Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations, and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the section captioned "RISK FACTORS" in Item 1A and elsewhere in this Report.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand our Company. This discussion is provided as a supplement to and should be read in conjunction with our consolidated financial statements for the years ended December 31, 2025 and 2024 and the accompanying notes included elsewhere in this Report.

All share totals reported herein have been adjusted to reflect our 1-for-10 reverse stock split, which was effective April 30, 2026.

Overview

We are a leading identity access management (IAM) platform provider for the enterprise and large-scale customer and civil ID solutions. Built to leverage BIO-key's world-class biometric core platform among seventeen strong authentication factors, BIO-key PortalGuard and hosted PortalGuard IDaaS are platforms that enable our customers to securely and easily assure that only the right people can access the right systems. PortalGuard goes beyond traditional multifactor authentication (MFA) solutions by addressing functional gaps, such as allowing roving users to biometrically authenticate at any workstation without using their phones or tokens, eliminating unauthorized account delegation, detecting duplicate users, and accommodating in-person identification.

Our customers use BIO-key every day to securely access a variety of cloud, mobile and web applications, on-premise and cloud-based servers from all of their devices. Employees, contractors, students and faculty sign in through PortalGuard to seamlessly and securely access the applications they need to do their important work, without relying on personal phone use or per-user tokens. Organizations use our platform to securely collaborate with their supply chain and partners, and to provide their customers with flexible, resilient user experiences online or in-person.

Large-scale customer and civil ID customers use our scalable biometric management platform and FBI-certified scanner hardware to manage enrollment, de-duplication and authentication for millions of users. One large bank has enrolled and identifies over 21.7 million of their customers using BIO-key fingerprint biometrics in branches on a daily basis.

PortalGuard and IBB deliver unique value to enterprises who find that mainstream MFA solutions do not adequately address their workforce use cases. PortalGuard operates as a single MFA user experience, providing a wide set of authentication choices to meet every use case. We sell our branded biometric and FIDO authentication hardware as accessories to our IAM platforms, so that customers can have a single vendor providing all components of their IAM solution. We do not mandate the use of BIO-key hardware with our software and services. Our NIST-certified fingerprint biometric platform is unique in that it supports interoperable mixing and matching combinations of different manufactures' fingerprint scanners in a deployment, so that the right scanner can be selected for the right use case, without mandating the user of a particular scanner.

Security-conscious software developers leverage our platform APIs and federation interfaces to securely and efficiently embed biometric and MFA identity capabilities into their software. Our approach to IDaaS allows our customers to efficiently scale their security and identity infrastructures to protect both internal cloud workforce- and external customer-facing applications.

In 2022, we expanded our product offerings and customer base when we acquired Swivel Secure, a Madrid, Spain based provider of IAM solutions. Until the fourth quarter of 2024, Swivel Secure was the exclusive distributer of 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, now operates as BIO-key EMEA maintains a direct sales force with offices in Madrid, Spain and Lisbon, Portugal, and sells only BIO-key products.

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

We plan to have a more significant role in the IAM market which continues to expand. We plan to continue to offer customers a suite of authentication options that complement our biometric solutions. The more well-rounded offerings of authentication options will allow customers to customize their approach to authentication all under one umbrella.

We expect to grow our business within government services and highly-regulated industries in which we have historically had a strong presence including financial services, higher education, and healthcare. We believe that continued heightened security and privacy requirements in these industries, and as colleges and universities continue operating in remote environments, we will generate increased demand for security solutions, including biometrics. In addition, we expect that the compatible, yet superior portable biometric user experience offered by our technology for Windows 10 users will accelerate the demand for our computer network log-on solutions and fingerprint readers. Through value add-offerings via direct sales, resellers, and strategic partnerships with leading higher education platform providers, we will continue to grow our installed base.

Our primary sales strategies are focused on (i) increased marketing efforts into the IAM market, (ii) dedicated pursuit of large-scale identification projects across the globe and (iii) growing our channel alliance program which we have grown to more than eighty-five participants and continues to generate incremental revenues.

