What changed in this filing

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Item 1. Financial Statements

2024-11-14 compared with 2024-08-14 · 179 added, 83 removed, 562 unchanged (32% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

Cash and cash equivalents

13 unchanged sentences

430,596 229,806

Deposits and other assets

Operating lease right-of-use assets

73,637 36,905

Intangible assets, net

12 unchanged sentences

Operating lease liabilities, current portion

24,545 37,829

Total current liabilities

6 unchanged sentences

83,901 188,787

Operating lease liabilities, net of current portion

Total non-current liabilities

6 unchanged sentences

issued and outstanding;

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

3,109,288 and 1,032,777 of $ .0001 par value at September 30, 2024 and December 31, 2023, respectively

Additional paid-in capital

14 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Total revenues

50 unchanged sentences

( 127,184,445

Restricted stock forfeited

Issuance of restricted common stock to employees and directors

Foreign currency translation adjustment

Share-based compensation

Exercise of prefunded warrants

Exercise of warrants

Issuance costs

Balance as of September 30, 2024

( 127,923,404

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.

22 unchanged sentences

( 120,796,573

Issuance of common stock for directors’ fees

Restricted stock forfeited

Issuance of restricted common stock to employees

Foreign currency translation adjustment

Share-based compensation

Balance as of September 30, 2023

( 122,634,397

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

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOW FROM OPERATING ACTIVITIES:

3 unchanged sentences

Amortization of capitalized contract costs

Amortization of Note Payable

Reserve for inventory

34 unchanged sentences

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

Six Months Ended June 30,

Nine Months Ended September 30,

Cash paid for:

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2024 (Unaudited)

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

The balance sheet at September 30, 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 June 5, 2024.

36 unchanged sentences

Disaggregation of Revenue

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

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

September 30,

$ 188,181 $ 34,753 $ 44,437 $ - $ 267,371

738,838 223,703 478,470 - 1,441,011

52,897 - 361,525 22,000 436,422

Total Revenues

$ 979,916 $ 258,456 $ 884,432 $ 22,000 $ 2,144,804

September 30,

$ 294,581 $ 26,009 $ 267,303 $ - $ 587,893

426,059 - 523,956 - 950,015

48,057 - 231,143 - 279,200

Total Revenues

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

$ 768,697 $ 26,009 $ 1,022,402 $ - $ 1,817,108

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

September 30,

$ 618,421 $ 98,430 $ 47,211 $ - $ 764,062

1,797,707 1,490,255 877,707 - 4,165,669

140,598 - 361,764 35,200 537,562

Total Revenues

$ 2,556,726 $ 1,588,685 $ 1,286,682 $ 35,200 $ 5,467,293

September 30,

$ 840,045 $ 75,806 $ 812,654 $ 12,375 $ 1,740,880

1,614,971 552,630 1,526,091 70,650 3,764,342

134,390 - 278,292 11,900 424,582

Total Revenues

$ 2,589,406 $ 628,436 $ 2,617,037 $ 94,925 $ 5,929,804

*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 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.

At September 30, 2024 and December 31, 2023 , amounts in deferred revenue were approximately $ 961,000 and $ 443,000 , respectively.

Revenue recognized during the three and nine -months ended September 30, 2024 from amounts included in deferred revenue at the beginning of the period was approximately $ 51,000 and $ 482,000 , 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.

ACCOUNTS RECEIVABLE

2 unchanged sentences

Accounts receivable are written off when deemed uncollectible.

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

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

September 30,

Accounts receivable

$ 2,606,064 $ 2,207,311

Allowance for credit losses

( 675,806 ) ( 1,005,785 )

Accounts receivable, net of allowances for credit losses

$ 1,930,258 $ 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 June 30,

Three Months Ended September 30,

Selling, general and administrative

$ 53,117 $ 56,414

Research, development and engineering

Six Months Ended June 30,

12,936 48,758

$ 66,053 $ 105,172

Nine Months Ended September 30,

Selling, general and administrative

$ 140,142 $ 171,833

Research, development and engineering

31,475 48,758

$ 171,617 $ 220,591

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

2 unchanged sentences

Approximately $ 3,200,000 of the reserve on inventory is due to slow moving inventory purchased for projects in Nigeria, and the balance for other slow-moving inventory.

