EVENTS

On May 6, 2024, 186 shares of restricted common stock were forfeited by an employee who left the Company before the lapse of the restriction period applicable to such shares.

During July 2024, 849 shares of restricted common stock were forfeited by employees who left the Company before the lapse of the restriction period applicable to such shares.

On July 31, 2024, the Company issued 1,352 shares of common stock to its directors in payment of committee meeting fees.

Additionally, the Company issued an aggregate of 10,500 shares of restricted stock to non-employee directors with three -year vesting.

On July 31, 2024, the Company issued an aggregate of 158,486 of restricted stock with three -year vesting period to its officers and current employees.

The Company has reviewed subsequent events through the date of this filing.

19 unchanged sentences

the duration and extent of continued hostilities in Ukraine and its impact on our European customers;

delays in the development of products, the commercial, reputational and regulatory risks to our business that may arise as a consequence the restatement of our financial statements, including any consequences of non-compliance with Securities and Exchange Commission (“SEC”) and Nasdaq periodic reporting requirements;

our temporary loss of the use of a Registration Statement on Form S-3 to register securities in the future;

delays in the development of products, the commercial, reputational and regulatory risks to our business that may arise as a consequence the restatement of our financial statements;

if we fail to increase our stockholders' equity to at least $2.5 million, our common stock will be delisted from the Nasdaq Stock Market which could negatively impact the trading price of our common stock and impair our ability to raise capital, our temporary loss of the use of a Registration Statement on Form S-3 to register securities in the future;

any disruption to our business that may occur on a longer-term basis should we be unable to remediate during fiscal year 2024 certain material weaknesses in our internal controls over financial reporting, 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, 2023 and other filings with the SEC.

7 unchanged sentences

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.

Our products include PortalGuard® and PortalGuard Identity-as-a-Service (IDaaS) enterprise IAM, 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.

46 unchanged sentences

RESULTS OF OPERATIONS

THREE MONTHS ENDED March 31, 2024 AS COMPARED TO March 31, 2023

THREE MONTHS ENDED June 30, 2024 AS COMPARED TO June 30, 2023

Consolidated Results of Operations - Percent Trend

Three Months Ended March 31,

Three Months Ended June 30,

Total Revenues

19 unchanged sentences

Hardware - reserve

For the three months ended March 31, 2024, and 2023, service revenues included approximately $194,000 and $292,000, respectively, of recurring maintenance and support revenue, and approximately $19,000 and $240,000 respectively, of non-recurring custom services revenue.

For the three months ended June 30, 2024, and 2023, service revenues included approximately $274,000 and $310,000, respectively, of recurring maintenance and support revenue, and approximately $10,000 and $310,000 respectively, of non-recurring custom services revenue.

Recurring service revenue decreased $36,000 or 12% in 2024 which was due to the loss of one large customer service agreement.

1 unchanged sentence

We expect the service revenue to remain at the current lower rate in future periods.

For the three months ended March 31, 2024, license revenue increased 371,878 or 24% to $1,950,434 from $1,578,556 in the corresponding period in 2023.

We received one large customer order that contributed to the increase.

For the three months ended June 30, 2024, license revenue decreased $461,546 or 37% to $774,2254 from $1,235,771 in the corresponding period in 2023 , as several anticipated orders slipped into the third quarter.

For the three months ended

March 31, 2024, hardware sales decreased 76% to $17,647 from $72,689 in the corresponding period in

The decrease was due largely to reduced add-on orders from an existing customer in

2024, compared to increased new hardware deployments in

June 30, 2024, hardware sales increased 15% to $83,492 from $72,693 in the corresponding period in

The increase was due largely to a change in the mixture of hardware sales.

Costs of goods sold

For the three months ended March 31, 2024, cost of service decreased approximately $16,000 or 10% to $138,849 from $154,801 in the three months ended March 31, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments.

For the three months ended March 31, 2024, license fees decreased to $148,221 from $620,881 in the three months ended March 31, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings.

For the three months ended March 31, 2024, hardware costs decreased to $12,573 from $44,592 in the three months ended March 31, 2023, related to costs associated with decreased hardware revenue.

For the three months ended June 30, 2024, cost of service decreased approximately $287,000 or 80% to $73,385 from $360,156 in the three months ended June 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments.

For the three months ended June 30, 2024, license fees decreased to $148,432 from $198,147 in the three months ended June 30, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings.

For the three months ended June 30, 2024, hardware costs decreased to $40,455 from $47,808 in the three months ended June 30, 2023, related to costs associated with mixture of hardware revenue.

Selling, general and administrative

1 unchanged sentence

Selling, general and administrative

Selling, general and administrative expenses for the three months ended March 31, 2024, decreased 8% from $1,931,732 in the corresponding period in 2023 to $1,782,973 in the current quarter.