A second component of our growth strategy is to pursue strategic acquisitions of select businesses and assets in the IAM space. In furtherance of this strategy, we are active in the industry and regularly evaluate businesses that we believe will either provide an entry into new market verticals or be synergistic with our existing operations and in either case, be accretive to earnings. We cannot provide any assurance as to whether we will be able to complete any acquisition and if completed, successfully integrate any business we acquire into our operations.

Recent Developments

As discussed under "Item 1A. Risk Factors", given the uncertainty the current economic and political environment and their effects on our business operations, sales cycles, personnel, and the geographic markets in which we operate, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature, the related financial impact cannot be reasonably estimated at this time.

The current trend of continued remote work environments increases the risk of unauthorized users, phishing attacks, and hackers who are eager to take advantage of the challenges of securing remote workers. A growing trend of security incidents that highlight potential cybersecurity vulnerabilities, additional regulatory requirements, and increasingly stringent Cyber Insurance underwriting standards that mandate enhanced security solutions has resulted in many businesses requiring MFA for their employees, partners and customers to access their business systems and data. We believe that biometrics should continue to play a key role in remote user authentication.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Two Year % trend

		Years ended
		December 31,
		2025				2024
Revenues
Services			20	%			16	%
License fees			58	%			75	%
Hardware			22	%			9	%
			100	%			100	%
Costs and other expenses
Cost of services			7	%			6	%
Cost of license fees			5	%			9	%
Cost of hardware			20	%			7	%
Cost of hardware reserve			-9	%			-3	%
Total cost of goods sold			23	%			19	%
Gross Profit			77	%			81	%
Operating expenses
Selling, general and administrative			106	%			103	%
Research, development and engineering			44	%			36	%
Impairment of investment		42		%			-
Total operating expenses		192		%			139	%
Operating loss			-115	%			-58	%
Other income (expense)
Total other income (expense)			-5	%			-4	%
Loss before provision for income tax benefit			-120	%			-62	%
Provision for income tax benefit			0	%			0	%
Net loss			-120	%			-62	%

Revenues and Costs and other expenses

										2025-2024
		2025				2024				$ Chg				% Chg
Revenues
Services		$	1,172,107			$	1,108,506			$	63,601				6	%
License fees			3,423,300				5,189,370				(1,766,070	)			-34	%
Hardware			1,342,148				631,695				710,453				112	%
Total Revenue		$	5,937,555			$	6,929,571			$	(922.016	)			-14	%
Costs and other expenses
Services		$	387,144			$	396,274			$	(9,130	)			-2	%
License fees			309,829				589,505				(279,676	)			-47	%
Hardware			1,189,464				516,611				672,853				130	%
Hardware reserves			(513,400	)			(213,005	)			(300,395	)			141	%
Total Costs and other expenses		$	1,373,037			$	1,289,385			$	83,652				6	%

Revenues

Revenue decreased $922,016 or 142% to $5,937,555 in 2025 as compared to $6,929,571 in 2024. This reduction was due largely to a significant contract renewal with a foreign retail bank that benefited 2024 that did not recur in 2025 and due to our exit from our distribution agreement with Swivel Secure Limited (SLL) and transition to selling BIO-key branded solutions in the EMEA market and to the factors discussed below.

For the years ended December 31, 2025, and 2024, service revenues included approximately $1,060,000 and $1,017,000, respectively, of recurring maintenance and support revenue, and approximately $112,000 and $91,000, respectively, of non-recurring custom services revenue. Recurring service revenue increased 4% in 2025 due to the growing customer base. Non-recurring custom services increased 23% in 2025 due to several new customers requiring supported deployments. We expect the service fees to increase from the current levels as we expand our deployments worldwide.

For the years ended December 31, 2025 and 2024 license revenue decreased $1,766,070 or 34% to $3,423,300, due largely to a significant contract renewal with a foreign retail bank that benefited 2024 hat did not recur in 2025, and due to the ramp up of BIO-key EMEA selling only BIO-key product.

Hardware sales increased by $710,453, or 112%, to $1,342,148 in 2025 from $631,695 in 2024. The increase was attributable to several long-term and new customers expanding their purchase of biometric cybersecurity solutions combined with selling some of fully reserved inventory from the African project.

Costs of goods sold

For the year ended December 31, 2025, cost of services decreased approximately 2% to $387,144, due primarily to the decreased costs to support Swivel Secure deployments.