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

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

The Company has been selling units in small quantities and continues to explore other markets and opportunities to sell the product.

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

September 30,

Finished goods

$ 4,220,416 $ 4,373,056

Fabricated assemblies

54,153 59,184

Reserve on finished goods

( 3,887,625 ) ( 3,986,500 )

Total inventory

$ 386,944 $ 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 June 30, 2024 , the Company was not a party to any pending lawsuits.

As of September 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.

4 unchanged sentences

3 Months ended

September 30,

Total lease cost

$ 9,702 $ 34,145

9 Months ended

September 30,

Total lease cost

$ 38,808 $ 145,828

September 30,

Balance sheet information

Operating right-of-use assets

$ 73,636 $ 36,905

Operating lease liabilities, current portion

$ 24,545 $ 37,829

Operating lease liabilities, non-current portion

Total operating lease liabilities

$ 73,636 $ 37,829

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

Weighted average discount rate – operating leases

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 :

5.50 % 5.50 %

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

$ 51,950 $ 213,783

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

2024 (3 months remaining)

16 unchanged sentences

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 %).

The Company received gross proceeds of approximately $ 1.9 million in connection with a financing transaction (see Note 12.

In accordance with the terms of the 2024 Note, on October 1, 2024, 40 % of the proceeds received, or approximately $ 762,600 , was used to prepay amounts due under the 2024 Note.

CONVERTIBLE NOTE PAYABLE

14 unchanged sentences

Three Months ended

Six Months Ended

Nine Months Ended

September 30,

Stock options

3,007 9,266 3,007 9,266

2,739,362 207,234 2,739,362 270,234

2,742,369 216,500 2,742,369 279,500

STOCKHOLDERS’ EQUITY

Issuances of Common Stock

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

During the nine -month periods ended September 30, 2024 , and 2023 , there have not been any shares of common stock issued to anyone outside the Company, except as noted in this Note 12.

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

8 unchanged sentences

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

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.

During the nine -month periods ended September 30, 2024 and 2023 , the Company issued 168,963 and 16,404 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 $ 244,996 and $ 31,200 , 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.

During the nine -month periods ended September 30, 2024 and 2023 , 1,351 and 2,650 shares of restricted common stock were forfeited, respectively.

Share based compensation for the nine -month periods ended September 30, 2024 and 2023 , was $ 171,617 and $ 220,591 , respectively.

Issuances to Directors

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.

During the nine -month periods ended September 30, 2024 , and 2023 , the Company issued 4,287 and 3,078 , shares of common stock to its directors in lieu of payment of board and committee fees valued at $ 9,003 and $ 39,006 , respectively.

Employees ’ exercise options

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.

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

During the nine -month period ended September 30, 2024, the entered into a warrant inducement agreement with an existing institutional investor for the immediate exercise of certain outstanding warrants that the Company issued on October 30, 2023.

Pursuant to the warrant inducement agreement, the investor agreed to exercise outstanding warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock at an amended exercise price of $ 1.85 .

The gross proceeds from the exercise of the warrants was approximately $ 1.9 million, prior to deducting placement agent fees and estimated offering expenses.

In consideration for the immediate exercise of the warrants, the Company also agreed to issue to the investor unregistered Series A Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock and unregistered Series B Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock, each with an exercise price of $ 1.85 per share.

The Series A Warrants and Series B Warrants share substantially the same terms, are immediately exercisable and will expire five years from the date of issuance.

There were no warrants issued for the nine -month period ended September 31, 2023.

There were 911,672 prefunded warrants exercised during the nine -month period ended September 30, 2024.

FAIR VALUES OF FINANCIAL INSTRUMENTS

2 unchanged sentences

MAJOR CUSTOMERS AND ACCOUNTS RECEIVABLE

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 .

During each of the three month periods ended September 30, 2024 , and 2023 , three customers accounted for 47 % and two customers accounted for 33 % of the revenue, respectively.