The decreases included reductions in administration, sales personnel costs and marketing show expenses.

Selling, general and administrative expenses for the three months ended June 30, 2024, decreased 9% from $2,143,164 in the corresponding period in 2023 to $1,941,866 in the current quarter.

The decreases included reductions in administration, sales personnel costs and marketing show expenses, offset by an increase in professional services.

Research, development and engineering

1 unchanged sentence

Research, development, and engineering

For the three months ended March 31, 2024, research, development, and engineering costs decreased 12% to $607,521 compared to $690,159 in the corresponding period in 2023.

The decrease consisted primarily of reductions in personnel costs and reductions in outside services.

For the three months ended June 30, 2024, research, development, and engineering costs increased 6% to $591,234 compared to $558,181 in the corresponding period in 2023.

The increase consisted primarily in an increase in personnel costs.

Other income (expense)

1 unchanged sentence

Interest income

Loan fee amortization

Change in fair value of convertible note

Interest expense

Other income (expense)

Other income (expense) for the three months ended June 30, 2024 consisted of interest income of $46 and interest expense of $8,910 comprised of approximately $1,400 on the government loan through the BBVA bank and the balance on the 2024 Note, and a loan fee amortization amount of $4,000.

Other income (expense) for the three months ended June 30, 2023 consisted of interest income of $23, interest expense of $56,806 on the secured note payable and the government loan through the BBVA, bank net of interest and change in fair value of $44,568 on the convertible note payable.

Six MONTHS ENDED June 30, 2024 AS COMPARED TO June 30, 2023

Consolidated Results of Operations - Percent Trend

Six Months Ended June 30,

Total Revenues

Costs and other expenses

Cost of services

Cost of license fees

Cost of hardware

Cost of hardware - reserve

Total Cost of Goods Sold

Operating expenses

Selling, general and administrative

Research, development and engineering

Total Operating Expenses

Operating loss

Other expense

Loss before provision for income tax

Provision for income tax

Revenues and cost of goods sold

Six Months Ended

Total Revenue

Cost of Goods Sold

Hardware - reserve

For the six months ended June 30, 2024, and 2023, service revenues included approximately $467,000 and $602,000, respectively, of recurring maintenance and support revenue, and approximately $30,000 and $551,000 respectively, of non-recurring custom services revenue.

Recurring service revenue decreased $135,000 or 22% in 2024 which was due to the loss of one large customer service agreement.

Non-recurring custom services decreased 95% due to loss of one large customer for Swivel Secure customizations and upgrades.

We expect the service revenue to remain at the current lower rate in future periods.

For the six months ended June 30, 2024, license revenue decreased 89,668 or 3% to $2,724,659 from $2,814,327 in the corresponding period in 2023.

Several anticipated orders sliding from the second quarter to the third quarter, contributed to the decrease.

six months ended

June 30, 2024, hardware sales decreased 30% to $101,140 from $145,382 in the corresponding period in

The decrease was due largely to reduced add-on orders from an existing customer in

2024, compared to increased new hardware deployments in

Costs of goods sold

For the six months ended June 30, 2024, cost of service decreased approximately $303,000 or 59% to $212,234 from $514.957 in the six months ended June 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments.

For the six months ended June 30, 2024, license fees decreased to $296,652 from $819,028 in the six months ended June 30, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings.

For the six months ended June 30, 2024, hardware costs decreased to $12,573 from $44,592 in the six months ended June 30, 2023, related to costs associated with decreased hardware revenue.

Selling, general and administrative

Six Months Ended

Selling, general and administrative

Selling, general and administrative expenses for the six months ended June 30, 2024, decreased 9% from $4,074,896 in the corresponding period in 2023 to $3,724,839.

The decreases included reductions in administration, sales personnel costs and marketing show expenses, offset by professional fees.

Research, development and engineering

Six Months Ended

Research, development and engineering

For the six months ended June 30, 2024, research, development, and engineering costs decreased 4% to $1,198,755 compared to $1,248,340 in the corresponding period in 2023.

The decrease consisted primarily of changes in personnel costs and reductions in outside services.

Other income (expense)

Six Months Ended

Interest income

Loss on foreign currency transactions

Loan fee amortization

Change in fair value of convertible note

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Other income (expense)

Other income (expense) for the three months ended March 31, 2024 consisted of interest income of $5 and interest expense of $1,356 on the government loan through the BBVA bank net of interest.

Other income (expense) for the three months ended March 31, 2023 consisted of interest income of $4, a change on foreign currency in the amount of $15,000, interest expense of $1,920 on the government loan through the BBVA bank and $54,999 on the secured note payable, which amounts were offset by a change in fair value of $141,991 on our secured convertible note payable.