License fees for the year ended December 31, 2025 decreased $279,676, or approximately 47%, to $309,829 from $589,505 due primarily to decreased license revenue and related license fees payable for third-party software distributed by Swivel Secure.

Hardware costs for the year ended December 31, 2024 increased $672,853, or approximately 130%, to $1,189,464 from $516,611 in 2024. The increase was associated with the increased hardware sales and hardware mix. Hardware reserve costs for the year ended December 31, 2025 increased $300,395, or approximately 141% from $(213,005) to $(513,400) which represented a removal of the entire reserve for sales of slow-moving inventory purchased for projects in Nigeria, and for other older inventory. We were successful in our efforts to sell the slow-moving inventory.

Gross Profit

Gross profit decreased to $4,564,518 in 2025 from $5,640,186 in 2024, due to lower license fee revenue, and an increase in lower-margin services and hardware revenue.

Our strategic decision to exit the SSL agreement and offer only BIO-key branded solutions in the EMEA market contributed to lower costs to support deployments, including software license fees incurred in connection with sales of Swivel Secure offerings using SLL solutions rather than BIO-key's internally developed software solutions. 2025 gross profit also benefited from the sale of $513,400 of fully reserved hardware inventory.

Selling, general and administrative

								2025-2024
2025				2024				$ Chg				% Chg
$	6,282,232			$	7,140,147			$	(857,915	)			-12	%

Selling, general and administrative costs for year ended December 31, 2025 were $6,282,232 compared to $7,140,147 in 2024, representing an 12% decrease. The decrease was due to a reorganization of sales personnel costs, lower marketing show expenses, and audit fees which were partially offset by an increase in professional services, principally related to financing activities in 2025.

Research, development and engineering

								2025-2024
2025				2024				$ Chg				% Chg
$	2,609,893			$	2,511,080			$	98,813				4	%

For the year ended December 31, 2025 research, development and engineering costs were $2,609,893 compared with $2,511,080 representing a 4% increase from 2024. Included in the increase were higher personnel costs associated with wages and benefits for engineering employees to support new product development.

Impairment of investment

								2025-2024
2025				2024				$ Chg				% Chg
$	2,500,000			$	-			$	2,500,000				100	%

For the year ended December 31, 2025 impairment of investment was $2,500,000 compared with $0 representing a 100% increase from 2024. The amount of $2,500,000 represents a 50% impairment of the investment based on expected revenue that has not occurred to date.

Other income (expense)

										2025-2024
		2025				2024				$ Chg				% Chg
Interest income		$	3,787			$	110			$	3,677			3343		%
Foreign currency loss			-				(13,004	)			13,004			-100		%
Loan transaction costs			(256,833	)			(124,000	)			(132,833	)		52		%
Interest expense			(60,793	)			(175,755	)			114,962			-65		%
		$	(313,839	)		$	(312,649	)		$	(2,501,190	)			800	%

The amounts for other income (expense) for the year ended December 31, 2025 consisted of interest income of $3,787, interest expense of $60,793 on the note payable and the government loan through the BBVA bank, and a loan fee amortization amount of $256,833. The amounts for the year ended December 31, 2024, consisted of interest income of $110, interest expense of $175,755 on the note payable and the government loan through the BBVA bank, and a loan fee amortization amount of $124,000.

Net Loss

Reflecting decreased gross profit and an impairment expense, net loss increased to $(7,157,946) in 2025 from a net loss of $(4,300,692) in 2024.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities overview

Net cash used for operations during the year ended December 31, 2025 was $4,668,689. Items of note included:

	●	Net positive cash flows related to non-cash expenses of approximately $3,568,000.
	●	Net negative cash flows related to changes in accounts receivable, lease liabilities, accounts payable, deferred revenue and prepaid expenses in the aggregate amount of approximately $984,000 and our net loss for the period.

Investing activities overview

Net cash used in investing activities during the year December 31, 2025 was $12,012 for capital expenditures.

Financing activities overview

Approximately $7,967,000 was provided by financing activities during the year ended December 31, 2025 consisting of the proceeds of $1,000,000 advanced under a secured note, proceeds from the exercise of warrants totaling approximately $6,500,000, and $10,076 from sales of common stock under our employee stock purchase plan. These amounts were offset by a partial repayment of note payable, repayment of a government loan, and costs associated with the issuance of our securities.