For the nine month periods ended September 30, 2024 , and 2023 , one customer accounted for 29 % and two customers accounted for 23 % of revenue, respectively.

Four customers accounted for 65 % of current accounts receivable at September 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 and six months ended June 30, 2024 and 2023 because the estimated annual effective tax rate was zero.

The Company recorded no income tax expense for the three and nine months ended September 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 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.

As of September 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 nine months ended September 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

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.

On November 7, 2024, the Company issued 7,761 shares of common stock to its directors in payment of meeting fees.

Additionally, the Company issued an aggregate of 10,000 shares of restricted stock to new employees with three -year vesting.

All the shares were issued at $ 1.16 the closing price on November 7, 2024, as reported on the Nasdaq Capital Market.

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

42 unchanged sentences

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.

Swivel Secure Europe is a 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.

34 unchanged sentences

RESULTS OF OPERATIONS

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

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

Consolidated Results of Operations - Percent Trend

Three Months Ended June 30,

Three Months Ended September 30,

Total Revenues

15 unchanged sentences

Three Months Ended

September 30,

Total Revenue

Three Months Ended

September 30,

Cost of Goods Sold

Hardware - reserve

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.

For the three months ended September 30, 2024, and 2023, service revenues included approximately $214,000 and $279,000, respectively, of recurring maintenance and support revenue, and approximately $53,000 and $291,000 respectively, of non-recurring custom services revenue.

Recurring service revenue decreased $65,000 or 24% 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 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 September 30, 2024, license revenue increased $490,996 or 52% to $1,441,011 from $950,015 in the corresponding period in 2023 , as several long-term customers expanded their license deployments.

For the three months ended

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.

September 30, 2024, hardware sales increased 56% to $436,422 from $279,200 in the corresponding period in

The increase was due largely to several long-term customers expanding their biometric cybersecurity solutions.

Costs of goods sold

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.

For the three months ended September 30, 2024, cost of service decreased approximately $14,000 or 11% to $110,723 from $125,039 in the three months ended September 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments.

For the three months ended September 30, 2024, license fees decreased to $146,732 from $253,891 in the three months ended September 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 September 30, 2024, hardware costs increased to $207,655 from $97,674 in the three months ended September 30, 2023, related to increase of hardware revenue.

Selling, general and administrative

Three Months Ended

September 30,

Selling, general and administrative

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.

Selling, general and administrative expenses for the three months ended September 30, 2024, decreased 9% from $1,776,305 in the corresponding period in 2023 to $1,607,925 in the current quarter.

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

Research, development and engineering

Three Months Ended

September 30,

Research, development, and engineering

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.

For the three months ended September 30, 2024, research, development, and engineering costs increased 23% to $652,174 compared to $529,757 in the corresponding period in 2023.

The increase consisted primarily in an increase in personnel costs.

1 unchanged sentence

Three Months Ended

September 30,

Interest income

3 unchanged sentences

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

Other income (expense) for the three months ended September 30, 2024 consisted of interest income of $2 and interest expense of $98,556 comprised of approximately $4,200 on the government loan through the BBVA bank and the balance on the 2024 Note, and a loan fee amortization amount of $60,000.

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.

Nine MONTHS ENDED September 30, 2024 AS COMPARED TO September 30, 2023

Consolidated Results of Operations - Percent Trend

Six Months Ended June 30,

Nine Months Ended September 30,

Total Revenues

14 unchanged sentences

Revenues and cost of goods sold

Six Months Ended

Nine Months Ended

September 30,

Total Revenue

1 unchanged sentence

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.

For the nine months ended September 30, 2024, and 2023, service revenues included approximately $682,000 and $899,000, respectively, of recurring maintenance and support revenue, and approximately $82,000 and $842,000 respectively, of non-recurring custom services revenue.

Recurring service revenue decreased $217,000 or 24% 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 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

For the nine months ended September 30, 2024, license revenue increased $401,327 or 11% to $4,165,6699 from $3,764,342 in the corresponding period in 2023.