Other income (expense) for the six months ended June 30, 2024 consisted of interest income of $51 and interest expense of $10,267 for approximately $,2,700 on the government loan through the BBVA bank and the balance accrued on the 2024 Note, and a loan fee amortization amount of $4,000.

Other income (expense) for the six months ended June 30, 2023 consisted of interest income of $27, a change on foreign currency in the amount of $15,000, interest expense of approximately $2,000 on the government loan through the BBVA bank and approximately $112,000 on the secured note payable, which amounts were offset by a change in fair value of $97,423 on our secured convertible note payable.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities overview

Net cash provided by operations during the three months ended March 31, 2024 was $297,085.

Net cash used in operations during the six months ended June 30, 2024 was $1,123,533.

Items of note included:

Net positive cash flows related to adjustments for non-cash expenses of approximately $415,000.

Net positive cash flows related to inventory, accounts receivable, amount due from factor, and deferred revenue of approximately $952,000.

Negative cash flows related to changes in prepaid expenses, accrued liabilities and accounts payable of approximately $456,000, due to working capital management.

Net positive cash flows related to inventory, accounts receivable, amount due from factor, accounts payable and deferred revenue of approximately $1,054,000.

Negative cash flows related to changes in prepaid expenses, and accrued liabilities of approximately $416,000, due to working capital management.

Financing activities overview

Net cash used for financing activities during the three months ended March 31, 2024 was $41,841 for repayment of the government loan through the BBVA bank and $13,470 for offering costs.

Net cash received from financing activities during the three months ended March 31, 2024 was $1,400 of proceeds for the exercise of prefunded warrants.

Net cash provided by financing activities during the six months ended June 30, 2024 was $1,912,408 which included $2,000,000 of proceeds from the 2024 Note, $1,400 from the exercise of prefunded warrants, and $1,939 from the purchase of shares in the Employee Stock Purchase Plan, which amounts were offset by repayment of the government loan through the BBVA bank and $13,470 for offering costs.

Net cash received from financing activities during the six months ended June 30, 2024 was $1,400 of proceeds from the exercise of prefunded warrants.

Investing activities overview

Net cash used in investing activities during the three months ended March 31, 2024 was $1,869 for capital expenditures.

Net cash used in investing activities during the six months ended June 30, 2024 was $1,869 for capital expenditures.

Liquidity and Capital Resources

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The following sets forth our investment sources of capital during the previous two years:

On June 24, 2024, we entered into and closed a note purchase agreement which provided for the issuance of a $2,360,000 principal amount senior secured promissory note (the "2024 Note").

This resulted in gross proceeds of approximately $1,826,000 after deducting placement agent fees, estimated offering expenses, and the original issue discount.

The 2024 Note is due eighteen months (18) following the date of issuance, accrues interest at a rate of nine percent (9%) per annum, and commencing six months after the date of issuance of, the lender shall have the right to redeem up to $270,000 of principal amount each month.

For a more complete description of the 2024 Note, please see Note 9 to Our Condensed Consolidated Financial Statements included in Part I Item 1 of this report.

On November 20, 2023, we completed a private placement of shares of common stock and warrants resulting in net proceeds of approximately $435,000, after deducting placement agent fees and estimated offering expenses.

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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 with AJB Capital Investments, LLC under which we issued a $2,200,000 principal amount senior secured promissory note (the “Note”).

In December 2022, we entered into and closed a securities purchase agreement with AJB Capital Investments, LLC under which we issued a $2,2 million 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.

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Liquidity outlook

At March 31, 2024, our total cash and cash equivalents were $690,449, as compared to $511,00 at December 31, 2023.

At March 31, 2024, we had negative working capital of approximately $1,048,000.

At June 30, 2024, our total cash and cash equivalents were $1,260,351, as compared to $511,400 at December 31, 2023.

At June 30, 2024, we had negative working capital of approximately $2,560,000.

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.

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We also have approximately $3.6 million of inventory (currently reserved) purchased for projects in Nigeria.

We are exploring other markets and opportunities to sell 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.

We continue to explore other markets and opportunities to sell the product to generate additional cash.

If we are unable to generate sufficient revenue to fund current operations and execute our business plan, we will need to obtain additional third-party financing.

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 support operations.

In addition, as reported in our Current Report on Form 8-K filed June 14, 2024, we are no longer in compliance with Nasdaq Capital Market continued listing rules which require us to maintain stockholders' equity of at least $2,500,000.

Our plan to regain compliance will require us to raise additional equity capital in the near term.

There can be no assurance that we will be able to raise such capital or regain compliance with the continued listing requirements.

Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements