Next Biometrics, a prominent provider of fingerprint sensors, has disclosed the discovery of potential fraud and significant irregularities within its China operations. This revelation has necessitated a restatement of the company's financial figures for 2024, resulting in a negative impact of NOK 8.9 million on its equity. The identified issues, primarily related to historical sales, payment terms, and order processes in the second half of 2024, have led to a substantial adjustment in the company's financial standing and a reported loss before tax of NOK 19.7 million in Q2 2025.

The company's second-quarter 2025 revenues were significantly lower than anticipated, reporting negative NOK 2.2 million, with adjusted revenues at NOK 4.3 million, a sharp decline from NOK 18.3 million in the same quarter last year. This downturn is attributed to sluggish sales in both India and China, alongside extraordinary discounts granted on China-ID products due to evolving market conditions and competitive pricing. In response to these financial pressures and the need for operational cleanup, Next Biometrics has announced plans for a capital raise, aiming to secure NOK 15-20 million through a new share issuance at NOK 4.25 per share, with existing shareholders guaranteeing NOK 15 million.

The incident has already impacted Next Biometrics' stock, which saw an approximate five percent drop shortly after the market opened following the announcement, contributing to a year-to-date decline of around 40 percent. The company's board has also proactively contacted the Norwegian Financial Supervisory Authority (Finanstilsynet) regarding the matter, signaling the seriousness with which these irregularities are being addressed. CEO Ulf Ritsvall affirmed the company's commitment to rectifying the situation, including efforts to reclaim affected products and re-distribute them to new or existing customers, though acknowledging a risk of non-recovery.

Market Signals

Sector Impacts and Opportunities: This incident highlights the inherent complexities and potential risks for biometric technology companies operating within the Chinese market. While China represents a vast growth opportunity due to its population and government initiatives, the fraud underscores the critical need for robust due diligence, stringent compliance frameworks, and transparent distributor relationships. Competitors demonstrating strong governance and compliance may find opportunities to capture market share, especially as China continues to tighten its biometric data privacy and security regulations.
Price Movements and Volatility: Next Biometrics' stock experienced immediate negative pressure, reflecting investor concerns over financial irregularities and the impending dilution from the capital raise. The significant drop in Q2 2025 adjusted revenue to NOK 4.3 million (from NOK 18.3 million in Q2 2024) and a deteriorating adjusted EBITDA to negative NOK 14.2 million underscore the financial challenges and contribute to increased stock volatility.
Competitor Positioning Changes: Rivals in the biometrics sector may leverage this situation to differentiate themselves by emphasizing their robust internal controls and ethical business practices, potentially gaining a competitive edge in securing new partnerships and contracts, particularly in sensitive markets like China.

Winners & Losers

Losers: Next Biometrics faces significant financial strain, reputational damage, and operational challenges in resolving the irregularities and reclaiming products. Existing shareholders will experience dilution due to the new share issuance. Distributors and customers in China could face supply chain disruptions and uncertainty regarding product availability. The incident also casts a shadow on the broader market's perception of risk associated with foreign companies operating in China.

Potential Winners: Competitors with strong compliance programs and transparent operational models may seize this opportunity to gain market share and strengthen their positions by offering more reliable and trustworthy partnerships in the biometrics sector, especially in the Chinese market.

Action Timeline

Immediate: Next Biometrics must prioritize the investigation and resolution of the fraud, concurrently executing its planned capital raise to stabilize its financial position. Investors are presented with a time-sensitive decision point regarding potential entry into the stock at the new issuance price, weighing the recovery potential against inherent risks.
Short-term: The company will focus on strengthening internal compliance measures and attempting to reclaim and re-sell affected products. Strategic partners and competitors should analyze Next Biometrics' experience to refine their own due diligence and market entry strategies for China.
Long-term: Stakeholders should monitor Next Biometrics' ability to achieve its projected revenue targets of NOK 25-30 million per quarter by Q4 2025/Q1 2026, the success of new product launches, and the overall recovery of the Chinese biometrics market. The evolving regulatory landscape in China will also be a critical factor to watch.

Risk Assessment

Regulatory Risks: China's increasingly stringent biometric data regulations, focusing on privacy and security, could impose additional compliance burdens on Next Biometrics and other foreign companies, potentially affecting operational flexibility and market access.
Reputational Risks: Allegations of fraud can severely damage a company's reputation, impacting its ability to secure new contracts, attract talent, and maintain investor confidence globally.
Financial Risks: The capital raise, while necessary, will dilute existing shareholdings. There is also a significant risk that Next Biometrics may not achieve its projected revenue targets or successfully recover all outstanding products, leading to further financial strain.
Geopolitical Tensions: Broader geopolitical tensions between Western countries and China, particularly concerning technology transfer and data security, could indirectly exacerbate operational challenges for Next Biometrics in the region.
Fraudulent Activity in Biometrics: The incident underscores the general vulnerability of the biometrics market to sophisticated fraud tactics, including those enabled by AI, necessitating constant vigilance and robust security measures.

Key Indicators

Market Signal: The uncovering of fraud serves as a strong signal for all companies considering or expanding operations in China, emphasizing the paramount importance of rigorous internal controls, thorough partner vetting, and continuous oversight of local operations.
Leading Indicators: The success of Next Biometrics' capital raise, the progress in recovering and reselling products, and the actualization of its updated revenue projections will be critical leading indicators for the company's financial stability and market re-entry.

Regional Perspective

The situation at Next Biometrics offers a unique lens into the operational intricacies and potential pitfalls for foreign technology companies in China. The "irregularities related to sales to selected distributors" and the need for "extraordinary discounts" due to market conditions highlight the aggressive competitive landscape and the challenges of maintaining control over sales channels and pricing in a dynamic market. CEO Ulf Ritsvall's statement about "cleaning up the irregularities" and planning to "take control over the products again and quickly deliver these products to new or existing customers" underscores the direct operational challenges on the ground in China. This case serves as a stark reminder for global professionals to conduct enhanced due diligence on local partners and establish robust oversight mechanisms when navigating the Chinese market.

Immediate Implications

What Happens Next: Next Biometrics will proceed with its capital raise, internal investigation, and efforts to reclaim products. The Norwegian Financial Supervisory Authority will likely initiate its own review.
Time-Sensitive Opportunities/Risks: For investors, the current share price and the upcoming capital raise offer a potentially time-sensitive opportunity to buy into a recovering company, albeit with significant risk. For competitors, immediate strategic positioning to capitalize on Next Biometrics' current vulnerabilities in the Chinese market is crucial.

What to Watch

Resolution of Irregularities: Closely monitor updates on the internal investigation and any external regulatory actions concerning the Chinese operations.
Capital Raise Success: The successful completion and oversubscription of the capital raise will be a strong indicator of investor confidence and the company's short-term financial stability.
Market Recovery in China: Track Next Biometrics' performance in the Chinese market, particularly the realization of management's expectation for normal quarterly revenues to resume in the second half of 2025.
New Product Launches: Observe the impact of any new product launches or "breakthrough orders" on the company's revenue and market position.

Analysis

This incident at Next Biometrics serves as a critical case study for international firms navigating the complex regulatory and business landscape in China. It underscores the imperative for stringent internal controls, robust due diligence on local partners, and transparent operational practices to mitigate risks associated with market entry and expansion. The company's ability to recover hinges not only on its swift and transparent resolution of these issues but also on its success in re-establishing market trust and proving its long-term financial viability through effective capital deployment and operational efficiency. The broader implications for the biometrics sector include a heightened awareness of compliance demands and the competitive advantages of ethical business conduct.