Several long-term customers expanded their license deployments which contributed to the increase.

nine months ended

September 30, 2024, hardware sales increased 27% to $537,562 from $424,582 in the corresponding period in

The increase was due largely to add-on orders from existing customers 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.

For the nine months ended September 30, 2024, cost of service decreased approximately $317,000 or 50% to $322,957 from $639,996 in the nine months ended September 30, 2023, due to reduced costs to support the PortalGuard and Swivel Secure deployments.

For the nine months ended September 30, 2024, license fees decreased to $443,384 from $1,022,919 in the nine months ended September 30, 2023, due largely to a decrease in license fees for third-party software included in our Swivel Secure offerings.

For the nine months ended September 30, 2024, hardware costs increased to $260,684 from $240,074 in the nine months ended September 30, 2023, related to costs associated with increased hardware revenue.

Selling, general and administrative

Six Months Ended

Nine Months Ended

September 30,

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.

Selling, general and administrative expenses for the nine months ended September 30, 2024, decreased 9% from $5,851,201in the corresponding period in 2023 to $5,332,764.

The decreases included reductions in administration, sales personnel costs and marketing show expenses, offset by an increase in professional fees incurred in connection with financing transactions.

Research, development and engineering

Six Months Ended

Nine Months Ended

September 30,

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.

For the nine months ended September 30, 2024, research, development, and engineering costs increased 4% to $1,850,929 compared to $1,778,097 in the corresponding period in 2023.

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

Other income (expense)

Six Months Ended

Nine Months Ended

September 30,

Interest income

4 unchanged sentences

Other income (expense)

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.

Other income (expense) for the nine months ended September 30, 2024 consisted of interest income of $53 and interest expense of $108,823 comprised of approximately $8,100 on the government loan through the BBVA bank and the balance accrued on the 2024 Note, and a loan fee amortization amount of $64,000.

Other income (expense) for the nine months 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.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities overview

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

Net cash used in operations during the nine months ended September 30, 2024 was $2,399,508.

Items of note included:

Net positive cash flows related to adjustments for non-cash expenses of approximately $667,000.

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.

Net positive cash flows related to inventory, amount due from factor, accounts payable, and deferred revenue of approximately $875,000.

Negative cash flows related to changes in accounts receivable, prepaid expenses, and accrued liabilities of approximately $469,000, due to working capital management.

Financing activities overview

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.

Net cash provided by financing activities during the nine months ended September 30, 2024 was $3,660,414 which included $2,000,000 of proceeds from the 2024 Note, $1,906,528 from the exercise of warrants, $1,571 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 $101,762 in repayment of the government loan through the BBVA bank and $147,862 for offering costs.

Investing activities overview

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

Net cash used in investing activities during the nine months ended September 30, 2024 was $23,047 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 September 12, 2024, we entered into a warrant exercise agreement with an existing investor (the “Investor”) to exercise certain outstanding warrants to purchase an aggregate of 1,030,556 shares of the Company’s common stock.

The warrants were originally issued to the Investor on October 31, 2023 and had an original exercise price of $3.15 per share.

In consideration for the immediate exercise of the warrants, we reduced the exercise price of the warrants to $1.85 per share and issued to the Investor unregistered Series A Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock and unregistered Series B Warrants to purchase an aggregate of 1,030,556 shares of the Company's common stock, each with an exercise price of $1.85 per share.

The Series A and Series B warrants share substantially the same terms, are immediately exercisable and will expire five years from the date of issuance.

The forgoing transaction resulted in gross proceeds of approximately $1.9 million prior to deducting placement agent fees and estimated offering expenses.

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").

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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.

In connection with the warrant exercise agreement described above, we prepaid approximately $762,600 of the amount due under the 2024 Note.

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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Liquidity outlook

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.

At September 30, 2024, our total cash and cash equivalents were $1,801,137, as compared to $511,400 at December 31, 2023.

At September 30, 2024, we had negative working capital of approximately $1,320,000.

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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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.

Our plan to regain compliance will require us to raise additional equity capital in the near term, or engage in a strategic transaction.

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

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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