Sources of Liquidity

Since our inception, our capital needs have been principally met through proceeds from the sale of equity and debt securities. We expect capital expenditures to be less than $100,000 during the next twelve months.

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

On October 27, 2025, we entered into and closed a warrant exercise agreement with an existing institutional investor to exercise certain outstanding warrants to purchase an aggregate of 3,091,668 shares of common stock. The warrants were originally issued on January 15, 2025 and had an exercise price of $2.15 per share. In consideration for the immediate exercise of these warrants, we issued new unregistered warrants to purchase up to an aggregate of 6,183,336 shares of common stock at an exercise price of $1.02. We realized gross proceeds of approximately $3.1 million, prior to deducting placement agent fees and estimated offering expenses.

On September 30, 2025, we entered into and closed a note purchase agreement which provided for the issuance of a $1,130,000 principal amount senior secured promissory note (the "2025 Note"). This resulted in gross proceeds of approximately $1,000,000 after deducting estimated offering expenses, and the original issue discount. The 2025 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, the lender shall have the right to redeem up to $135,000 of principal amount each month. In connection with the October 27, 2025 warrant exercise agreement described above, we prepaid approximately $450,000 of the amount due under the 2025 Note. As of the date of this report, the outstanding principal amount due under the 2025 Note is approximately $675,000. For a more complete description of the 2025 Note, please see Note J to our Consolidated Financial Statements included in Part II Item 8 of this report.

On January 15, 2025, we entered into a warrant exercise agreement with an existing institutional investor to exercise certain outstanding warrants to purchase an aggregate of 206,112 shares of common stock at an exercise price of $18.50 per share which were originally issued to the Investor on September 13, 2024. In consideration for the exercise of these warrants, we issued new warrants to the investor to purchase an aggregate 309,167 shares of common stock at an exercise price of $21.50 per share. We realized gross proceeds of approximately $3.8 million, prior to deducting placement agent fees and estimated offering expenses.

On September 12, 2024, we entered into a warrant exercise agreement with the investor to exercise certain outstanding warrants to purchase an aggregate of 103,056 shares of common stock. The warrants were originally issued to the investor on October 31, 2023 and had an original exercise price of $31.50 per share. In consideration for the immediate exercise of these warrants, we reduced the exercise price of the warrants to $18.50 per share and issued to the Investor additional warrants to purchase an aggregate of 206,112 shares of common stock at an exercise price of $18.50 per share. 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"). 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 was 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. In connection with the warrant exercise agreements described above, we prepaid approximately $762,600 of the amount due under the 2024 Note. Pursuant to a series of exchange agreements in January 2025, the lender exchanged $859,000 principal amount due under the 2024 Note for 50,461 shares of common stock. As of the date of this report, the 2024 Note is fully paid. For a more complete description of the 2024 Note, please see Note J to Our Consolidated Financial Statements included in Part II Item 8 of this report.

We entered into an accounts receivable factoring arrangement with a financial institution (the "Factor") which has been extended to October 2026 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 December 31, 2025, our total cash and cash equivalents were approximately $2,694,000, as compared to $438,000 at December 31, 2024.

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 $750,000 per month to conduct our operations, a monthly amount that we have been unable to consistently achieve through revenue generation. During 2025, we generated approximately $5,900,000 of revenue, which did not generate enough cash to fully fund our average monthly cash requirements. We also have approximately $2.9 million of inventory (currently reserved) purchased for projects in Nigeria. We continue to explore other markets and opportunities to sell or return the product to continue to generate additional cash.

If we are unable to generate sufficient revenue and positive cash flow from operations or liquidation of existing inventory to fund current operations and execute our business plan, we will need to obtain additional third-party financing during the next twelve months. Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, if at all, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations, as listed below:

1. Revenue Recognition

2. Allowances for Accounts Receivable

New Accounting Pronouncements

See Note A Item 16, "Recent Adopted Accounting Pronouncements" and Note A Item 17, "Recent Issued Accounting Pronouncements," of the Consolidated Financial Statements for additional information about new accounting pronouncements.